Dow: Why Banks Didn't Play Ball


It was a solid day for stocks today, as the Dow and the broader S&P 500 Index both advanced 0.6%. The S&P 500 achieved a new five-year high, but financials didn't play along -- they were the only losing sector today. In fact, JPMorgan and Bank of America were two of the three worst-performing stocks in the S&P 500, declining 0.8% and 4.2%, respectively. (Unsurprisingly, then, they were the worst performing Dow components.)

Why banks didn't play ball
Both B of A and Citigroup reported earnings today. The results were not well received; as mentioned above, B of A shares fell 4.2%; meanwhile, Citi shares lost 2.9%. As one New York money manager told Bloomberg:

Both organizations are, for lack of a better word, somewhat lost. [They] have been spending a significant amount of time dealing with the problems of the past rather than aggressively marketing the organizations.

I suspect this view is relatively popular among professional investors, who find it convenient to conflate the two companies' positions, performance, and prospects. (How's that for alliteration?) A reductive model of the universal banks has J.P. Morgan in a league of its own, completely separate from the second tier made up of B of A and Citi, which are still floundering.

Of course, the notion that this view is widely held is merely a hypothesis, and one that is difficult, at that. But if it is true, I think that part of the decline in B of A's stock is attributable to that of Citi's. You might retort: Why, then, would the former fall harder than the latter? Good question, but I think the recent relative performance of the two shares may help to answer it:


Data by YCharts.

As the graph clearly shows, B of A shares have dusted Citi's over the three-month period ended yesterday, while both have smashed the broad market. In other words, on the heels of a strong run-up in their stock prices, B of A had further to fall than Citi.

You may have guessed that I don't share the view that B of A and Citi are similar organizations. Keep in mind, variant perception is a potential source of opportunity -- assuming it is correct.

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him @longrunreturns. The Motley Fool owns shares of Bank of America and Citigroup Inc . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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