The pandemic-era trading boom appears to be petering out for Wall Street banks. Goldman Sachs is the latest to report a drop in revenue from fixed income and equities trading in the fourth quarter, against tough comparatives from the manic last three months of 2020.
Investors should not panic. Uncertainty over how quickly and aggressively the Federal Reserve will increase rates this year may create enough volatility to give trading volumes another jolt.
Goldman needs the party to continue. Investment banking was strong last quarter. But trading is Goldman’s biggest unit, accounting for 37 per cent of revenue last year.
The business took in just under $4bn of revenue in the final three months of the year, a 7 per cent decline from $4.3bn recorded last year. The drop is an alarming 29 per cent compared with the third quarter. The dawdling equities trading business was largely responsible.
For investors who knocked 8 per cent off Goldman shares on Tuesday, the trading slowdown is especially concerning given that it is coming against a backdrop of rising operating expenses.
Compensation and benefits — the single biggest line of costs at Goldman — jumped 31 per cent in the fourth quarter, reflecting the big payouts received by employees following a record year in dealmaking. JPMorgan has already warned it may miss its target for return on equity this year.
Some context: trading volumes at Goldman remain well above pre-pandemic levels. The outlook for investment banking remains robust.
Surprise rate rises could galvanise trading. While the Fed has signalled that it could raise the cost of money three times this year, Fed fund futures are pointing to as many as five increases.
Goldman, having traded at around 1.6 times its book value last summer, sits at a multiple of 1.25 times. That valuation may waver further as investors wait to see what the new normal in trading is. But Goldman remains worth holding during what promises to be a bumpy year in the markets.