The historic U.S. election jolted Wall Street trading desks, buoying investor confidence and sparking activity that pushed the five biggest U.S. investment banks to sharply higher fourth-quarter profits.
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The performance marks what could be a turning point for banks after a fallow period that had some worried the trading business -- the lifeblood of Wall Street and its billion-dollar bonus pools -- was dying for good.
Goldman Sachs Group Inc. and Citigroup Inc. reported quarterly earnings Wednesday that beat analyst expectations and grew from a year ago, thanks to a resurgence in long-challenged trading businesses.
Citigroup's $3.7 billion trading haul was its best fourth-quarter showing since the financial crisis. J.P. Morgan Chase & Co., which reported its results last week, had its best fourth-quarter for trading ever.
"There was increased optimism around the world," said Harvey Schwartz, chief financial officer at Goldman, where trading revenues jumped 25% over last year. Noting rising interest rates and confidence that President-Elect Donald Trump's policies will spur the economy, he said: "Those are the kinds of things that always drive our business."
Overall, the five largest Wall Street firms -- Goldman, J.P. Morgan, Citigroup, Bank of America Corp. and Morgan Stanley -- had $18.1 billion in trading revenue during the quarter, up 26% from 2015. Those combined results are the highest in any fourth quarter since the financial crisis.
Banks tend to do better when their clients, such as asset managers and corporations, are putting money to work, which often reflects confidence in the economy. In turn, higher bank profits can make them more confident about lending, spurring further economic growth.
The hum on bank trading desks also reflects a bout of volatility after years of calm. Investors shifted billions of dollars from technology stocks to financial stocks in the wake of the election, routing more trades through Wall Street's equities trading desks.
Meanwhile, Mr. Trump's election -- and his steady stream of comments on everything from outsourcing of U.S. jobs to the strength of the dollar -- has spurred frantic buying and selling in global debt, currencies and commodities.
The strong 2016 finish was a welcome respite for trading desks that started the year in a deep slump. The first quarter is typically the strongest for trading desks as clients set their priorities for the year and a fresh wave of corporate securities flood the market. But in 2016, first-quarter trading revenue fell about 20%.
Sluggish trading, though, had been a problem for banks for the better part of this decade. Since the financial crisis, Goldman, Morgan Stanley and other firms have struggled with tougher rules, which made trading less profitable, and investor apathy, which proved hard to shake as interest rates ground lower and economies across the globe struggled to lift off.
In the following three quarters, however, an acceleration of the U.S. economy, combined with hopes that the surprise election of Mr. Trump could usher in lower taxes and other pro-growth policies in 2017, gave Wall Street a string of strong trading results.
The bounce was particularly strong in fixed-income products, which include corporate and government debt, currencies and commodities. The performance helped shake the belief that the business was in secular decline. J.P. Morgan CEO James Dimon last month estimated that half of the fixed-income trading fees lost since the crisis would eventually return.
More recently, UBS Group AG analysts estimated that the biggest banks could post an additional $15 billion in fixed-income trading revenue over the next two years, with the lion's share accruing to firms like Goldman, whose hedge-fund clients tend to be particularly active when markets turn choppier.
Bank stockholders have embraced the surge. The KBW Nasdaq index, a collection of large bank stocks, is up around 20% since the election on hopes of lower taxes, lighter regulation and enforcement, and more-stimulative economic policies.
"The bar has clearly moved higher," said Devin Ryan of JMP Securities. "The question is whether we will see the real policy changes" to justify the new valuations.
No firm has benefited more than Goldman, whose shares are up nearly 30% since the election and have flirted in recent weeks with highs not seen since 2007.
Goldman on Wednesday reported that earnings rose to $2.35 billion, driven by a 70% surge in bond-trading, which broke $2 billion in revenue for the first time since 2014. Goldman is more dependent on trading than many rivals and has clung more tightly to the business, even in the wake of punitive capital charges and enhanced regulatory oversight. Goldman's shares Wednesday fell 0.6%.
At Citigroup, fourth-quarter trading zoomed up 31%, far better than the 20% range that the bank guided to early last month. The gains were shared across both fixed-income, Citigroup's traditional stronghold, and the smaller stock-trading unit it has been trying to expand. The bank reported a quarterly profit of $3.57 billion. Citigroup's stock Wednesday dropped 1.7%.