Volatility Is Good News For Financials!

In our year-end letter we mentioned that our expectation for market volatility in 2018 was, ironically, one of the positives for financial firms' earnings going forward:

"5. Trading volume: 2017 is about to go down as one of the least volatile years in market history. Thus, an important revenue source -- securities trading -- for major financial firms faced a real headwind for much of the year, as volatility equates to trading activity. While, as discussed in Part 2, we like the macro setup going forward, we believe that the likelihood of a repeat of 2017 (in terms of volatility [lack thereof]) is very low indeed. Thus, the prospects are decent for a pickup in trade-related revenue for the big banks going forward."

Here's Wall Street Journal's February 6th article titled Banks Cheer Return of Wild Markets:

“Anything that brings back volatility would be good,” said Peter Tchir, macro-investing strategist at New York-based Academy Securities LLC. “Maybe we could see a return to better quarters” for banks across their fixed-income trading businesses, from currencies to interest-rate hedging.

Dull markets during most of 2017 pushed lenders’ trading revenues to historic lows as clients saw little reason to shuffle their investments or buy derivatives to hedge risks in ever-rising markets. Now, with stocks plunging on expectations of rising bond yields and higher inflation, the same banks, analysts and investors see a brighter picture.

Financials remain among our top sector picks for 2018.