Big Merger Deals Fuel Today's Wall Street Rally
UPDATED at 4:30 p.m.:
A wave of pre-market merger-and-acquisition (M&A) deals pushed Wall Street to its best day in recent weeks, as all three major indexes surged.
The Dow closed up 124.17, or 1.3 percent, at 9,789.36 after being up as much as 1.6 percent during the day.
The broader S&P 500 closed up 1.8 percent at 1,062.98 after being up nearly 2 percent earlier today.
The tech-heavy Nasdaq closed up 1.9 percent at 2,130.74 after being up as much as 2.3 percent in intraday trading.
It was the Dow's biggest point and percentage gain since Aug. 21. Of the Dow's 30 blue-chip stocks, 28 rose and two fell.
What's caused the surge, especially on a day of lighter volume, thanks to the Jewish holiday?
First, the markets were influenced by the rash of pre-market "merger Monday" deals out this morning, including Xerox's $6.4 billion purchase of Affiliated Computer Services and Abbot Labs saying it would buy a Belgian pharma business for $6.6 billion.
Traders like mergers because they generally are a sign of a healthier market. The M&A market has been largely moribund over the past year, with the occasional strategci exception, such as Disney's purchase of Marvel.
For example: Total M&A activity in the U.S. was $990 billion in 2005, a figure that peaked at $1.32 trillion the following year. Last year, that number had dropped to $910 billion. So far this year, $426 billion worth of M&A deals have been announced.
The huge drop off during that time came in leveraged buyout deals. In 2005, there were $118 billion worth of LBO deals. That peaked at $376 billion in 2007 before absolutely falling off the table last year, dropping to $29 billion, because no one could raise any capital. So far this year, the pace is even slower: $12 billion in LBO deals, according to Capital IQ.
Also, we're coming up on the end of the third quarter of the year, and sometimes mutual fund managers indulge in "window dressing," which means to dump poor-performing stocks and buy strong-performing ones just before the end of the quarter, so their quarterly report to clients will look better.
Also, the markets' "animal spirits" seemed to want to reverse the three-day losing street that concluded on Friday. I know that's a frustrating thing to hear, because it doesn't give you anything to hang your hat on, but it's as true a reason as anything else.
In a research note this morning, Mizuho Securities warns: "Domestic financial markets continue to firm as the recovery and asset reflation trades work in tandem to push up valuations and yet the rally appears to be getting long in the tooth." (Emphasis mine.)
One of the reasons for the market rally is savings: people are spending less and putting more away, Mizhuo writes: "...excess liquidity is being channeled into the financial markets instead of the goods market as households scramble to rebuild savings balances."
Over the past six months, the Dow is up just a little less than 25 percent. The S&P 500 is up about 28 percent over the same period and the Nasdaq is up about 35 percent, as tech stocks have been leading this rally.
-- Frank Ahrens
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September 28, 2009; 4:30 PM ET
Categories: The Ticker | Tags: Dow Jones, nasdaq, s&p 500
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