JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon surprised some analysts on Monday by suggesting that trading revenue at the largest U.S. bank will likely reach just above $6 billion in the second quarter, falling short of current estimates.
Anyone who listened to him 11 months ago could have already seen this coming.
“For trading, because no one asked, cut it in half,” Dimon said on July 14, 2020, referring to making projections based on its record-breaking $9.72 billion in second-quarter revenue from trading stocks and bonds. “Cut it in half, and that’ll probably be closer to the future than if you say it’s going to still be double what it normally runs.”
That turned out to be a decent rule of thumb. Yes, technically the average analyst estimate of $6.5 billion is closer to Dimon’s latest guidance than $4.9 billion, which is roughly half of last year’s second quarter trading revenue. But it underscores that as the world moves out from under the shadow of the Covid-19 pandemic, some of the extraordinary conditions in the financial markets that propped up the bottom lines of the biggest banks in 2020 are increasingly fading away.
Most obviously, the kind of volatility that defined the second quarter last year no longer exists, at least in equities and fixed income. The stock-market volatility index known as the VIX fell to 15.04 on Monday, the lowest since February 2020, and has averaged 18.24 since the start of April, compared with 34.49 in the three months through June last year. An investment-grade credit default swaps index dipped to the lowest since the same month as corporate-bond spreads remain remarkably steady. Meanwhile, the ICE BofA MOVE Index, a yield-curve weighted measure of the normalized implied volatility on one-month Treasury options, has fallen for three consecutive months as benchmark U.S. yields have gradually moved lower. Nothing about this is positive for Wall Street trading activity.
Vanquished Volatility
Wall Street trading revenue is poised to slump amid calm markets
Source: Cboe Global Markets, ICE BofA, Markit
“Remember, the quarter last year was exceptional,” Dimon reiterated Monday at a Morgan Stanley virtual conference. “This quarter is, like, call it more normal,” he said, adding that his projection “is still pretty good by the way.”
Of course, this period could hardly be considered normal for most financial-market observers. The price of Bitcoin tumbled from as high as $64,869.78 in April to as low as $30,016.82 in May and is now hovering around $40,000, seemingly getting direction from the latest musings of Tesla Inc. CEO Elon Musk. So-called meme stocks like AMC Entertainment Holdings Inc. continue to bedevil hedge funds and other institutional investors. That all may be true, and yet, for big banks like JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley, these flare-ups generated by crypto enthusiasts and Redditors are tiny in comparison to the once-in-a-century pandemic that put the world in a standstill around this time a year ago and prompted unprecedented policy actions to rescue the global economy.
As for JPMorgan, it has enough lines of business that it will almost certainly be just fine, even if its shares took a 1.7% hit on Monday in the biggest drop since April 22. While Dimon said the company’s net interest income may only reach $52.5 billion this year, less than a previous estimate of $55 billion, investment banking might have “one of the best quarters you’ve ever seen.” Banks are first in line to report quarterly earnings, and JPMorgan often leads off, so Dimon and other executives have an incentive to manage expectations ahead of time. Morgan Stanley CEO James Gorman also cautioned on Monday that second-quarter revenue at his bank will be nowhere near the “gangbusters” level from the first three months of the year.
Still, with interest rates this low and the animal spirits driving risk assets having largely dissipated, it’s becoming clear that banks won’t have the luxury of leaning on their traders to make up for shortfalls elsewhere as they did a year ago. Dimon warned that the Covid conditions were a glaring exception rather than the norm. We’ll soon find out whether Wall Street leaders were ready for that reality or were caught unaware.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net
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