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Why Shares of Bank of America Corp. Are Soaring on Tuesday

By John Maxfield - Mar 1, 2016 at 1:55PM

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The nation's second largest bank by assets is particularly well-positioned to benefit from the day's positive economic news.

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Shares of Bank of America (BAC -0.83%) are up more than 5% halfway through the afternoon on Tuesday, as positive economic news rallied bank stock investors behind the nation's second biggest bank by assets.

Reports out this morning show that automakers had their best February results in nearly a dozen years. Ford led the way, with sales growing last month by 20% year-over-year. Ford's SUV sales climbed even more, growing by 28% compared to February 2015 and resulting in the best February for SUV sales in the company's history.

Other automakers reported similarly upbeat results. GM said that retail sales of Chevrolet vehicles were 13% higher than in February 2015, while Cadillac sales grew by 4% and Buick sales were up 2%. Nissan said that its light vehicle sales increased by 11%, while SUV sales increased 14%. With respect to the latter, it was the best February on record for Nissan.

Adding to the positive news from the auto industry was a report from the Commerce Department showing that construction spending in January was the highest it's been since October 2007. State and local infrastructure projects increased construction spending by 1.5% in the first month of 2016, handily outpacing the consensus forecast for a 0.2% rise.

Finally, manufacturing data from February soothed concerns about the ongoing economic recovery. The Institute for Supply Management's monthly manufacturing index came in at 49.5 last month, the organization said Tuesday. While that figure reflects manufacturing activity that is still mildly contracting -- a reading above 50 implies expansion -- it was nevertheless a significant improvement over January's score of 48.2.

The latest news out of the broader economy is good for Bank of America for two reasons. First, a healthy economy spurs loan demand, which in turn begets loan growth. And second, if the economy continues to improve, the Federal Reserve will be more inclined to continue raising interest rates. This would translate into higher profits for banks, as their loan portfolios would benefit from higher yields.

Bank of America's stock in particular was positioned to benefit from all these factors. Shares of the nation's second biggest bank by assets have fallen by 22% since the start of the year, and are trading for a 44% discount to their book value, according to Yahoo! Finance.

On top of that, Bank of America sports one of the highest betas in the bank industry. Its beta of 1.76 means that its shares move by 76% more than the typical stock does on an average day. Today, for instance, while the S&P 500 is up 2.1% at around 1:45 p.m., Bank of America's shares are up 5.1%.

In sum, while positive economic news like today's can be fleeting, there's no question that shareholders in Bank of America, myself included, will welcome the respite given the recent performance of the stock.

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