Why Bank of America's Stock Price Dropped 16.3% in June

What Happened

Bank of America (BAC -0.13%) saw its stock price plummet 16.3% in June, according to S&P Global Market Intelligence. 

The second-largest bank in the country fell further than the S&P 500, which was down 8.4% for the month. It was also outperformed by the KBW Bank Index, which was down 12.9% in June.

So what

Bank of America was certainly not alone in watching its stock price plummet in June. The biggest catalyst in the quarter was likely the release, and the anticipation leading up to it, of the May Consumer Price Index (CPI), which saw inflation increase 8.6% over the past 12 months, the highest year-over-year increase since 1981. It was also a higher increase than the 8.3% that analysts had anticipated.

The Dow Jones Industrial Average dropped 880 points upon the release of inflation numbers on June 10. While this impacted most sectors and industries, banks were hit particularly hard by the news as rising inflation could lead to a recession. Recessions are obviously not good for most stocks, but banks really take a hit during economic downturns as they are cyclical businesses that do well when the economy is growing and consumers are borrowing and investing. Bank of America's stock price dropped almost 14% in the days following the release of the May CPI numbers. 

The bank actually got a small boost when the Federal Reserve raised interest rates at its June 15 board meeting by 0.75 basis points to the 1.5% to 1.75% range. Rising rates are good for banks, in general, as they raise the level of interest income, but the minor boost in the share price for the major jump in rates is due to the fact that the market is concerned that the hikes will bring on a recession in an effort to lower inflation.

Now what

The competing forces of inflation and aggressive interest rate hikes leave much uncertainty in terms of which way Bank of America will go in the near term. Higher rates are good for banks, but recession is not. So keep an eye on the June CPI and how the Fed reacts over the next few meetings.

One bit of good news for investors was that Bank of America passed its annual stress test, administered by the Federal Reserve to test the resiliency of large banks to a hypothetical economic shock, like a severe recession. Another piece of good news is that Bank of America announced that it will increase its quarterly dividend by 5% to $0.22 per share in the third quarter.