It's not every year that Great Britain decides to leave the European Union. Or that a billionaire provocateur defeats a scion of the political establishment in the race for U.S. president.
So it was, perhaps, inevitable that capital market volatility in 2017 wouldn't equal that of the year before and that fixed-income trading revenue for the largest Wall Street traders would drop. The decline varied widely from firm to firm in the year's first nine months, however, with some posting double-digit slides while one reported a gain.
JPMorgan Chase, whose fixed-income revenue fell 11 percent, slightly above the 6 percent average, will offer the first indication of how the banks fared in the last quarter of the year — a period during which analysts say the overall decline almost certainly continued — when the New York-based company reports earnings on Friday.
"The trading environment for the fourth quarter of 2017 felt remarkably similar" to the second and third quarters, Jason Goldberg, an analyst with Barclays, said in a note to clients. "In addition, trading results in the fourth quarter of 2016 marked the highest fourth quarter since 2009, as it was aided by activity surrounding the U.S. presidential election."
Indeed, while polls largely favored Democrat Hillary Clinton, a former secretary of state and the wife of the 42nd American president, the 2016 race was roiled by the FBI's investigation of her handling of government emails and claims of sexual harassment against the eventual victor, Republican Donald Trump, whose fame as a real estate mogul widened when he began hosting NBC's "The Apprentice."
In the year since, volatility has faded despite controversies in Trump's administration, as investors speculated that he and Republicans in Congress would eventually cut taxes and reduce the regulation that some CEOs argue has hampered growth since the 2008 financial crisis.
That's been a positive for equity markets, with the blue-chip Dow Jones Industrial Average surging 38 percent to a record above 25,000 and the broader S&P 500 climbing 29 percent, but it hasn't benefited bond traders.
Fixed-income trading at JPMorgan alone narrowed about 15 percent in the three months through December, executives have estimated. At the firm and its biggest rivals, which include Bank of America, Citigroup, Morgan Stanley, and Goldman Sachs, the decline averaged 20 percent, Goldberg said.
Still, revenue from stock trading, a typically smaller business, was likely stable or higher, he wrote. Analysts said banks overall will benefit during 2018 from easier year-to-year comparisons as well as the passage of the Republican tax overhaul that trimmed top corporate rates to 21 percent from a previous 35 percent.
The average rate for the five largest banks tumbled on average 10 points, estimated Brian Kleinhanzl, an analyst with New York-based brokerage Keefe, Bruyette & Woods.
"The benefit from the tax bill is that earnings and returns should increase, as we expect banks will not want to see capital ratios building after working hard to lower" them, in part through expansion of stock buyback programs, he wrote.
The downside is that some will see fourth-quarter profit cut by the repatriation provision of the Tax Cuts and Jobs Act, which assesses a mandatory one-time levy of 15.5 percent on cash held overseas and an 8.8 percent charge on other assets.
That may curb fourth-quarter profit at Goldman Sachs by as much as $3.3 billion, the lender said in a Dec. 29 regulatory filing, and other provisions may cost the firm an additional $1.7 billion.
A pivotal question for many investors will be how the year-end accounting adjustments, some related to the tax overhaul, will affect core earnings and the companies' ability to pay dividends and buy back stock next year, Kenneth Leon, an analyst with CFRA Research, told the Washington Examiner.
JPMorgan hasn't disclosed how the new law may affects its earnings. The firm is likely to post fourth-quarter profit of $1.70 a share on revenue of $25.2 billion, according to the average estimates from analysts surveyed by FactSet.
The largest U.S. lender by assets, JPMorgan has climbed 28 percent in the past year to $110.25 a share in New York trading, in line with the Dow Jones gauge and outpacing the KBW index of 24 leading banks.