VOL. 128 | NO. 35 | Wednesday, February 20, 2013
The Worldly Investor
Quiet Period Could Lead to Frisky Phase
Buyer Intent Building By some analysis, the last two weeks have exhibited the lowest stock market volatility since 1986. While sideways markets are boring, they also reduce anxieties. On average, since 1980, the S&P 500 experienced intra-year declines of 15 percent.
Last year, the market shed a milder 10 percent between April and early June. With last year largely crisis-free and this year already calmer still, an even less active market would fortify investor confidence. With mountains of capital idling in cash and yield-free bonds, investment capability is high. Those with ready cash often wait for “pullbacks” as entry points.
However, high levels of intent quickly reverse pullbacks when they occur. This fits the current trading pattern. The S&P 500 has not closed a day on its low since Dec. 19. Since then, on average, the market has rallied nearly 60 percent off its daily lows into the close. With downside volatility mitigated by investment intent searching for execution, and upside volatility mitigated by the conclusion of earnings season, this quiet period may continue.
For investors already invested, a sideways period of adjustment feels fine after a 20 percent rally since June. For those looking to turn investment intent into execution, it feels frustrating. Given what we have been through, this is a very comforting frustration.
Spring Fever With the announcement of the Heinz acquisition by Berkshire Hathaway and the proposed merger of American Airlines and US Airways, total merger and acquisition volume has hit $182 billion so far in 2013. This represents the fastest start to a year since 2005.
Large corporate deal making requires significant confidence, cash, and credit. Other capital market activities exhibit confidence markers as well. Year to date, global IPO activity has eclipsed $10 billion, triple the level of activity to this point in 2012. Corporate bond issuance globally has hit historic levels, as voracious investors and issuers mate in a historically low interest rate environment.
Also, according to a recent Senior Loan Officer Report published by the Fed, “Moderate fractions of domestic banks indicated stronger demand for C&I loans by firms of all sizes, on net, and cited their customers’ increased investment in plant or equipment and increased need to finance mergers or acquisitions and accounts receivable as the main reasons for increased loan demand.” Translation, it’s not just the larger players feeling frisky, but also the mid-size and smaller players.
Mixing together a lower volatility environment, rising investment intent, and accelerating corporate finance activity may finally stir animal spirits. These spirits consistently appear later in cycles and eventually sow the seeds of their own demise as the investment decision-making process becomes clouded by optimism.
Clearly, we are nowhere near that point. In economics, animal spirits act as a catalyst for heightened activity levels and economic velocity. Caveat: improving corporate appetites do not prevent periodic drawdowns in stock prices. However, if a typical drawdown appears while momentum in animal spirits continues to build, those looking for an invitation to participate need to RSVP.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.