Pandemic response drives Wall Street's trading revenue to best
first half in eight years
By Liz Hoffman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 4, 2020).
Investment-banking and trading revenues hit an eight-year high
in the first half of 2020, a counterintuitive boom that shows the
heavy hand of the Federal Reserve and a growing gulf between
financial markets and the real economy.
Global banks raked in fees from companies scrambling to raise
cash and panicky investors scrambling to sell, then buy again as
markets surged. Revenue in these traditional Wall Street businesses
was 32% higher than in the same period last year, bucking years of
sideways and downward drifts, according to industry research group
Coalition, which compiled data from the 12 largest global
investment-banking firms.
The surge is being driven by two factors: huge need for cash
from pandemic-hit companies and the Federal Reserve flooding the
system with money, which props up market prices and nudges
investors into its riskier corners. The result is a borrowing boom
that has pulled companies back from the ledge and lifted Wall
Street's fortunes.
"The Fed created a bubble where life could go on -- not unlike
the NBA bubble," said Yousef Abbasi, a strategist at investment
bank StoneX Group Inc., referring to the bizarro basketball season
happening in quarantine at Disney World in Florida. "That explains
the disconnect we see between the economy and the market."
Executives have been quick to describe the windfall as
temporary, hoping to lower expectations from investors and head off
criticism from politicians. "Cut it in half," JPMorgan Chase &
Co. Chief Executive James Dimon predicted in July of his firm's $11
billion in quarterly trading revenue.
The gap between the real economy and financial markets has only
widened since JPMorgan and its peers closed their second-quarter
books. The S&P 500 and the tech-heavy Nasdaq Composite Index
both closed at fresh highs on Wednesday, in sharp contrast to a
limping economy. Tens of millions of Americans are unemployed, and
preliminary jobs data released this week suggests the economy added
far fewer jobs than anticipated in August.
Issuance of highly rated corporate debt is up 29% globally and
72% in the U.S. by dollar volume this year, according to Dealogic.
PepsiCo Inc., Walt Disney Co., Verizon Communications Inc. and
other blue-chip companies pried the market open in March. Riskier
companies followed.
"Companies and investors learned the lesson from 2008, which is
to create fortress balance sheets as quickly and holistically as
you can," said Thomas Sheehan, Bank of America Corp.'s co-head of
investment banking.
Records have fallen one after another. Ford Motor Co. raised $8
billion in the largest junk-bond deal ever. Google's parent
company, Alphabet Inc., sold the cheapest five-year bond on record,
paying just 0.45%, according to Refinitiv.
Some deals bore Wall Street's fingerprints with intricate
structures that allowed cheaper borrowing, like United Airlines
Holdings Inc.'s Goldman-led deal backed by the carrier's
frequent-flier program. Other companies, like Ford, raised more
than they asked for.
"The idea is to build a bridge to a reopened economy," said
Susie Scher, who co-runs the capital-markets group at Goldman Sachs
Group Inc. "If the story is good enough and investors believe a
company can get to the other side of this, the demand is
there."
Goldman itself took advantage, selling $2.5 billion in bonds on
the same day in March that it helped raise more than $13 billion
for clients including Verizon and Exxon Mobil Corp.
That steady supply of new securities fed Wall Street's trading
machine, which purred back to life after years of decline.
Revenue from fixed-income trading, which includes bonds and
products linked to interest rates, rose 56% from 2019's first half
to $55 billion, according to Coalition. Investors scrambled to cut
risk, then loaded up on safer names for what looks to be a
prolonged period of low yields. "Investors need to own something,
and investment-grade debt looks attractive," Ms. Scher said.
Equities revenue was more mixed, up from a year earlier but
hovering around its five-year average. Simple stock orders jumped
as day traders piled into the market on retail platforms like
Robinhood Markets Inc.
But hedge funds, some of Wall Street's best-paying customers,
retreated from the market to protect gains and meet margin calls.
(Banks lend money against hedge funds' portfolios. When prices
fall, funds must pony up more cash or sell assets to keep their
borrowing levels in check.) Morgan Stanley's hedge-fund clients
held 15% fewer assets at the firm in the second quarter than in the
first.
Another laggard has been merger activity, which is down by more
than half from a year ago. But appetite is starting to stir,
especially among private-equity firms -- and with it, the prospect
of acquisition-related borrowings. The Wall Street Journal reported
Wednesday on a private-equity bid for railroad giant Kansas City
Southern.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
September 04, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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