The big banking news so far in 2023 has been the failure of several midsize banks. The entire U.S. banking sector was tarnished, with banks both large and small feeling increased scrutiny. Bank of America (BAC -0.21%), one of the nation's largest and most renowned financial institutions, was not spared. The stock has declined almost 5% this year, a time when the broader stock market has rebounded. But that just highlights an interesting and important thing about performance.
A tough year
Bank of America's year-to-date decline really isn't that bad when you compare it to the SPDR S&P Bank ETF (KBE -0.31%), which is down nearly 10%. If you get even more specific and look at midsize and smaller banks, using the SPDR S&P Regional Banking ETF (KRE -0.58%), the pain was much greater with a decline of nearly 20%. So far this year, Bank of America is a standout performer.
Data source: YCharts
To some extent that makes sense, given the size and scale of the $250 billion market cap bank. It is large, diversified, and financially strong, exactly the type of bank you might switch to if you were worried about a regional banking provider closing up shop. But that's just six months or so of time.
If you push back to about 2010, Bank of America would have turned a $10,000 investment into roughly $21,000. That's not bad, though it doesn't really stand out materially compared to the two ETFs above. That said, regional banks, which are smaller and likely have greater growth prospects, did a little better and large bank peers did a bit worse. So, overall, giant Bank of America looks pretty attractive since 2010.
The big hurt
Other than being a nice round number, 2010 is an interesting date. The Great Recession lasted from 2007 to 2009, so 2010 is an advantageous starting point. Essentially, the worst was over by that point, including a dividend cut by Bank of America. That cut, by the way, speaks to just how bad the financial crisis was for the banking industry.
Data source: YCharts
If you had invested $10,000 at the start of 2007, just before that terrible economic downturn, you would have just under $7,000 today. That's better than the roughly $6,000 a similar investment in the SPDR S&P Bank ETF would have ended with, so it is hard to complain about underperformance relative to peers. Still, three years made a huge difference.
Data source: YCharts
What's notable, though, is that the strong performance following the recession (basically investing at the start of 2010) still hasn't gotten investors back to breakeven. That's how bad the recession was for banks. And it helps explain why Bank of America stock is only up 25% or so since the turn of the century. By comparison, the S&P 500 Index is up more than 200%.
Data source: YCharts
Some might consider a such an investment in Bank of America "dead money" looking at the longer-term performance. But looking at the shorter periods in between shows that the stock has been anything but a boring investment.
Timing matters
Hindsight is 20/20, and it would have been impossible to predict the key turning points in Bank of America stock with any kind of forethought. That said, banks were particularly hot leading up to the Great Recession, with Bank of America skyrocketing relative to the S&P 500, as the last chart above highlights. The fall was huge and painful, and it has taken years for the stock to gain back most of the losses from the peak.
Perhaps, then, the biggest takeaway here is that investors need to be extra careful when Wall Street gets too excited about a sector or individual stock. If, perhaps when, they experience a fall from grace, the pain can last a long time. Indeed, even iconic industry giants can be bad investments if you pay too much for them.
