Editor's note: All signs point to a bullish narrative...
With volatility weighing on stocks right now, many investors are uncertain about the direction of the markets.
But according to Rob Spivey – director of research for our corporate affiliate Altimetry – one sector is telling us more than you might expect about the current state of the economy.
In today's Masters Series, originally from the November 5 issue of the Altimetry Daily Authority e-letter, Rob explains why recent activity in this sector is making him optimistic about where stocks are headed...
This Doesn't Happen in a Shaky Economy
After a long stretch of corporate quiet, the dealmakers are busy again...
Boardrooms have stayed cautious with their deals for three years. High interest rates made it tough to justify borrowing to invest. Executives preferred to hoard cash instead.
But the tide has turned... and fast.
Since the Federal Reserve's September rate cut, the pace of dealmaking has picked up in earnest.
PNC Financial Services (PNC) announced a $4.1 billion purchase of FirstBank on September 8 – before the rate cut was even official. Just a month later, on October 6, Fifth Third Bancorp (FITB) announced a $10.9 billion acquisition of fellow regional bank Comerica.
Both deals are significant because they involve regional banks... a sector that typically pulls back when credit conditions are tight.
And that tells us more than you might expect about the current state of the economy...
Two midsized lenders are confident enough to pursue multibillion-dollar transactions...
For that to be true, it means credit risk is under control. And sentiment across the banking industry is improving.
A broader flood of mergers and acquisitions (M&A) is sending a strong bullish signal to the market today. U.S. M&A has already topped $2.4 trillion this year.
That's more than all of last year. And it's within striking distance of 2021's record $2.6 trillion.
Take a look...
Deals like these don't happen in shaky economies. They happen when credit is available and financing costs are easing.
And conditions are easing even further. The Fed cut rates by another 0.25 percentage points in October. President Donald Trump has made it clear he intends to push the central bank for even more cuts next year.
With financing costs coming down at last, executives finally feel confident enough to put their balance sheets to work again.
We saw a similar pattern around 20 years ago, from 2003 through 2006...
Deal volumes spiked toward $1.6 trillion as the Fed wrapped up its early-2000s easing campaign and profits accelerated. The market surged about 66% through 2006.
It happened again starting in 2010. Mergers jumped 25% year over year as the post-financial-crisis expansion gained momentum.
And over the next five years, the market nearly doubled.
Each time, the return of dealmaking marked a transition from caution to optimism. Business leaders stopped waiting for the all clear... and started building for the next cycle.
We consider four metrics when gauging the health of the market... credit, earnings growth, valuations, and sentiment.
Credit matters more than the other three combined. So the influx of M&A deals is a powerful signal.
Earnings are ramping up, helping rationalize today's expensive market. And credit conditions are finally easing thanks to the two recent rate cuts.
In short, credit has finally shifted from being a market stabilizer to a participant in the rally.
This change could very well lift the market in the coming months. The flood of new deals tells us it's time to be bullish.
Regards,
Rob Spivey
Editor's note: On Monday morning, Rob's colleague and Altimetry founder Joel Litman is going live with an emergency briefing...
Joel has built his reputation by uncovering the hidden financial strength of companies that Wall Street often misunderstands or overlooks. And today, he sees one tiny stock flying under the radar that could deliver massive gains almost overnight.
That's why he's going on camera to reveal what you must do with your money immediately to capitalize on this setup before folks start to catch on. Click here to get the full details...
