Why Bank of America Stock Is Stumbling

It could be a long day for investors after stocks opened sharply lower this morning on fears that the Federal Reserve will soon begin to draw down its support for the economy. Among other sectors taking a hit are banks, as measured by the benchmark KBW Bank Index (DJINDICES: ^BKX  ) , which is off by 0.9% at the time of writing. Shares of Bank of America (NYSE: BAC  ) , the nation's second largest bank, are down by 1.14%.

Before getting to the impetus for today's fall, I'd be remiss if I didn't talk the upbeat news emanating out of the housing sector. According to the National Association of Realtors, the number of people buying previously owned homes rose last month to the highest level since late 2009. The metric, known as existing home sales, rose by 4.2% over April and an impressive 12.9% compared to May 2012.

"The housing numbers are overwhelmingly positive," said NAR's chief economist Lawrence Yun. "However, the number of available homes is unlikely to grow, despite a nice gain in May, unless new home construction ramps up quickly by an additional 50 percent."

On its face, this is great news for both banks and the broader economy more generally. Many of the nation's largest lenders look to the housing market for a significant source of revenue. In the first quarter of this year, for instance, Bank of America underwrote $24 billion in home loans. And while this paled in comparison to Wells Fargo and JPMorgan Chase, which originated $109 billion and $53 billion in mortgages, respectively, it was nevertheless a source of growth for the bank.

So what's counteracting this news and sending bank stocks lower? The answer is: speculation about the Federal Reserve.

Following the conclusion of its quarterly monetary policy meeting yesterday, Fed chairman Ben Bernanke intimated that the bank could soon begin to reduce the amount of bonds it's buying in the open market -- though, it's important here to emphasize the word "could."

"Bernanke stressed that the Fed isn't poised to raise interest rates any time soon," Katie Martin of The Wall Street Journal noted. "But assuming economic data keep improving in the world's biggest economy, it will look to trim its monthly bond purchases from the current level of $85 billion a month by the end of this year."

The irony, of course, is that any drawdown in support would be a sign that things are improving. As an equity strategist told Bloomberg News, "The market is choosing to ignore the good news embedded in the Fed's comments. All it's looking at is the reduction of the accommodation."

For investors, much of this is just noise. And in the banking sector specifically, as I've noted before, there's reason to believe that the Fed's reduction in support could be a net positive if the resulting upward movement in net interest margins more than offsets the reduced noninterest revenue from mortgage underwriting fees, which it could.

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.


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