“The year started strong in all areas,” said Securities Industry Association Senior Vice President and Chief Economist Frank Fernandez, “as the industry’s exceptionally strong cyclical recovery, led by bond issuance activity and trading gains, carried over from 2003. But a combination of weaker summer volume and a generalized decline in rates and fees charged by the industry for most of the products and services it provides to its customers reduced profits to more sustainable levels as the year progressed.”
Firms countered the “summer swoon” and increased price pressure by continuing to contain costs. By the final quarter of 2004, increased revenues from equity underwriting and merger and acquisition activity as well as stronger secondary market activity helped offset lower revenues from trading desks and bond underwriting. “Fourth-quarter results will likely prove somewhat better than originally forecast and Wall Street will post a solid performance for the year as a whole.”
Pre-tax profits for all broker-dealers doing a public business are expected to be $19.5 billion, down 19.1 percent from 2003’s $24.1 billion. This is, however, up from $16.0 billion in 2001 and $12.1 billion in 2002.
Gross revenues remained higher after slumping in the two previous years, increasing 3.2 percent from 2003’s $212.7 billion to $219.6 billion, while net revenues increased 0.9 percent.
“The industry responded quickly throughout the year to competitive pressures and demands from investors for a broad mix of products and services at affordable prices,” said Fernandez. “This flexibility has enabled them to maintain their profitability and continue to deliver a high level of service.”
Industry Continues To Raise Capital
The securities industry raised an estimated $2.9 trillion of capital for U.S. businesses in 2004 (annualized based on 11 months of data) through corporate underwriting activity in the United States. This marks the second straight year in which nearly $3 trillion was raised for businesses through the sale of newly issued stocks and bonds to the general public. In the last five years alone, the industry has raised approximately $12.8 trillion for U.S. businesses, an amount that already surpasses the $12.4 trillion total raised during the 30-year period from 1970 to 1999.
The amount of equity raised in the U.S. markets for new, start-up, and small U.S. businesses through the sale of initial public offerings rebounded in 2004. After a three-year downturn from a record $75.8 billion in 2000 to a low of $15.9 billion in 2003, dollar proceeds from IPOs rose to $45.7 billion in 2004 (11-month annualized data).
U.S. Securities Industry Employment Continues To Rise
Securities and commodities industry employment reached an all-time high of 840,900 in March 2001, then declined 9.9 percent over the next two years to a low of 757,800 jobs in May 2003. Increasing at a measured pace since then, total employment has risen 3.6 percent for the year, beginning January at 771,400, and ending November at 798,000 (preliminary November figures).
“Managers in areas that contributed to the firms’ bottom line were able to get headcount increases approved,” said Fernandez. “But most of the new hires have been income-producing personnel. The hiring of support staff remains subdued, as the composition of industry employment continues to be transformed by both cyclical and structural forces.”
Dividend Payments Continue To Increase
According to Standard and Poor’s, the S&P 500 companies are expected to pay $189.4 billion in dividends in 2004, up from 2003’s $160.6 billion. A total of 247 companies increased their dividends in the first 11 months of the year, compared with 222 for the first 11 months of 2003. Of the 7,000 firms that report their dividends to Standard and Poor’s, 1,578 reported increases in the first 11 months of the year, up from 2003’s 1,494.
“The positive impact of dividend tax reform continues to be felt,” said Fernandez. “Investors are benefiting as more and more firms introduce dividends and other issuers increase their payout.”
Signs Of Growth In M&A
After two years of stagnation, M&A activity picked up in 2004. The value of announced deals grew from $528 billion in 2003 to $741 billion in 2004 (11 months annualized); global M&A activity increased from $1.34 trillion to $1.78 trillion (11 months annualized). “While these numbers are still sharply down from the peak in 2000, they show a resurgence in M&A deals,” said Fernandez. “The J.P. Morgan/Bank One deal led the pack, but a number of smaller deals helped boost this area.”
Markets Begin To Regain Early Momentum
After months of stagnation as investors waited out the summer, markets reacted positively in November as oil prices declined and the election was decided. From the start of the year through December 10, the Nasdaq Composite rose 6.2 percent, from 2,003.37 to 2,128.07; the S&P 500 gained 6.8 percent from 1,111.92 to 1,188.0; and, the DJIA increased 0.9 percent to 10,543.22 from 10.453.92.
Average daily volume on the markets increased modestly from 2003. Nasdaq daily volume averaged 1.78 billion shares for the first 11 months, 5.5 percent above 2003’s 1.69 billion; the New York Stock Exchange realized a 4.1 percent rise in average daily volume, from 2003’s 1.40 billion to 1.46 billion shares. The average daily value of trading also showed increases on the markets, with Nasdaq increasing 21.9 percent from $28.0 billion to $34.1 billion. NYSE stocks had an equally impressive gain, with the average daily value of trading rising 19.3 percent, from 2003’s $38.5 billion to $45.9 billion.
Investors Proceed With Caution
Net inflows into equity mutual funds reached $146.9 billion through October, with inflows of $17.4 billion in September and October. “The uncertainty of the election, the war, and oil prices kept many investors on the sidelines for the summer,” said Fernandez. “Their confidence is returning as they see positive returns in the portfolios so far this year and the positive effects of the dividend tax cut.”
Americans’ Portfolios Have Foreign Flavor
At mid-year, Americans were on track to break 2003’s record for dollar value of foreign equity holdings. SIA Vice President David Strongin attributes the $43.2 billion in acquisitions in the first half to strength in the Japanese market. Foreigners continued to invest heavily in U.S. securities, especially Treasury bonds, during the year, with their total holdings of U.S. government securities nearing $2 trillion.
Tempered Growth In The New Year
While early indications show better-than-expected results for the fourth quarter, firms are expected to continue on a cautious path. “The firms are still waiting to see more signs of a continued recovery before increasing their budgets,” said Fernandez. “Compensation and other expenses will still be tightly controlled.”
Fernandez identified the underwriting and asset management areas as showing signs of starting strong in 2005. ”We expect equity underwriting and M&A activity to lead growth early next year, with support provided by structured finance, derivative products, and asset management.”
And investors will continue investing cautiously, as they readjust their expectations for their portfolio’s performance. “Investors may see a slight improvement over 2004’s modest gains, but should not expect a repeat of 2003’s strong showing.”
