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,”
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.
Walt Disney Co.,
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.)
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
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