Is a Fed Pivot Bearish?

Hey everyone,

Today I’m working on an update on finance layoffs, what a Fed pivot may mean for stocks, and reflecting on the notes I wrote seven months ago re: how long bear markets take.

I’m working on a dozen different newsletter pieces I plan on getting out over the coming months. The big one is a very comprehensive guide on 1) getting a finance job out of school 2) intern/first-year analyst advice and 3) buy-side recruiting thoughts. I am spending a very long time on this, because I want it to be as detailed as possible, and also because I’m weighing moving seats this spring and will probably have more items to add.

Additionally, I’m narrowing through the list of books I loved as a college student/junior analyst, preparing for a late February compensation report, looking for more anon Fin-Twit accounts to interview, and working through other ideas to share with y’all on the newsletter.

Let’s get into it. I don’t talk about stocks in this, but as usual, here’s the disclaimer - none of this is meant to be taken as financial advice.

Part I: Finance Layoffs:

In early January, Goldman executed the most brutal round of layoffs we’ve seen thus far this cycle, firing 3.2k employees or 6.5% of the workforce. Additionally, BlackRock, the asset management giant laid off 500 workers or 2.5% of the workforce. Then TODAY - Truist has engaged in a significant amount of layoffs, which we're still trying to get more info on. This is on top of the initial layoffs we saw in 2022, which were mainly banks cutting 1%-2% and Credit Suisse beginning their restructuring program.

More on Bloomberg’s latest finance industry job-cut tracker can be found here.

I know a decent amount of the Finmeme audience is starting to get affected by these cuts (especially Truist today) which pisses me tf off. It’s very frustrating seeing firms treat employees like crap. I want to emphasize this too - it may not be because you're an underperformer. We're very quick to label ppl as underperformers - but the reality is you may have been in the wrong seat at the wrong time. As much as I wish I could say it’s over, if deal flow continues to get crushed, then every business driven by deal flow is going to continue trimming costs. Higher interest rates for longer definitely has a meaningful impact.

Many of you saw me post a deck full of advice from a MS VP who was let go. This deck was made during mid-2020 as a way to encourage juniors to keep things in perspective. Most of the responses were full of people finding it highly insightful – so here’s the full tweet. I encourage you to save these down and reflect on what’s right for you.

What you can do: There’s a lot of people reading this who will probably have someone who was laid off asking for help. I ask you to be kind and to provide guidance and help where you can. I have never been laid off, but I’ve been on edge constantly after seeing people around me getting fired. Try to put yourselves in their shoes, be empathetic and help where you can so they can grind their way back into the industry.

It’s unlikely that layoffs will stop here across large institutions. Both tech and banking beefed up hiring efforts in 2021 as they thought there was going to be hockey stick growth in their prospective end markets. This is why even with 10%-20% layoffs, you still see institutions that are still significantly larger than they were in 2018-2020. Firms will likely continue looking to “do more with less” over the coming two years.

I strongly encourage everyone who can to beef up their savings. I personally have always been under the assumption that at some point I will be laid off. Not because I’m doing a terrible job, but because this is a relatively cyclical, cutthroat, and competitive industry and things can change on a dime fairly quickly. I think everyone should assume they get laid off at least one time within the first 10-15 years of their career and think about their net worth and budget and make sure they have enough liquid assets to be okay for 10-12 months.

Additionally, I have seen scenarios where it takes people a while to get a new seat. I hope everyone gets a new seat within two months – but that may not be realistic. The longer we get into our careers, the more “pigeonholed” (for the best or the worst) we become. For example, there may only be 10-20 shops that are perfect for your experience in “subordinated real estate debt” or “opportunistic middle market debt” (I’m making up examples). This is especially the case outside of NYC or other big finance hubs. When I’ve talked to colleagues about leaving NYC, they’ve said they couldn’t hit the bid because they felt that if they were laid off, they would be stuck in that city and be unsure where to go. If you don’t have a list of alternative seats in your city you could work at if things went south, then I would get on that ASAP. For example, if you’re in Miami, jot down at least five different places you’d try to get a new job at if things went bad.

There is one positive though, the new hybrid world has opened the door for numerous remote opportunities so you don’t have to move to a new city to find a new job. However, I have struggled to find any private or public credit seats that are remote, but hey if you want to work in corporate finance at a tech startup, you can probably get a fully remote seat. Not everyone may want to do FP&A, but at least it’s an option right?

FinTwit Jobs: Finance layoffs are going to continue and tbh FinTwit is an incredible resource that people love being on far more than LinkedIn. Somehow the FinTwitJobs handle wasn’t taken – so I created FinTwit Jobs – a new Twitter account to get the word out on roles FinTwit ppl are hiring for. I encourage you to follow so we can get some scale and get the word out effectively.

I think this is going to be a great way to spread the word and help people land seats. I’m going to continue working to get more momentum for this account and to source jobs that I can post. Twitter has certainly changed my life – if we can hire a bunch of people from Twitter during this finance labor market recession then this would be an incredible outcome.

As you can see, I am here to help where I can. If you are hiring for a relevant seat in the U.S. or London you can give some details and I can put the word out on Instagram & Twitter. $0 in it for me. It’s a recession, I want to see HYH followers have jobs.

Follow FinTwit Jobs here.

Part II: A Fed Pivot may not equal a soft landing:

We've had a decent rally lately in stocks and risk on assets (crypto, growth tech) but what if we're getting ahead of ourselves and retracing what usually happens right before the market tanks? I’ve got some really good data points below to walk through this.

A good outcome for the markets (and economy) would be a “soft landing”, the Fed raising rates causing inflation to normalize to 2% or less with a small bump in unemployment expected, followed by the Fed normalizing (loosening) monetary policy to support steady-state economic growth.

Obviously, sustained high rates increase the cost of debt and equity capital, which lowers discounted future cash flow used to assess the value of a Company. So one would think rates getting cut would be a good thing for stocks right? Well ya, it would be, BUT usually rates are probably getting cut because the earnings outlook is not looking good and monetary policy relief is needed.

There's a fascinating tweet (albeit kinda fear-mongering) below that shows when the Federal Reserve loosens policy, stocks usually tank. More recently, in early 2020 we saw the Fed cut rates aggressively as news about the covid-19 pandemic spooked the world and sent us into a temporary lockdown. During the great financial crisis (GFC), the Fed lowered rates to provide support to the economy as the housing and financial markets cratered. The amount and length of drawdowns following the start of rate cuts is fascinatingly scary though:

The Motley Fool laid out the following: During the tech bubble, the Fed started cutting on January 3rd, 2001, from a rate of 6.5% to 1.75% over 11 months, but it took 645 days (1.7 years) for the stock market to reach its bottom on October 9th, 2002. During the GFC, the Fed started cutting on September 18th, 2007, from a rate of 5.25% to 0%, but it took 538 days (1.5 years) for the stock market to reach its bottom on March 9th, 2009.

Right now, the market is expecting the Fed to start cutting this year, which if history repeats itself & the soft landing doesn’t play out, will drive more pain for the market. Idk if this will play out to a tee though given we have a Fed that started hiking too late and will probably pause too late. Maybe that means the market will bottom sooner than 500 days? Idk – but let’s look at it a little deeper.

Here’s a really good visualization from Nick Maggiulli from OfDollarsAndData. Nick does a great job combining data analysis with analyzing the stock market and had some great charts in that article I just linked. You can follow Nick on Twitter here too.

Chart 1: For the most part, rate hikes (green dots) happen during bull markets, while rate cuts (red dots) play out as the economy is weakening and the economy needs monetary policy relief.

Chart Two: This is similar to chart one but zooms in on when rate cuts played out relative to S&P drawdown levels.

Chart Three: This interactive chart shows that typically the median return after a rate cut isn’t so hot.

Chart Four: Lastly, here’s the average S&P 500 performance following a rate cut, with the market historically falling after a cut. It would appear that the initial rate cuts are when markets are most prone to fall, while after the last cut, stocks are more likely to post positive returns.

This is an immensely helpful visualization, but I will say though, the limitation of this data is that we’re just looking at 1994-2020 data. Of course, if you look at Michael Gayed’s tweet from above, you can see that this trend appeared to be taking place prior to 1994, and played out in the late 60s-early 80s.

I view the Fed personally as being obsessed with laying ppl off – but idk how that fully solves supply chain issues. This period is becoming increasingly defined by white-collar layoffs, but there is still an immense struggle to fill blue-collar roles. While Tech and Banks can lay ppl off left and right, it seems unlikely that laid off workers will pivot to becoming a plumber or truck driver. There appears to be an obsession with labor but blue-collar wages remain incredibly sticky (although growth is slowing) while other key inflation drivers such as energy and rent are cooling off.

Not financial advice ofc - but here's what I'm thinking. My belief personally is that the Fed is usually late to the party. They’re too late to starting to hike rates, they’ll be too late to soften monetary policy, and then they’ll probably stay in a dovish monetary policy for too long.

Part III: Revisiting a post on Bear Markets from 7 months:

Early subscribers remember this one. The full article is here if you need a refresher, I gave a preface how about how bear markets can last a while and are full of bear market rallies and included some of the details regarding the best trades made during the great financial crisis. It’s worth reading later if you haven’t given it a look, but for now, I want to circle back on a few key points regarding bear markets I had in the article.

These two charts from this Bloomberg piece nailed that it can be dangerous to get suckered into bear market rallies.

Additionally per Bloomberg, bear market rallies can last quite a while and give the false impression of a return to a bull market!

Lastly, I laid out this CNBC chart showing that the median decline in the S&P 500 during a recession is -27% (average is -32%). As of Monday Jan 23rd, 2023, the S&P 500 is down -15.7% from the highs.

I think it’s crucial to keep an eye on this – because it keeps things in perspective. It feels like this bear market has lasted forever, but the reality is “we’re still so early.” There really haven’t been any significant systemic blowups in the financial markets over the past year and a half. I still firmly believe we’re on the verge of a recession and once we are forced to cut rates, there will be a year or so of tough times. Part of this is driven by the fact that the Fed probably can’t navigate a soft landing and mistimed their hikes, but a lot of this thinking is driven by history and the fact that lengthy bull market cycles have to come to an end. It’s easy for people to say “millennials/Gen Z haven’t been through a recession & shouldn't opine” but we shouldn’t discount the voices of younger investors. Every day, our finance jobs (regardless of age) revolve around making big investment and macro calls, and you can learn a lot by reading a lot of history. Now is a great time to reflect on previous recessions and stock market crashes and think through potential parallels. Or, alternatively, maybe you look back and realize there aren’t enough indicators to declare a significant enough downturn. Either way, this is my way of saying (for myself and for all the ppl that tune in) that this is the year to really dig in and try to figure out how investors will talk about 2023 ten years from now.

That’s all for this time. Remember to follow FinTwit Jobs!

Stay tuned for more soon!