No one likes to watch the stock market shed 10 percent of its value, regardless of how long it takes. But to watch it evaporate in one day of trading, as it did on Thursday? Yikes.
Anyone with a 401(k) feels the pinch. But one important sector in Boston could be particularly affected: the people who manage all that retirement money.
Boston’s famed money managers — Fidelity, Putnam, MFS, State Street, and the rest — collectively cut thousands of jobs during the last bear market, in the dark days of the Great Recession more than a decade ago.
Consider these numbers: At its most recent peak in mid-2007, employment in the state’s investment industry was at 53,500 people, according to economist Alan Clayton-Matthews; by early 2013, it was down to roughly 43,000. A fifth of the sector’s workforce, gone, in less than six years.
Will we see a repeat performance? The obvious answer: It depends on how long this newly christened bear market lasts. For fund management firms, revenue is primarily tied to the value of the assets they manage. It’s not necessarily one-for-one. But if the stock markets end down for the year by 20 percent or more, you can expect a revenue decline of a similar magnitude for many of them.
Former MFS executive chairman Bob Pozen said these companies should be able to withstand the shocks if all the pandemic-related gyrations end by September, and the market stabilizes. But Pozen, who now teaches at MIT’s Sloan School of Management, said the situation could get painful if the bear market continues through the end of the year. Many companies will make budget decisions for 2021 in the fall. Revenue pressures could cause some to squeeze employment, he said, and people would be laid off.
Pozen said the money management industry in Boston has suffered from the trend of investors pulling money out of actively managed funds in favor of lower-cost, passively managed options, such as index funds. Revenue continued to climb for everyone, because of the stock market’s ascension. That crutch gets yanked away in a bear market.
Even before stocks took a sudden turn downward last month, the local investment industry hadn’t recovered all the jobs it lost during the Great Recession. As of the end of 2019, Clayton-Matthews said, the sector only employed about 46,000 people in Massachusetts.
Gerard Cassidy, a bank analyst at RBC Capital Markets, said the trend toward low-cost index funds is one reason all those jobs haven’t returned; computers are doing more of the work. And Cassidy noted that many financial companies in the Boston area have moved a considerable amount of back-office work to cheaper locations, in other states or overseas.
To some extent, that slow recovery will likely blunt the economic damage this time around, said Clayton-Matthews, associate professor emeritus at Northeastern University. There’s simply less to cut now.
The bear market won’t only be felt at the trading desks. Michael Goodman, an economist at the University of Massachusetts Dartmouth, points out that many white-collar workers will likely see smaller end-of-year bonuses, or no bonuses at all. Then there’s the issue of stock-based compensation: Many people, particularly in the tech industry, receive a big portion of their compensation in stock options, earnings they won’t be able to pocket for some time now.
All this means those workers will have less to spend on big-ticket items, from furniture to cars to fancy dinners — the kinds of expenditures that keep the economy humming, and support countless small businesses.
Local economists say they’re more concerned about other sectors of the economy that will be harder hit by the pandemic, such as airlines and hotels. Many of the hourly workers in these businesses lack the financial security of the white-collar employees who have steady salaries at Boston’s big fund firms.
Then there’s the potential hit to the state budget. State budget writers expected an increase in tax revenue of nearly $900 million in the next fiscal year. But we could be stuck with no increase at all — or even a modest decline. Clayton-Matthews estimates that a 10 percent drop in stock prices for the year would wipe out as much as $336 million in anticipated tax revenue, particularly as capital gains dry up and wary consumers pare back discretionary purchases. But that number could triple, he said, once you account for revenue losses due to Covid-19’s effects on employment, incomes, and spending.
The 10-percent declines in the Dow Jones industrials and Standard & Poor’s 500 on Thursday might seem like abstract numbers flashing by on a screen. But they’ll have real-world consequences, within our investment industry, and well beyond it.