Most of us have wondered if the post-financial crisis world would create a New Normal for the economy and the capital markets or if something resembling the Old Normal would eventually reassert itself…
Our own view has been more inclined toward the latter notion… However, we admit that the challenges of the last five-plus years—full of tapering, near-zero interest rates, and a mostly barbell-shaped bull market that’s been great for companies paying high yields and exhibiting fast growth though merely good for almost everything else—have tested our patience and conviction…
Yet over the last two years we have seen encouraging signs… emerging by fits and starts, these signals are still key positives for us… we saw better performance for many of the fundamentally sound companies that we typically seek in the second half of 2012… and a similar pattern emerge over the last year… from the low for the 10-year Treasury on May 2, 2013.
These developments have led to improved results for many active managers… ourselves included… but we are equally excited about the prospect of the economy and markets returning to something like normal… to an environment that will more consistently reward well-run, conservatively capitalized businesses—especially those likely to benefit from a robustly growing economy.
And so far in 2014, we have seen another healthy sign. A piece in the May 4, 2014 edition of The Wall Street Journal by Dan Stumpf and Matt Jaremsky stated that, “The fastest start on record for corporate takeover is providing fuel for a stock market stuck in low gear. U.S.-based companies this year have proposed or agreed to $637.95 billion worth of mergers and acquisitions—either as the buyer or the target—the most at this point since Dealogic started tracking these figures in 1995.”
The piece went on to note, “Shares of the companies getting snapped up have jumped an average of 18% the day after the deal news, according to Dealogic. And contrary to conventional wisdom, shares of the buyers in proposed deals have risen.
“Buyers’ shares are up an average of 4.6% the day after a deal’s announcement. That is the highest post deal share jump on record, according to Dealogic. In contrast, from 1996 through 2011, the acquirer’s shares fell 1.4% the day after a takeover was announced.”
As the article makes clear, much of the impetus for increased M&A activity can be tied to the economy’s slow pace of growth, which “is putting pressure on companies to find new ways to beef up profits, especially with profit margins near record levels in the S&P 500.”
No one knows when the economy will heat up to a point when we no longer describe it as growing slowly… it seems clear that we’ll see the evidence for it only in retrospect…
However, we remain confident that the economy is likely to expand more rapidly soon… and that this will encourage more investors to focus once more on fundamentals.