The end of the year is a big time for Wall Street; this is when final trades, deals, and sales can finally be wrapped up, and for most of Wall Street we’re getting in time for bonus season, where performance, accountability, and fair remuneration become hot topics both on the small and big scale.
Okay, maybe that’s just a fancy way to say analysts and managers are going to start negotiating (or, in some cases, arguing) over who deserves to be paid what and why. But the end of the year isn’t just about bonuses; in fact, the year is an important metric in finance.
This shouldn’t be too surprising; the year as a unit really is most practically significant for agriculture. Knowing the season cycle and where you’re in it is essential for farming, and finance in many ways really is just a form of abstracting concepts and processes that humans developed with the birth of agriculture and fixed human settlements. When asked, many people would say finance is about money—and that is true, but it is also very much about time.
The time value of money is not just the basis for calculating compound growth rates. Funds, from the humblest index fund to the most sophisticated private quant hedge fund all use annual returns and one-year returns as the basis for demonstrating the fund’s performance. Lockups of investment funds tend to be in one year increments, and bond/loan terms are based on the year as well.
It isn’t just annual returns that hinge on the year; many see equity markets in terms of annual trends, too. Obviously, 2020’s trend was the pandemic, and 2021’s was the slow recovery; 2022, quite clearly, was inflation and the Fed. Next year is already being talked about as a separate entity—many financial journalists are talking about whether 2023 will be the year of the expected recession or not—and the deeper we get into 2023, the likelier that it will be seen as a totally different entity from the prior year.
This may be part of the impetus behind Santa rallys; in a down year, some want to front run the changing attitude of the next year. Often this doesn’t make much sense, as in 2022; since the Fed’s rate hiking regime is set to last well into March, the cutoff of yearly themes does not fit now as well as it has in the past (and particularly in each year from 2018 to 2021), and yet it is still a mental model being applied by pros and amateurs alike. Wall Street, whether it should or not, cannot stop thinking in terms of years.
Employees at banks don’t just think of end-of-year bonuses, either. The year is the standard (and in many circles still an ideally indivisible) unit of career measurement. One works at a financial institution for at least a year (and ideally two, especially for one’s first job) before moving to another position; leaving a job after even nine months is often treated with suspicion, whether rightly or wrongly. And tricks to try to make a tenure look longer. For instance, an applicant is hired in December 2021 and quits in September 2022, but she omits the months from her resume and states in a cover letter that she worked at the firm for a year—these are the kind of things that Wall Street HR staff are trained to sniff out, and when they do it never looks good.
The year even encroaches into some investing styles, particularly thematic and market sentiment strategies that try to find mispricings between the market’s current mood and a larger context the market is failing to adequately consider. There are also theories in behavioral finance that this thinking in years tendency creates market inefficiencies that one can arbitrage; enough analysis of market behavior, and one can find these mistakes and profit from them.
It’s no secret that the vast majority of people who flock to Wall Street do so for money—but it’s also true that Wall Street spends a lot of money thinking about time, too.
