Since the beginning of this week, shares of Bank of America (BAC 3.35%) have fallen by more than 5% while the S&P 500 is down only 1.3%. What explains the difference?
The answer is twofold.
The first part of the answer has little to nothing to do with anything that's taken place over the last few days. Since the financial downturn, B of A has become one of the most heavily traded stocks on the market. High-frequency traders love it because it's cheap enough on a per-share basis to trade massive amounts of stock at a reasonable price. In addition, it offers virtually limitless liquidity because of its nearly 11 billion outstanding shares. For these reasons, along with the natural rise in high-frequency operations, it went from trading an average of 11.7 million shares a day in 2000 up to an average of 198 million last year, a nearly 17-fold increase.
Source: Yahoo! Finance.
With this in mind, it should come as no surprise that B of A's shares have become exceeding volatile. In the investment world, volatility is expressed by a stock's beta. A beta of 1 indicates that a stock moves in perfect unison with the broader market. A beta of less than 1 implies less volatility. And a beta of more than 1 implies more volatility. In B of A's case, its beta is somewhere between 1.8, which is the figure Yahoo! Finance provides, and 2.4, the figure provided by the financial screener Finviz.com. On any given day, in turn, B of A's stock price is between 80% and 140% more volatile than the broader market.
On top of this is the second part of the answer, as B of A isn't immune from the influence of outside events. The events impacting the bank this week concern the housing market, the health of which is critical for the success of virtually any bank. While housing prices and sales volumes have been gradually improving over the past two years, data released yesterday suggests that the market took a breather last month. According to the Commerce Department, housing starts fell by 8.5% in January compared to December; though they were up 23.6% on a year-over-year basis.
In addition, as my colleague Amanda Alix noted yesterday, there's growing evidence that the Federal Reserve could terminate its third round of quantitative easing earlier than expected. The minutes from the Fed's most recent monetary policy meeting were released yesterday, and they show that a growing number of the committee members believe it's time to start winding the program down. Because this round is focused on spurring housing prices and demand via lower mortgage rates, this has many a bank investor worried.
