The Wall Street Job Market's Leading Indicators

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The recent pullback of a number of buyout-related bond sales provides a timely reminder that financial market trends drive employment on Wall Street.

Of course, price action in stock and bond markets is notoriously difficult to predict. But because significant market shifts generally affect hiring only after a lag of several months or longer, turns in headcounts and even compensation often are predictable. If any market segment or asset class enters a sustained downturn, it's a good bet that Wall Street departments most exposed to that segment will retrench sooner or later.

Today, the growth of fixed-income headcounts in the U.S. is under pressure from a cyclical rise in interest rates and a housing market downturn that's hit mortgage-backed and asset-backed securities, notes Brad Hintz, financial services analyst at Sanford C. Bernstein.

If current problems in the credit market spill over to the equity market and merger activity, they would wash away the foundation beneath the current hiring boom in investment banking.

Stock Market, Dealmaking Show Resilience

That isn't happening yet. The U.S. stock market is holding near record highs. Both private equity and corporate buyers continue racking up deals, notwithstanding the bond market's hiccups. Just days after investor resistance forced underwriters to cancel or scale back private equity-related bond sales for four well-known companies, two of the largest buyouts ever hit the news: a $48.5 billion purchase of Canadian phone company BCE, and Blackstone's $26 billion deal for Hilton Hotels.

The deal parade continued Monday. Private equity behemoth Carlyle Group agreed to buy Sequa Corp. for $2.7 billion (a 54 percent premium above Friday's closing market value), and London-based CVC Capital Partners nailed its first big U.S. deal, a $2.2 billion purchase of chemicals distributor Univar. Carlyle also raised the target amount it seeks to raise from investors in its latest U.S. buyout fund, from $15 billion to $17 billion.

Noting Carlyle's move and the July 3 IPO filing by long-time private equity kingpin Kohlberg Kravis Roberts, The Wall Street Journal's Dana Cimilluca observed, "With all that money in their coffers, private equity firms should be able to keep plowing money into deals even if financing conditions continue to deteriorate."

Warning Signals to Watch Out For

So, if the need for investment bankers isn't about to fall off the tracks, how can anyone determine when it is?

We suggest watching for any of these possible signs:

- A decline in major stock indices of greater than 10 percent, with no sign of a quick recovery.

- A broad pullback of liquidity in credit markets. That could show up as a cascade of cancelled bond deals, to a point where credit for LBOs became scarce enough to force buyout sponsors to cough up more equity on a regular basis.

- The Fed starts hiking rates again. Such a move probably would be preceded by a conspicuous strengthening of the economy, and/or an upturn in core inflation from its current 1.9 percent year-over-year pace, toward 2.5 percent.

- Surprise bankruptcy filings by one or more big-name companies.

- A major bank or investment bank suffering losses - whether from hedge fund exposure, corporate loans, subprime mortgages or some other source - whose magnitude is great enough to threaten its survival.

- A blowup involving a hedge fund that is severe enough to dent investors' buoyant mood toward hedge funds in general. By luring so many people from Wall Street through sky-high pay packages, these funds have contributed heavily to today's candidate-driven market. So if the hedge fund sector became less aggressive about hiring, investment bank compensation growth would probably slow.

For now, expect Wall Street's skies to remain sunny so long as business volumes, tied to uptrending stock markets and ample credit availability, stay healthy. When those markets eventually roll over, career advancement will become more challenging for most financial professionals, even though the job market will continue to look deceptively solid for awhile.

What are your views on the job market's strength? Share them by posting a comment below.

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