It’s good to be the bank.
You know, just in a kind of general sense. That’s where all the money is, after all. And last year was a banner year for trading desks and investment bankers, as Wall Street prospered despite (and in some sense as a result of) the pandemic.
For example, the second quarter of 2020 was the worst quarter for the US economy since The Great Depression. During that three-month stretch, Goldman, Morgan Stanley, Citi, and JPMorgan together generated some $25 billion between them in FICC revenue and debt underwriting fees.
That’s not to demonize the banks, it’s just to point out the juxtaposition between Main Street and Wall Street which, while always glaring, was especially so in 2020 due to a variety of factors, including increased trading and blockbuster corporate debt and equity issuance.
Still, it hasn’t always been easy being a bank shareholder since the financial crisis, depending on which way the regulatory winds were blowing and how the yield curve was behaving (or not behaving). You’d have been far better off in big-cap tech, that’s for sure.
In 2021, though, with the reflation narrative firmly entrenched in market psychology, yields rising, growth expectations building, and the curve steepening, bank shares are off to the proverbial races. Indeed, the KBW Bank index was up 22% in February alone through Wednesday afternoon in the US.
That’s pretty remarkable, and speaks volumes about the prevailing zeitgeist.
If you’re curious about the historical context, the index touched the highest since mid-2007 on Wednesday. So, the last time banks were feeling this good about life, BNP was still three months away from freezing the hodgepodge of ABS funds which effectively marked the beginning of the subprime crisis.
I suppose this isn’t much consolation for anyone who bought just prior to the GFC, just as the recent recovery in energy shares offers little in the way of solace for anyone who bought the “dip” early in 2020 before the Saudi-Russia price war conspired with the pandemic to make oil briefly worthless.
Nevertheless, it says quite a bit about the market’s expectations for the future of the economy.
Now if only we can get the line in the figure (below) moving in the right direction again, we’ll be in good shape.