Markets

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

A lot has been written, and plenty more is sure to come, about how the U.S. stock market went pretty much nowhere this year.

The S&P 500 finished 2014 at 2,058.90, and it's hovering within a few points of that level as 2015 draws nearer and nearer to a close. In fact, with profit growth disappearing at the index level and the stomach for valuation expansion feeling a bit queasy,  it's noteworthy how closely the benchmark index has clung to last year's close: its average level of the year has been 2,061, less than three points away from where it ended 2014. Excluding the correction in August and rapid rebound in the following two months, the year was pretty flat.

A funny thing happened during that flat market, however: Trading volumes are showing some signs of life after a few years in which it looked as if traders had dozed off, or at least put some of their algorithm machines into sleep mode. More than 6.9 billion U.S.-listed shares changed hands each day, the highest since 2011.  

Pump Up the Volume
U.S. equity trading averaged almost 7 billion shares a day in 2015, the highest since 2011.
Source: Bloomberg Data
Note: 2015 figure is year to date as of 12/24. Data series starts in June 2008, so average is not full year for 2008.

It was still a far cry from the financial crisis in 2008 and 2009, when average volume approached 10 billion shares a day. Still, the pickup definitely seems to have benefited shares of companies that, at least to some degree, operate the treadmill that investors were running on this year.  

While shares of fund managers like Franklin Resources, Legg Mason, Invesco and T. Rowe Price are all showing big losses for the year, companies that benefit from higher volumes in stocks and derivatives did very well. Nasdaq Inc. and E*Trade Financial, for example, gained more than 20 percent this year. (Virtu Financial, the high-frequency trading firm that went public in April, rose 17 percent since its IPO.) 

Winners and Losers
Companies that benefit from heavier trading volumes outperformed asset managers this year.
Source: Bloomberg

In fact, these stocks have been on a roll for a few years, rallying right through the volume doldrums. Each is beating the S&P 500 Financials Index since the end 2011 -- especially Schwab, which has almost tripled, and E*Trade, which has almost quadrupled. Most of these volume-friendly companies have pretty bright growth prospects -- with analysts predicting double-digit percentage increases in earnings next year -- and valuations that are somewhat elevated but not ridiculous.  

E*Trade and Schwab are expected to be standouts when it comes to profit growth in 2016, with each projected to increase adjusted earnings per share by 36 percent. Higher trading volume is only part of the story. Both companies also make money from the spread -- or net interest margin -- between what they pay customers on cash and what they charge on, say, margin loans. And unlike bank customers, brokerage customers may not pay much mind to deposit rates on their cash, so the pressure to raise them won't be as strong.  

Of the two, analysts prefer E*Trade, which has begun buying back shares after drastically shrinking the mortgage business that caused it a lot of trouble in the financial crisis. E*Trade is rated the equivalent of "buy" at 13 firms, compared with three holds and no sell ratings; analysts' average 12-month price target of $33 implies a 12 percent gain. Schwab is rated "buy" at nine firms, while an equal number rate it either a hold (9) or a sell (2). Schwab's average 12-month price target is only about 4 percent higher than where the shares trade now.

E*Trade is trading for about 18.5 times earnings estimates for the next 12 months and Schwab is trading for about 24.6 times forward earnings, so neither is at nosebleed valuations if those earnings projections are in the right ballpark. While that's a big "if," it's a reasonable bet that the Federal Reserve's interest-rate increases -- and the market's fixation on them -- could create two positives by increasing net interest margins and whipping up some good old-fashioned volatility that would pump up trading volumes. E*Trade set a record during the market's panic attack in August, executing 394,000 trades in one day.

So regardless of the direction the market takes in 2016, the momentum in these stocks is poised to continue.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net