(Part 1) Comparing JPMorgan Chase & Company and Bank of America
Among America’s largest and most popular financial institutions, JP Morgan Chase & Company (JPM) and Bank of America (BAC) consistently remain top dogs in this fierce and competitive environment. But in a side-by-side comparison, who is the top dog of top dogs? In this series of financial blogs, I’d like to dig deeper into these companies’ stock performance, company structure, management, and outlook. Hopefully, by the end of this, we will have a winner and loser, or maybe two winners? Let’s find out.
Stock Performance:
Creating this backtest, the information hypothesized was a singular equal investment of $10,000 on 01/01/20211–05/31/2021 (Roughly 10 Years of Performace). With the settings, I set the dividends that the company gives out to be reinvested to purchase more stock of these companies.
The findings were pretty uneventful. Since both of these companies are Mega-Cap companies ( > 200B Markt Cap), and a significant portion of the financial sector, I expected some consistent correlation. Based purely on performance, JPM offered greater returns than BAC over the ten-year period. A further breakdown is listed below:
JPM:
- $10,000 → $47,526
- Total Return: 375.26%
- Inflation-Adjusted Compounded Annual Growth Rate: 16.72%
- Standard Deviation: 25.55%
BAC:
- $10,000 → $39,477
- Total Return: 294.77%
- Inflation-Adjusted Compounded Annual Growth Rate: 14.59%
- Standard Deviation: 32.68%
Some notes I would like to touch on are the Compounded Annual Growth Rate (CAGR) and Standard Deviation.
- The CAGR is exaggerated excessively for both companies due to the lack of any major long-term recessions. Although COVID-19 did bring significant drawdowns to both stock’s price, the quick action of the Federal Reserve and vaccine effort brought a quick “V” shaped recovery. However, during a drawn-out recession, the CAGR would be significantly less. For perspective, the historical CAGR of the S&P 500 index is roughly 7–10% depending on the historical timeline.
- The Standard Deviation (σ) represents the volatility or price movement of a particular stock. For this example, Bank of America has an SD (σ) noticeably higher than JPMorgan Chase. That being said, if we gave BAC a longer timeline, it could possibly close the gap between itself and JPM. On the flip side, BAC could make quicker moves into a drawdown, which could expand the gap.
Lastly, I would like to look at the performance of both of these companies with respect to the Financial Sector as a whole.
I used the Exchange Traded Fund, Financial Select Sector SPDR ETF (XLF), for this comparison. This ETF accurately tracks the performance of the Financial Services industry as a whole. The findings are listed below:
XLF:
- $10,000 → $34,511
- Total Return: 245.11%
- Inflation-Adjusted Compounded Annual Growth Rate: 13.07%
- Standard Deviation: 18.86%
Overall, XLF lagged significantly compared to BAC & JPM, which makes sense. XLF is tracking an entire sector, which brings less volatility and returns because of diversification, which means that the returns will be less than owning a single company, but the drawdown will be less severe if the allocation is spread out. Also, this ETF is less susceptible to unsystematic risks, like problems with a companies management, or investigation by regulatory authorities. When you give up the return, you typically increase your risk protection, which may be advantageous to investors closer to retirement.
For the section of stock performance, we appear to have a clear winner from 01/01/2011–05/31/2021, JPM **10 Points to Gryffindor**. While JPM significantly outperformed the sector, I believe proper diversification and financial planning should take place before buying specific stocks.
UNTIL NEXT TIME,
Spencer