Sensory Deprivation at All-Time Highs

God has a great sense of humor. An 80-month bull market for stocks, the second longest in history, and Wall Street sits it out because no one is trading. LOL, it’s almost too perfect.

If Goldman Sachs were the old Goldman Sachs, its stock would be at $400 a share. Instead, it’s barely benefitting. Neither is the rest of The Street. At least not in the manner that it used to. Asset management is good and banking is okay, but the trading that built these firms is nowhere. They’ve shed a lot of it and what’s still there is sitting idle, like rusting farm equipment in a drought.

In the morning note from Nick Colas (ConvergEx), he likens the lack of volume, volatility and action to sensory deprivation. Here’s why it’s so painful for the big brokerages to countenance:

A few days ago I found myself sitting at a group lunch, chatting with a bunch of senior brokerage executives from mid-sized New York-based firms.  After the usual chit chat, the conversation turned to the topic of the year: when are trading volumes in U.S. equities going to bottom out?  From a high of 8-9 billion shares/day (and sometimes higher) during the Financial Crisis, domestic stocks now trade more like 5 billion shares/day.  And sometimes less.  I proposed that another 20% drop wouldn’t be impossible.  Wrong thing to say at a table of brokerage executives.  It put a distinct coolness in the air.

Look deeper into this criticism, however, and you will see a more fundamental complaint.  Things are dull, and that’s a bad thing for financial professionals who are always looking for the next big thing.  Wall Street needs volatility to get paid for its ideas.  On the brokerage side of the fence, volatility creates the need to trade and generate commissions.  In the money management community, fast moving price action is how you get paid for doing the work on an idea.  Unless you have Warren Buffett’s sense of serene anticipation, seeing your stock go up 20% in a month will give you more of a thrill than a 30% move over a year.  Volatility is the most powerful sensory input for investors and brokers alike.


Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York.

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