The steady rise in the S&P500 is beginning to feel inexorable, with the index up by almost 10% this year and by more than 16% in the last 12 months. The rally will enter its second decade if it lasts until March next year.
Investors in US shares are increasingly adopting the view that all is for the best in the best of all possible markets.
This allows them to ignore signs of distress abroad, such as the collapse of the Turkish lira or the risk of a no-deal Brexit. It also lets them look past the potential effect of a prolonged trade war between the US and China, and tune out the bizarre twists of American domestic politics.
A side effect of the oddly uneventful rise in stock prices has been the downgrading in status of traders on Wall Street. After all, there is little need for dealing skills if markets simply rally steadily.
Goldman Sachs remains the barometer of changing conditions on the Street, and its recent management changes have been widely interpreted as validation of a new era. Records for M&A activity are being set, which indicates that a new breed of investment banker should take management control.
The appointment by incoming Goldman chief executive David Solomon of his former colleague John Waldron as president and chief operating officer fits this analysis, as it places advisory experts in the top two roles, reversing the way that two former traders ruled when Lloyd Blankfein and Gary Cohn were chief executive and president.
One of the three co-heads of securities under the new regime, Jim Esposito, also spent much of his career in capital markets sales and only Ashok Varadhan among the co-managers rose by the traditional trading route of making the most money.
Marty Chavez, who was shifted from chief financial officer to join the new securities management gang of three, did get his start at Goldman in the same J Aron commodity unit as Blankfein and Cohn, but his abiding theme in recent years has been an attempt to automate trading functions at the bank.
A sign that this automation is reducing the need for experienced dealers came soon after the announcement of the Solomon senior management team, with the news in late September that equity trading veteran Paul Russo is leaving Goldman.
Russo could simply have been disappointed that he was passed over for one of the securities co-head slots. But his departure may also indicate that even the most sophisticated and tech-savvy traders face a diminished role in the Wall Street of the near future.
Russo was not an old-fashioned, fill-your-boots-with-hot-stocks type of equity dealer. He made his name trading equity derivatives, which is normally a much higher margin business than cash share dealing. Equity derivatives offer scope for taking controlled directional trading exposure, due to the leeway that dealers have in making decisions on hedging option positions.
That might seem like a business line that can thrive in a world of cursory regulatory monitoring of the Volcker Rule constraints on bank proprietary trading. But directional equity derivatives trading – no matter how complex – is unlikely to generate much revenue as long as stock volatility remains near historical lows.
The relative performance of Goldman and its competitors when the current US rally finally ends will be interesting
As the S&P500 ground slowly upwards in late September, the VIX measure of index volatility was stuck at around 12, making the brief spike above 30 that was seen in February this year seem like a distant memory to bored derivatives traders.
Solomon’s presentation to a Bernstein banking conference soon after he was anointed as next Goldman chief executive did give a name check to derivatives, in a list of three priorities for the equity division.
The stated goal was to increase penetration in corporate equity derivatives by leveraging relationships with company executives, however. This indicates that Solomon views the contacts of his advisory bankers as the key to moving Goldman up from the number-four slot in corporate equity derivatives revenue that it held in 2017, according to a Coalition survey.
A public presentation to analysts by a senior banker is unlikely to mention any internal plan to discretely ramp up trading risk, of course. The emphasis on corporate relationships in derivatives – alongside uncontroversial goals such as increased electronic equity execution and broader retail coverage – is nevertheless telling.
So, does the current dull US equity rally mean that the traders of Wall Street face a depressing future of lower remuneration and longer hours sitting in meetings about technology with irritating millennials?
In the short term, the answer is clearly yes.
In the longer term, the impact of the next big market downturn will show whether or not banks that keep trading veterans in senior positions are better placed to manage exposure when panic sets in.
Goldman was the best-performing bank by a wide margin when markets rebounded after the credit crisis a decade ago, due to aggressive trading by dealers including Varadhan and Ed Eisler.
Varadhan and his fellow traders were able to obtain swift approval from the management in place in 2009 – Blankfein and Cohn – for an early move to resume risk taking and a massive directional bet on the consequences of lower interest rates.
The relative performance of Goldman and its competitors when the current US rally finally ends will be interesting.
Could Varadhan convince Solomon and Waldron to permit a big wager on a market rebound?
Will JPMorgan’s current pre-eminence in markets revenues and its superior data enable the bank to ride a storm?
Can Morgan Stanley securities head Ted Pick’s nine boxes of management consultancy tedium help the firm to minimize losses?
Is Bank of America chief operating officer Tom Montag – once the top trader at Goldman – still closely involved enough in day-to-day operations to help to steer his firm through choppy waters?
Should new UBS investment bank co-head Rob Karofsky get back to his trading roots and try to profit from a downturn?
Does Credit Suisse still actually employ any traders?
These questions and more may be answered when a market downturn eventually arrives and the current hybrid Wall Street model of dealing algorithms combined with a few experienced traders is put to the test.