The altered states of America

Things are not what they used to be on Wall Street. It is hard to make a growth fund grow nowadays, and the bull is being chased daily by the bear.

Things are not what they used to be on Wall Street. It is hard to make a growth fund grow nowadays, and the bull is being chased daily by the bear.

And yet the atmosphere in the financial houses of Manhattan, while no longer euphoric, is not all misery, either. Quietly nervous might best describe the mood.

Obviously, there are patches of bad news. There have been lay-offs, and more are likely. Deutsche Bank recently announced plans to shed 500 employees in the Americas, most of them in New York. Merrill Lynch and Bank of America have also warned of job cuts.

By some estimates, about 9,000 people are likely to lose their jobs on Wall Street this year. But some of those cuts will be the result less of a changing trading environment and more of consolidation in the industry itself. Costs are being pared in other ways, too. Advertising budgets are being stripped. There are reports of firms spending far less on bringing in new talent.

"Times have definitely changed," notes Ted Necarsulmer, head of equities at Dresdner Kleinwort Wasserstein in New York. "Now it seems that expenses are getting a serious review."

And, of course, there is the predicament of the online brokerages. Where only a few months ago it seemed as if they had even the biggest of the traditional brokerages on the run, now the online outfits are suddenly cowering. E-Trade, Ameritrade and TD Waterhouse have all announced lay-offs.

This reversal in fortune is not hard to grasp. The sudden volatility of the markets in recent months, especially the hi-tech Nasdaq, has cured many individual investors of their cyber-trading habits. Either they are steering clear of the markets altogether or they are returning to the more established brokerage homes to seek advice on what to do next from real people.

The volume of trades done online in the US has fallen by an estimated 30 per cent from its peak about 10 months ago. That is a difference between 1.2 million trades a day and roughly 830,000 a day by the end of last month. Charles Schwab, based in San Francisco, recently told almost half its workforce not to turn up for work on Fridays. Earnings at Schwab, America's most popular online firm, are expected to drop 32 per cent in the first quarter.

It is not just retail activity that has gone south. Other money-spinning businesses on Wall Street, such as mergers and acquisitions, have also dropped away. M&A activity in New York in January was estimated to be one-quarter what it was a year before. Meanwhile, in January, only three companies in the US went public, making it the worst month for flotations in 21 years.

None of this, however, quite conjures up images of brokers gathering on ledges, ready to leap in despair. It is likely that many of those who do find themselves laid off in the next weeks and months will find work elsewhere fairly quickly as other banks, like Lehman Brothers, build up their ranks.

Raphael Soifer, a consultant to the industry and until recently a veteran broker himself, sees in the relative calm an ambivalence about what is actually happening in the US economy and, indeed, on the markets. "I think the street doesn't know what to think, because it is in several minds about the future direction of the markets," he explained last week.

And last week happened to see the last of this season's bonus cheques. You might expect them to have been dismal, but anecdotal evidence suggests otherwise. Bonuses were good, as they were in London. The only difference from a year ago, perhaps, is that the US firms took more care deciding who should get significant bonuses.

"[Firms] tried to identify who their key employees were and who should be taken care of," Mr Soifer reports. "At the same time, they have sent out signals to people not to expect so much money next year, depending on how things go."

It is because management cannot see around the corner that they have been loath to instigate the kind of payroll carnage that followed the market downturn of 1987. They don't want to ditch talent one month only to be caught unawares if business and investor confidence unexpectedly reignites the next.

And the signals are mixed, especially if you are trying to read the US economy. Having implied a few weeks earlier that zero growth may already be a reality, Alan Green- span, the chairman of the Federal Reserve, suggested on Tuesday that things were not so bad after all.

One moment the talk is of recession, the next it is of a mere slowdown in growth. And last week saw strong recoveries in the numbers on both the Nasdaq and the Dow Jones industrial average. On Thursday, when Dell Computer said it was laying off 4 per cent of its workforce, the Nasdaq climbed 61 points.

And all is not gloom on the Street itself. Retail investing may have tailed off, but institutional activity has picked up, as has bond underwriting. The promise of more cuts in interest rates has also helped fuel something of a recovery in the market numbers. Life is even starting to return to the new issues and mergers and acquisitions sectors.

As for London sentiment, the Wall Street uncertainty has made it across the Atlantic. The City knows that its biggest institutions are American and its biggest stocks have huge exposures to the US. "The UK market is slow precisely because of doubts about Wall Street," says Andy Hartwill, chief strategist at SG Securities in London, "Just wait until the full reporting season and you will see the true scars everyone is carrying from 2000."

"People are nervous and edgy," one veteran money manager in New York confirmed last Friday, while wishing to remain anonymous. "I think there is definitely a retraction going on, but it hasn't hit with full force yet. But at the same time, most of us are adopting a wait and see attitude."