Our Take: A Break in the Clouds?
Recent evidence suggests that the credit crisis may be starting to lift. While we see no reason to expect the Wall Street hiring outlook will brighten any time soon, the contour of financial market conditions going forward could form an important background consideration for professionals planning any type of career move.
In the two months since the Federal Reserve stepped in to pull Bear Stearns from the volcano's lip, most debt, equity and money markets have been looking healthier in both price action and, more important, activity and liquidity.
EfinancialCareers isn't in the business of forecasting how financial markets will perform. But after all the attention we gave to the Bear Stearns blowup and its aftermath - especially its impact on employer and job-seeker sentiment - we believe a forward-looking update is appropriate at this time. With that in mind, here is a rundown of signs that augur for and against a turnaround, and what it means for your career.
Let's begin with the green arrows.
Revived Bond and Stock Underwriting
1. Credit spreads are moving tighter, for both investment-grade and lower-rated corporate debt.
2. Deal activity is reviving in a range of markets.
Investment-grade corporate bond issuance in the U.S. already has set a monthly record in May with a week left to go. Both financial issuers and junk bonds - two sectors especially hard hit by the credit crunch - are rebounding too. Worldwide equity issuance, including initial public offerings, also picked up noticeably in recent weeks. That's great news for debt and equity capital markets bankers.
3. The surge in capital raising for distressed asset funds is finally helping banks make a serious dent in their holdings of troubled assets, thereby paving the way for them to lend again.
For example, UBS said Wednesday it sold $22 billion of troubled mortgage-backed securities at a discount to a distressed asset fund led by BlackRock. Other top banks also are making progress in unloading huge blocks of underwater assets, from commercial mortgage bonds to leveraged loans.
Economy and Money Markets Performing a Little Better
4. The economy might dodge the bullet.
While recession remains a front-burner concern, many economists are marking down the odds a bit. They cite recent data that exceeded expectations - such as April employment figures and retail sales, and first-quarter gross domestic product - plus rapid fiscal and monetary stimulus and signs of improved sentiment in financial markets since the Fed rescued Bear Stearns.
5. The Fed's liquidity measures seem to be working.
Although commercial banks remain heavy borrowers from the emergency lending facilities the Fed put in place between December and March, investment banks have progressively scaled back their use of those facilities in recent weeks. That's widely viewed as a sign that funding pressures on Wall Street are easing.
6. Money markets are improving.
Even asset-backed commercial paper (ABCP), which was at the epicenter of the credit crisis around the turn of the year, is showing signs of recovery. For instance, the yield spread between one-day ABCP and the target federal funds rate has shrunk by more than half from its peak, observes Tony Crescenzi, bond market strategist at Miller Tabak & Co.
To be sure, even market bulls admit that the upturn since March might prove fleeting. Reasons for caution include: a likelihood of more profit-killing write-downs by both investment banks and commercial banks; the danger that the huge and unregulated default protection market could buckle and stick banks with credit losses they thought they were hedged against; a continued steady decline in home prices; and the risk that a vicious cycle of shrinking sales and shrinking business investment could develop as the economic slowdown belatedly hits consumer spending patterns.
Even if March really did mark the bottom for financial conditions in this cycle, we anticipate a lengthy lag before employment conditions finally turn upward. Wall Street's decision makers aren't likely to start loosening the purse strings until they can confidently foresee concrete and sustained improvements in their respective companies' earnings. With many write-downs and severance costs yet to be booked, we'd be loathe to bet that the requisite degree of confidence will reappear any time in 2008.