Our Take: What the Equity Selloff Portends

The past two weeks' worldwide bloodbath in equity markets represents a new and, from a career standpoint, particularly troublesome dimension of the year-old financial crisis.

Before we get to speculating about the impact, let's be clear about the cause. Recent stock market behavior is an immediate consequence of the unchecked downward spiral in credit availability - rather than a response to softer U.S. economic data, as superficial media accounts would have it.

U.S. economic releases to date indicate a recession of familiar dimensions, lasting the usual six to nine months. But those data are already stale, in view of the severe worsening of the credit lockup since Lehman Brothers filed for bankruptcy on Sept. 15.

This new stage of asset deflation is likely to cut into a number of business segments that had held up fairly well against previous manifestations of the credit crunch. Here's a rundown of sectors whose "refuge" status may be coming to an end:

Institutional Asset Management

Thus far, traditional, long-only buy-side shops have provided a steady career bulwark against the credit storm. While asset price declines did bite into fund managers' top-line growth, the buy-side was insultated from the worst consequences because (unlike banks) management firms' own capital was not at risk. So the buy-side continued hiring and promoting, at a pace not much different from the heady days of 2006-07.

At this moment, however, assets under management are no longer merely stagnating, but hemorrhaging. That portends sharply reduced fee revenues, which could spur cutbacks in hiring, and perhaps layoffs, among asset management firms.

U.S. mutual funds for instance, saw a record $52 billion fly out the door during the week ended Oct. 8, according to unofficial estimates compiled by Trim Tabs Investment Research. That followed a $72.3 billion estimated outflow from U.S. stock and bond mutual funds during the month of September. (The Investment Company Institute will release official September fund flows data late this month.)

Hedge Funds

For several months after the credit crisis erupted in mid-2007, hedge fund hiring seemed largely immune. While wrong-way bets forced a handful of well-known funds to shut their doors, others prospered, and the fund sector as a whole continued to grow.

Now, fund industry headhunters see many of their smaller clients cutting back. Even large fund companies that want to opportunistically hire top talent cut loose by Wall Street's meltdown, are slowing hiring if only because most portfolio managers are too busy trading to interview any candidates.

More ominously, an overwhelming majority of funds are posting negative returns this year. Besides raising the likelihood that more investors will withdraw assets (as has happened with mutual funds), negative returns mean no incentive fees for the fund company and consequently, no bonus for the portfolio manager.

Corporate Mergers

While large private-equity-led buyouts have been absent throughout 2008, a resilient pace of strategic mergers and acquisitions among corporations cushioned the jobs of many a M&A banker. Now that the credit crunch is spilling into equity prices and high-grade credit lines, industrial America's appetite and capacity for strategic mergers may dry up as well.

Equity Trading

Trading volume typically soars during periods of extreme volatility - only to vanish and remain depressed for months or even years thereafter. Bear markets, in other words, give equity trading an artificial, temporary lift at their outset, but ultimately act as a long-term depressant. (On the other hand, traders in equity volatility products, such as futures and options on the VIX and other volatility indexes, may continue to benefit from the turmoil.)

Commodities and Emerging Markets

As recently as June, commodities were one of the hottest areas in finance. Major commodity price indexes soared between 30 percent and 50 percent in the first half of 2008. They have since shed all those gains and more, and are down at least 20 percent for the year to date (with the notable exception of precious metals).

Emerging markets also looked like a refuge, but are proving to be anything but. Already on the slide since mid-year, securities markets in places like China, Russia, the Middle East and Latin America now are taking still deeper hits due to escalating risk aversion. Even worse than prices cratering, authorities have ordered markets closed for days at a time, in Russia, Indonesia and even Iceland.