What's going on?
Continuing last week’s trend, big investment banks Bank of America, Goldman Sachs and Morgan Stanley reported first-quarter results this week. Despite strong results across the board, investors shrugged – and so did the shares.
What does this mean?
Morgan Stanley reported record profits in the first quarter, with the firm firing on all cylinders: its stock-trading business, its oft-maligned fixed-income trading segment (which includes things like bonds, which pay investors a “fixed” amount) and its asset management arm (i.e. investing others’ money, for a fee) all grew in the period.
These trends were mirrored in results from Goldman Sachs and Bank of America: both saw growth in their trading activities (stocks in particular) and tax benefits from recent US tax reform.
Why should I care?
For markets: Buy the rumor, sell the fact?
As was the case for Citigroup, Wells Fargo and JPMorgan Chase last week, a lot of the good news reported was expected by investors, and was likely already reflected in their share prices. With no further good news to surprise investors in Goldman Sachs, Bank of America and Morgan Stanley, some may have chosen to sell their shares and take profits – helping send Goldman’s shares down 2% after it released results on Tuesday (BoA on Monday and MS were broadly unchanged post results).
The bigger picture: Diversification helps banks perform well through an economic cycle.
When the current CEO took over Morgan Stanley in 2010, he embarked upon a mission to diversify its revenues away from highly volatile trading activities and towards the more dependable revenues of asset management. Nowadays, about a third of the bank’s revenue comes from those activities. This means Morgan Stanley can reap the rewards when the going’s good in its trading business, while also having a stable income from other areas when the going gets tough (as it has been for the last few years).