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Why Bank of America and Citigroup Tumbles?


If you were to check on Bank of America and Citigroup’s stocks on Monday, down an average of 5 percent, you would think they had done something wrong. However, the truth is that things are only getting better at the nations second and fourth largest banks, respectively.

However, to be fair, Bank of America and Citigroup are not the only bank stocks that are down severely today. The S&P 500 is off by approximately 2 percent, and bank stocks across the board are having difficulty, as fears of a possible recession have gripped the market. The point that nothing is out of sorts at these two banks specifically should be clear when you gaze at the performance of all four of the nations largest banks:

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Whats significant to remember is that there is little difference between the way the market is handling JPMorgan Chase and Wells Fargo, two of the nations best-run banks, and the way its handling Bank of America and Citigroup, two banks that have struggled over the past decade. And the difference that does happen is mainly explained by the fact that Bank of America and Citigroups shares are naturally more unstable than JPMorgan Chase and Wells Fargos. This is taken by their respective betas,  that measures how much a exact stock moves relative to the market on an regular day.

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By comparing Bank of America to Wells Fargo, you can see how this works. Bank of Americas beta of 1.77,  which means that its 77 percent more unpredictable on average than the broader market. Therefore, if the S&P 500 is down by about 2 percent on any given day, Bank of Americas shares will be down by 3.54 percent. On the other hand, because Wells Fargos beta is only 0.92, or less than 1.0, this means that its shares are 8 percent less unpredictable than the broader market on a typical day.

Differences in beta speak to a stocks hypothetical nature. For the reason that Wells Fargo and JPMorgan Chases impressive performances all through the financial crisis, investors see them to be safer and less speculative than Bank of America and Citigroup, together of which barely survived the 2008-09 decline.

This goes to Warren Buffetts opinion that companies acquire the shareholders they deserve.Uninteresting companies that make great long-term investments get long-term shareholders who dont trade in and out of their stocks. In the meantime, less practical companies get shareholders who are looking to make a speedy buck by quickly buying and selling their shares. This is showed by the average daily trading volumes of these four banks stocks:

Average Daily Volume as a Percent of Shares Outstanding

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These differences aside, the significant thing for investors to remember right now is that both Bank of America and Citigroup are building impressive steps at returning to respectable profitability. Bank of America had its great year in almost a decade in 2015. And compared to 2014, Citigroups earnings more than doubled last year.

These regaining could delay,  if a recession does indeed materialize, however,  It will be surprising if the progress at these two banks stopped completely. It is for this intention that it is hard to believe investors in either of these stocks should let fear to control their decisions about buying or selling shares of Bank of America or Citigroup at all.

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