Why the Banks Are Plunging

As I write this, the Dow (INDEX: ^DJI) is down about 1%.

However, the banking sector is down more than two times as much:


Price Move So Far Today

Bank of America (NYS: BAC) (3.13%)
JPMorgan Chase (NYS: JPM) (2.01%)
Wells Fargo(1.63%)
Morgan Stanley(2.83%)
Citigroup (NYS: C) (2.85%)
Goldman Sachs(1.22%)
KBW Bank Index (INDEX: ^BKX) (2.37%)

Source: Yahoo! Finance.

The apparent cause of today's Dow and banking declines is last Friday's jobs report (the market was closed on Friday). Or, more precisely, the 120,000 jobs created in March coming in under expectations. For an excellent review of the jobs report and why it shouldn't be taken too seriously, check out fellow Fool Morgan Housel's thoughts.

But why are the banks down so much more than the general market on the same news? This has been a trend since the financial crisis. As sentiment on the economy goes, so go the big banks -- but more violently.

If you look at the beta of the six largest banks (featured in the table above), you'll see current betas ranging in the 1.5 to 2.0 range. In other words, the stock prices of the banks have been 50% to 100% more volatile than the overall market's prices.

Put another way, the Dow has been up or down 1.0% or more only five times out of 66 trading sessions this year. That number for Bank of America is 48!

Even factoring in the expected additional volatility of an individual stock versus an index, that's pretty huge.

Since banking is the circulatory system of the economy, it's clear that the perceived health of the economy affects banks quite a bit.

For more on the banking industry, check out our free report: "The Stocks Only the Smartest Investors Are Buying." It details a smaller bank that's more impressive than the big boys. Just click here to access it.

At the time this article was published Anand Chokkaveluowns shares of Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase. He also owns long-dated options on Bank of America and warrants on Citigroup, Wells Fargo, and JPMorgan Chase. The Motley Fool owns shares of JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. The Fool has created a covered strangle position in Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of Goldman Sachs. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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