After the equity market falls, how long before the financial services jobs market collapses?

21 May 2010

2 minute read

After the equity market falls, how long before the financial services jobs market collapses?

Yesterday was not a happy day. At 2.8%, the FTSE had its biggest one day fall for 15 months. The S&P 500 fell 3.9%. Asian markets continued the sell-off. While not exactly a crash, it doesn't look pretty: the S&P 500 has now fallen 12% since April; the FTSE's down 15%.

In the past, there has been a reasonable correlation between equity market crashes and widespread annihilation of financial services jobs.

"If you look back to 1987, 1997, 2001, and 2007, there were always substantial banking job cuts within the next 6-12 months," says one London-based banking analyst.

Hence, in recent terms, headcount at Goldman Sachs fell 13% between 2001 and 2001, and 17% between 2007 and 2008. According to the CEBR, headcount across the City of London fell 5% between 2000 and 2003, and another 5% between 2007 and 2008 (Evidently there were other factors at work in 2007, but the market fell 7% in July), even before the full effects of Lehman's collapse were felt.

"There is a direct relationship between financial services jobs and the strength of the equity markets," adds Dick Bove, US banking analyst at Rochdale Securities. "When the market crashes or comes down very rapidly, it eliminates any possibilities of new issues or follow on offerings and companies choose not to make decisions about acquisitions because they are uncertain where the economy is going to go."

While this clearly doesn't sound good for jobs in ECM and M&A, what about sales and trading businesses, which had a strong Q1? Bove concedes that, "they make money when the market is highly volatile."

He's also sanguine about financial services job prospects longer term (having released a note yesterday saying that bank stocks will grow in "grow in multiples, not percentages").

"If this market were to decline on a sustained basis for a long period of time, there is no question that the headcount of investment banking firms would go down," says Bove. "But it is not clear that the market has crashed and will stay down for a sustained period. We are getting a major sell off driven by panic. I am not sure that we will still be here by June."

AUTHORSarah Butcher

Global Editor

Go
Goldy
21 May 2010
The bigger banks are going to feel bigger pressure due to regulation. I expect layoffs and restructuring. Hedges, VC, private equity will still be needed to produce quality investments no matter the outlook. The hype around early equities increases has shifted to the reality of long term fiscal pressure and sluggish growth.
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dave
21 May 2010
some institutions have already started making selective cuts in the front office as this years budgets are unattainable at many houses.
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me
metcalf1704
21 May 2010
Surely the fundamental rationale for hedge funds is that they can profit from falling markets as well as rising. And increased volatility should be manageable for better trading firms as volatility has been underpriced for a long time now. If firms can't react to the markets they shape, then so what? And the equity market growth / job creation correlation must broadly be coincidental (confidence begets more confidence etc).
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hedgie
21 May 2010
Those hedge funds may not close, because they might find it harder to open another entity under the new wave of regulations. Greater capital liquidity restraints for start-up and a smaller investor pool to tap, the new landscape will difficult.
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po
pop
21 May 2010
If the equity markets end up 15-20% down by year end this will be the death toll for a lot of hedge funds. Many of these funds lost big in 2008 and remain under the high water mark even after 2009. Another poor year and they'll be so far under the high water mark it really won't be in their interest to continue (who wants to wait 3-5 years before getting paid an incentive fee).
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