Bank of America Answered Your Top Investing Questions

Unpredictable markets mean investors have a whole lot of questions, and way too few answers, right now. So retail investors, Wall Street wizards, and everyone in between are turning to veterans like Bank of America (BoA) for clues. And to avoid wax-sealing any more personalized replies, the investment bank’s compiled and answered the five most common questions it’s been asked. (And because I couldn’t resist, I’ve added some tidbits in too.)

Question 1: With interest rates this high, can consumers keep spending?

High interest rates make it more expensive to borrow cash in the form of loans and mortgages. So you might think that in this climate, folk should be saving instead of spending – and remember, consumer spending’s a major economic driver. But BoA reckons that consumers opening or shutting their wallets mostly comes down to how they feel about their jobs. Check the chart below, from the Bureau Of Labor Statistics, and you can see that unemployment’s nestled at 3.5%, pretty much at an all-time low. A reasonable level of paranoia aside, then, most workers should feel secure in their roles and confident enough to splash (at least some of) the cash.

US unemployment rate. Source: Bureau Of Labor Statistics.

What’s more, American’s real wages – that’s pay minus inflation, essentially – are now ticking up, and they still have a healthy heap of savings. Plus, 85% of US mortgages are locked in for the long term, so they won’t be impacted by rising rates in the near term.

I have more to add on this. The richest 10% of American households currently hold nearly 70% of the country’s wealth, and it’s fair to assume they don’t have as much interest-paying debt as the other 90%. Not only that, but their healthy bank balances will be racking up some tidy interest from higher rates. Those ten-percenters also tend to own a lot of assets like stocks, so you can expect them to keep pounding Fifth Avenue if the market stays on track.

Question 2: Will banks’ tighter lending standards start to pinch?

BoA points out that the 2008 global financial crisis changed everything. The near collapse of the entire system encouraged more American consumers and firms to take out their loans via bigger (and presumably safer) banks rather than smaller lenders. That matters, because big banks make money in lots of ways, like asset management or trading, as well as from lending. So when rates rise, bigger banks aren’t as quick to charge more for loans. Smaller banks, meanwhile, have to compete for folks’ deposits by giving savers higher interest rates. And that means they need to charge higher loan rates to make a profit.

That trend was already well established, and then 2023’s smaller banking crisis came along. Spooked savers whipped their cash out of small banks and straight into big ones, widening the gap between the two.

Another effect of the financial crisis was that firms are now far more careful about loading up with debt. As a result, company balance sheets are much cleaner these days. Take a look at the chart below: net interest costs – debt repayment minus the interest earned on cash – are at their lowest for 50 years. That’s because US firms have less debt and more cash. Mix those cleaner balance sheets with big banks’ prominence, and BoA says the rapid rise in interest rates won’t hurt companies’ profitability as much as you’d expect – and certainly by way less than it has in the past.

US corporate net interest expense – debt repayment minus interest earned on cash (red line) – is at 50-year lows despite a rapid increase in the Federal funds rate (black line). Source: Datastream.

Question 3: Is the fear gauge signaling danger?

BoA’s answer to this one is basically, “Maybe, maybe not”. The VIX, also known as the market’s “fear gauge”, measures stock market volatility, and it’s low right now. That’s often a sign of calm, but nervous investors point out it could mean we’re being overly complacent and ignoring risk. The big bank, though, points out that it’s been this low before and can stay low for a long time. So while it’s worth keeping an eye on, it’s not necessarily an imminent cause for panic. For my part, I reckon we can make too much of a low VIX reading. In fact, I recently wrote about how the market’s fearless feeling could actually be a positive indicator.

Question 4: Could we be in for another mini-crisis?

Never say never, says BoA. Regional banks have been shaken up ever since Silicon Valley Bank’s (SVB) dramatic collapse, commercial real estate (like offices and shops) is emptying out, and government debt was recently downgraded. That’s enough to hold your attention, but BoA says to watch out for unexpected triggers. The bank’s keeping a close eye on so-called “zombie” companies: firms that raised or borrowed a lot of cash when rates were super low, and are now burning through it. Eventually, they’ll run out of money – and the ripple effects could be problematic.

Now I know you didn’t ask me this, but here’s my two cents. SVB’s collapse sparked a ton of panic, with concerns of a 2008-style repeat. But now, that feels like a lifetime ago, and very little ended up happening after the fallout. My point: don’t try to predict the unpredictable. Instead, manage your risk by investing in solid, well-managed companies that could hold up if the worst does happen

Question 5: Does the US really rule?

There was an obvious answer here for BoA – after all, the clue’s in its name. But seriously, BoA does prefer US stocks to those in other developed markets, pointing out long-term advantages like technology leadership and the dollar being the world’s currency. Plus, the bank thinks the Federal Reserve is ahead of other central banks when it comes to fighting inflation, and likes US firms’ healthy balance sheets. However, BoA reckons investors could do well by keeping some eggs in the emerging markets baskets. They’re still out of favor among professional investors, see, so they’re a steal compared to more expensive developed market options.

I’ve got to say, I truly believe that the US’s dynamism, celebration of success, and capitalism-in-its-DNA culture makes for some of the best firms and management teams in the world. Of course, other regions and markets might be more attractive than the States from time to time – but in the long run, Uncle Sam tends to come through.