Of all the months of the year, June may be the most important for Bank of America's (BAC -0.13%) stock in 2017. There are two catalysts in particular that could cause shares of the nation's second biggest bank by assets to either advance or retreat.
Will the Fed raise rates?
The first catalyst will arrive this week. On Tuesday and Wednesday, the Federal Reserve's Open Market Committee is meeting to decide whether to raise interest rates. It will announce the decision on Wednesday, and if it does in fact increase rates, as most people expect it to do, it will mark the second time this year that it's done so.
The Fed's decision will boil down to two variables, the first being unemployment. Based on this alone, there's every reason to believe that the central bank will in fact hike the Fed funds rate, the primary short-term interest rate benchmark in the United States. The current unemployment rate of 4.3% is comfortably below the Fed's 5% target. This accordingly weighs in favor of a rate hike.
US Unemployment Rate data by YCharts.
The second variable is inflation. This too seems to suggest that the Fed will raise rates, as the latest inflation data showed that consumer prices rose by 2.2% over the same month last year. This is above the Fed's 2% target, which suggests that higher interest rates may be appropriate to slow the advance of consumer prices.
Bank of America would welcome such a move. In its latest quarterly regulatory filing, the bank noted that a 100-basis-point increase in short- and long-term rates will translate into $3.3 billion in additional net interest income over the following 12 months.
The Fed isn't likely to raise rates that much this month -- a 25-basis-point boost is more likely -- but that's nevertheless a step in the right direction. To put it in perspective, when the Fed raised rates by 25 basis points in March, Bank of America said it would earn $150 million in added net interest income a quarter.
Will Bank of America boost its dividend?
The second catalyst that could impact Bank of America's stock is its performance on this year's Comprehensive Capital Analysis and Review, or CCAR. This is the second step in the annual stress tests that the Fed uses to assess whether the nation's largest banks will be able to survive an economic downturn akin to the financial crisis.
The CCAR is critical because it dictates whether a bank can increase its dividend and/or buy back more stock. Bank of America's performance on past stress tests, combined with its cautious approach to capital-return requests, has stymied that Charlotte, North Carolina-based bank's desire to raise its dividend in prior years. While competitors like Wells Fargo and JPMorgan Chase have increased their quarterly payouts every year since 2010, Bank of America has done so only twice.
Bank of America's headquarters in Charlotte, North Carolina. Image source: Getty Images.
Anything is possible, but when the Fed releases CCAR results on June 30, there's every reason to believe it will allow Bank of America to raise both its dividend and allowance for stock buybacks. Not only is Bank of America more than adequately capitalized, it has also seen its earnings grow and become more consistent over the past few years, both of which weigh on the Fed's decision to approve or deny requests by banks to increase the amount of capital they return to shareholders.
All of this is good news for Bank of America, but it doesn't necessarily mean you should buy its stock right now. Because these two catalysts are widely expected to occur, they're already likely baked into Bank of America's stock price. Additionally, the turmoil in the nation's capital, combined with the unfolding legislative paralysis in Congress, as well as the market's already lofty valuation, lead me to believe that investors have more to gain than to lose by waiting for a potential pullback before diving headlong into the market.
