When the going gets tough on Wall Street, brokers can lose money too, just like their customers.
There’s a scene in the classic 1983 movie “Trading Places,” in which the Duke brothers, played by Ralph Bellamy and Don Ameche, explain to Eddie Murphy’s character Billy Ray Valentine that whether their clients make money or lose money, their brokerage Duke & Duke makes money.
But investors learned that volatility is not always good for the Big 5 banks/brokers, which reported fourth-quarter earnings this week.
The stock market suffered a broad and sharp selloff during the fourth quarter, Treasury yields unexpectedly tumbled, despite interest rate hikes by the Federal Reserve, and the CBOE Market Volatility Index VIX, -1.44% (VIX) more than doubled. The S&P 500 index SPX, +1.32% plunged 14% during the fourth quarter, while the yield on the 10-year Treasury note TMUBMUSD10Y, +0.00% dropped 37 basis points and the VIX soared to 25.42 on Dec. 31 from 12.12 on Sept. 28.
This volatility led to mixed results for the Big 5 banks, with all seeing weakness in their fixed-income businesses, but increased client trading helped boost their equities businesses.
The SPDR Financial Select Sector exchange-traded fund XLF, +1.72% plummeted 14% during the fourth quarter, the weakest quarterly performance since the third quarter of 2011.
“Extreme volatile markets increase the probability of idiosyncratic trading challenges in specific businesses (market making losses) which can create further divergence in results amongst peers, but directionally, we believe trends are correlated,” said analyst Devin Ryan at JMP Securities.
On Thursday, Morgan Stanle y MS, +2.73% missed earnings expectations for the first time in 13 quarters, and snapped a 10-quarter streak of revenue beats, weighed down by weakness in its sales and trading businesses, as results were “negatively impacted by the volatile global market environment.” Read more about Morgan Stanley’s earnings.
Sales and trading revenue in equities was “essentially unchanged” from a year ago at $1.9 billion, below the FactSet consensus of $2.0 billion, but tumbled 30% in fixed income to $564 million, well below expectations of $800 million. To make matters worse, investment revenue swung to negative $52 million from positive $213 million, citing the “market deterioration of a publicly traded investment” that was subject to sale restrictions.
“This is not Morgan Stanley’s finest hour,” said Octavio Marenzi, chief executive of consultancy Optimas.
J.P. Morgan Chase & Co.’s JPM, +1.62% results weren’t much better, as the blue-chip bank missed revenue expectations for the first time in three years, as “challenging market conditions” were blamed for a surprise 3.7% drop in corporate and investment bank revenue, while the FactSet consensus called for a 6.7% rise to $8.02 billion. Within markets, in which revenue fell 6%, equity revenue rose 15% but fixed income revenue dropped 16%. Read more about the results.
“A confluence of factors throughout the quarter, including trade, concerns around global growth and corporate earnings, fears of a more hawkish Fed, as well as other negative headlines, caused spikes in volatility, which were amplified by markets that lacked depth and liquidity,” said Marianne Lake, chief financial officer of J.P. Morgan Chase & Co., on the post-results conference call with analysts, according to a transcript provided by FactSet.
“And although we saw a decent client flow, rates rallied, spreads widened and energy prices fell significantly, all against general market conviction that was anticipating a stronger end to the year.”
While Goldman Sachs Group Inc. GS, +1.73% produced big earnings and total revenue beats, institutional client services revenue rose 2% to $2.43 billion, but missed the FactSet consensus of $2.58 billion, as equities client execution revenue rose 80% to $401 million but fixed income, currencies and commodities (FICC) client execution revenue dropped 18% to $822 million. Nevertheless, the stock rocketed 9.5%, its best one-day post-earnings gain in 10 years.
Chief Financial Officer Stephen Scherr said the firm managed to increase wallet share by 65 basis points since 2016 with its institutional client base, but that provided a “minimal” revenue benefit so far “given the market backdrop.”
For Bank of America Corp. BAC, +1.07% total revenue beat expectations, although global markets revenue fell 5.4% to $3.21 billion to miss expectations of around $3.4 billion.
Within markets, Chief Financial Officer Paul Donofrio told analysts that FICC revenue dropped 15%, citing weakness in credit and mortgage markets, but equities revenue rose 11%, as “market volatility led to increased client activity.” The Duke brothers would be proud.
Citigroup Inc. C, +1.04% beat earnings expectations for the 16th straight quarter, but missed on revenue for the third straight quarter, as volatility hurt its “market sensitive” businesses, particularly fixed income.
Citi’s institutional client business revenue fell 15 to $8.21 billion, missing the FactSet consensus of $8.48 billion, as equity market revenue rose 18% to $668 million but fixed income market revenue plunged 21% to $1.94 billion.
Ironically, the Duke brothers ended up losing a lot of money despite huge volatility in frozen, concentrated orange juice futures because they speculated, rather than just executing trades for their clients.