NEW YORK – Compensation consulting firm Johnson Associates is forecasting a less generous bonus season for Wall Street this year.

The firm said Tuesday that its third-quarter compensation analysis shows year-end incentives, which can be cash or equity awards, will drop an average of 20 percent to 30 percent compared with 2010.

That means most Wall Street professionals will receive smaller bonuses.

“This year started with great promise for a banner year on Wall Street, but hopes for larger bonuses faded over the summer and continue to dim as we approach year end,” said Alan Johnson, managing director of Johnson Associates.

Bonuses last fell sharply in 2008, after the collapse of investment bank Lehman Brothers triggered the financial crisis. Incentives rebounded the past two years, however, as the market recovered.

But this year, the combination of the lack of an economic recovery, plus heightened regulation and uncertain markets has prompted most financial services firms to reduce the size of bonuses, Johnson said.

The firm anticipates fixed-income traders will see the biggest drop, with bonuses expected to fall up to 45 percent, while incentive pay for equities traders and senior management will drop up to 30 percent.

Johnson Associates also projects investment bankers’ bonuses will tumble 20 percent, while incentive payouts elsewhere in the financial services industry will be flat.

For 2012, Johnson expects parts of the financial services sector will post a modest recovery. Assuming there isn’t major economic weakness and a a large bank or nation doesn’t collapse, investment and commercial bankers could see bonuses jump 15 percent or more next year, Johnson said.

He also anticipates financial services firms will continue to cut staff in the U.S., while adding employees in emerging markets.

The firm’s analysis is based on monitoring the financial services industry, public data from eight of the nation’s largest investment and commercial banks, and 10 of the largest asset management firms.

NEW YORK (Reuters) – U.S. stocks have had a such a miserable quarter that investors might just have to buy a whole load of them this week.

Investors who keep portfolios on target by rebalancing every quarter are looking at a dramatic outperformance by bonds since July. Bonds soared, and stocks slumped — and those who desire a specific make-up in their portfolio are going to be selling lots of bonds and buying stocks to get back to their desired allocations.

The rebalancing means stocks could outdo bonds this week by about seven percent if historical trends hold, analysts at JPMorgan said. That forecast got off to a good start Monday as the stock market rallied and bond prices fell.

"If you're doing passive rebalancing for quarter-end, that would require investors to sell bonds and buy stocks especially given the dramatic difference in performance this quarter in particular," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, which oversees $50 billion in assets.

Stocks have been a disaster this quarter, with the S&P 500 (.SPX) down 12 percent through Monday. Bonds, meanwhile, have been stars. Benchmark yields rallied to lows not seen in decades, boosting the iShares Barclays 20+ Year Treasury Bond Fund (TLT.P), which follows an index of long-dated bonds. The ETF is up more than 26 percent since the beginning of July.

When this happens, it tends to reverse in the waning days of a quarter or a month, and that could drive flows for a good part of the week, according to the analysis from Marko Kolanovic, global head of equity derivatives strategy at JPMorgan.

JPMorgan analysts on Monday said that when the S&P 500 underperforms 20-year Treasury prices going into the last week of the month, stocks tend to reverse the trend and recoup roughly a quarter of the relative underperformance.

The underperformance in this quarter has been dramatic, with equities trailing bonds by about 42 percentage points –on par with what was seen during the financial crisis in 2008.

Government bonds outperformed stocks in the past three months as investors fretted first over the softening economic data and later over a return to recession.

The downgrade of the U.S. credit rating in early August cast further doubts over growth, with the reverse effect of enhancing the safe haven appeal of Treasuries.

Hopes for a resolution in Europe were viewed as a catalyst for the market rally, but it may not be the only reason as portfolio shifts are part of it.

To be sure, the main reasons for the massive decline on the S&P 500 in the past quarter — the European credit crisis and the weakening economic data in many world regions — are still unresolved.

"The market is bouncing around with the vagaries of the headlines," said Ablin. "We need either some kind of resolution to the uncertainty in Europe or some momentum signals, or some combination of both that would prompt us to go into this market," he said.

(Reporting by Rodrigo Campos; Editing by Andrew Hay)

NEW YORK – Small investors, take note: The smart money isn’t sure what to make of the economy, either.

Some market strategists say the recent drop in stock prices means the market is expecting a recession. Banks like Goldman Sachs and others have lowered their year-end forecasts for the Standard & Poor’s 500 index. And Mark Zandi, the much-followed economist from Moody’s, says the chance that the economy will fall into another recession is 40 percent.

Which is to say, there’s also a better-than-even chance the U.S. economy will continue to grow, albeit slowly. That’s the case Federal Reserve Chairman Ben Bernanke and others have been making. This camp believes the economy will grow at a gradual pace now that gasoline prices have fallen, Japan’s factories are mostly back up to speed after the earthquake and tsunami, and the debt ceiling debate is over for now.

All of these mismatched signs are leaving large investors in the lurch. Tack too hard to either safety or to risk, and there’s a chance that whatever the economy is doing will make their bets go sour. With so much hanging in the balance, some money managers say they don’t know what their next move will be: buy stocks, load up on bonds, or simply hoard cash and wait for the dust to settle.

“We’re in a no man’s land,” says Robert Stein, the head of Astor Asset Management who is responsible for investments of $1.2 billion. “As a portfolio manager, I would like to have clarity. If it’s going to be a recession, we know what to do. If the economy is improving, that’s even better. But the economic data that’s been coming out is doing a great job of creating more question marks.”

Stein slashed his stock holdings by 50 percent in June after poor reports on economic indicators including consumer spending and new applications for unemployment benefits made him think the economy was stalling. He thought then that stocks would pick up during the last three months of the year. That’s when he planned to buy, but now he’s not so sure.

“We could buy again soon,” he says. “But it’s equally possible that we could reduce (our stock holdings) even more. We don’t see a tipping point either way yet.”

Stein is not alone. Confusion about the economy is one reason the stock market is the most volatile it’s been since the peak of the financial crisis in 2008. The Dow Jones industrial average rose or fell by more than 100 points 16 times in August, a rate that comes to two out of every three trading days. It swung by more than 400 points for four consecutive days in the middle of the month — a first in its 115-year history. Since hitting a high for the year in April, the Dow has fallen nearly 11 percent.

What investors do know is that the economy barely grew during the first six months of the year. Consumer confidence fell to its lowest level since April 2009, when the economy was still in a recession. And there was no job growth in August.

At the same time, the Federal Reserve’s latest survey found that the economy grew in all 12 of its regions from mid-July to the end of August. Sales of big-ticket items like cars increased from the same time last year.

Some money managers say the economic picture is muddled now because there are so many important issues that aren’t settled. Europe’s economies continue to battle slow growth and lingering debt problems. If Greece or another country were to default, it would likely throw the European Union into a financial crisis. That would directly impact U.S. companies, which rely on Europe for about 20 percent of their exports.

It’s not much clearer at home. Investors are waiting to see whether Congress can pass any legislation to bring the unemployment rate down from 9.1 percent, and if the so-called super committee can agree on $1.2 trillion in spending cuts before the end of the year.

Wil Stith, fixed income manager at MTB mutual funds, says that he thinks the economy will continue to grow at an annual rate of less than 2 percent. He’s buying corporate bonds because he thinks they provide attractive yields.

But he is still concerned that Europe or the U.S. economy could falter soon. “We’ve never had this sort of dynamic before, and I’m not sure where it goes from here,” he says.

The mixed signals are prompting some money managers to sit on the sidelines. “I don’t remember a time when the market has traded from economic report to economic report like this, and I’ve been doing this for 22 years now,” says Mark Lamkin, who manages $350 million for retail investors and endowment funds as part of Lamkin Wealth Management. “There is a huge tug of war going on and we don’t know the direction.”

Lamkin says that he tells his clients that they could either lose their capital or an opportunity. “Right now, I’d rather lose an opportunity,” he says. Lately, he’s moved 70 percent of his client’s assets into cash. The last time he was this cash-heavy was when Lehman Brothers fell in September 2008, he says.

He’s not buying government Treasurys, a traditional place that investors park their money when they aren’t confident in the economy. That’s because the economic gloom has pushed Treasury prices near record highs.

The yield on the 10-year Treasury bond fell to 1.87 percent on Sept. 12th as investors piled into assets thought to be safe during a down economy. That was the lowest since the Federal Reserve Bank of St. Louis began keeping daily records in 1962. If the economy improves, bond prices will likely fall quickly, Lamkin says.

“Why take the risk and tie your money up?” Lamkin says. “I’m trying to keep my powder dry so that when a trend does become clear we can make some money on it.”