Wall Street has been plagued with uncertainty for four years now. After Lehman Brothers went under and Merrill Lynch was sold in a fire sale to Bank of America, Wall Street shed 28,000 jobs over two years starting in 2008. It started to resume growth in 2010, adding 12,200 jobs over the next two years. But then continued uncertainty from the European debt crisis put a halt on growth and 4,500 more jobs were lost. Even as recently as June, the status of the industry was unknown as the Dodd-Frank regulations were still vague and Europe was still issuing troubling reports, especially from Spain and Italy.
But in the last two weeks that has changed. Not only have European leaders agreed to the outlined plan for the European Stability Mechanism (E.S.M.) – a permanent bail-out fund that works like the International Monetary Fund – but Germany’s Constitutional Court ruled that Germany could contribute to the bailout fund. The takeaway from these developments is that the continent is unified on its bail-out intentions. The E.S.M. replaces the temporary European Financial Stability Facility, both of which were designed to be a “firewall” to contain the debt crisis.
As if that weren’t enough good news, the Fed announced last Friday that it would buy large quantities of mortgage bonds and other assets to help improve the job market. The S&P 500 jumped. It has climbed more than 4% since the start of September. For the year, the S&P is up over 16%. What could go wrong now?
Well, it will take some time before these positive developments register serious job growth. Europe still needs to iron out the details of the E.S.M., including a more centralized banking system; many European countries are still operating under austerity measures and many companies are waiting to see who will win the November election and whether or not the next elected officials will lead us off the “fiscal cliff” by letting the current tax cuts expire and instituting spending cuts. Even on Monday, the New York Times reported that third quarter profits for many companies would be lower due to weakness in worldwide demand.
In sum, things are looking brighter and there is much to be optimistic about. As interest rates both here and especially abroad continue to fall, Wall Street should start to add jobs in the next three or so months which will boost New York City’s economy, generate demand for office space and raise property values. It may take as many as six months to see sustained growth on Wall Street and higher profits, but what is most reassuring is that so much of the uncertainty that has hampered the industry appears to have lifted.