Why Bank of America's Stock Tumbled on Tuesday

Markets Motley Fool

It was a tough day for bank stocks, with Bank of America (NYSE: BAC) leading the way. Shares of the nation's second-biggest bank by assets fell 3.2% on Tuesday.

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That exceeded the 2.3% drop of the KBW Bank Index, which tracks shares of two dozen large-cap bank stocks. It's also bigger than the 0.8% drop on the S&P 500.

Company/Index

Performance on Sept. 5, 2017

S&P 500

 (0.76%)

KBW Bank Index

 (2.3%)

Bank of America

 (3.2%)

There wasn't any fundamental news that broke on Tuesday that caused Bank of America's stock to suffer more than the broader market. It was instead a combination of two factors.

The first was the catalyst for the decline in stocks largely across the board: North Korea's purported test over the weekend of a hydrogen bomb.

"After North Korea's test of its most powerful nuclear bomb yet, investors headed for safer stores of value, like U.S. government bonds and gold," wrote The Wall Street Journal.

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This is systematic risk that impacted stocks broadly, thereby explaining the drop in Bank of America's stock.

But what explains the extent of Bank of America's drop is related to its beta of 1.61. This is a measure of how much a specific stock moves in relation to the market on an average day.

A stock with a beta of 1.0 mirrors the market on the average day. If the market goes up 2%, so does a stock with a beta of 1.0.

In Bank of America's case, its 1.61 beta means that its stock will move by an average of 61% more than the broader market on a given day. If the market is up 1%, for instance, Bank of America's will be up 1.61%.

The net result is that the drop in Bank of America's stock price on Tuesday, though steep, need not be a cause of concern to the bank's shareholders. Both its direction and its magnitude were caused by external forces that aren't reflective of its ongoing progress toward its performance targets.

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John Maxfield owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.