Merger pop missing from US market

Slowdown in deal activity means smaller boost to share prices

Cracks in the foundation of the bull market in US stocks are quickly spreading. The Wall Street deal-making machine that powered 2015 to one of the biggest years ever for mergers and acquisitions has slowed, and that means the pop to stock prices that investors could count on from corporate transactions has been reduced. While there are still seven months left in 2016, the volume of takeovers shows few signs of picking up.

Take the knee-jerk jump in acquired companies on the first trading session after a takeover is announced. Those gains alone added $192 billion to equity values in 2015, according to data compiled by Bloomberg. This year, single-day moves following M&A are on pace to add $70 billion - the least since 2009.

Seldom since stocks began their ascent in March 2009 has the outlook been more bleak than now. Economists are cutting forecasts for global growth and the Federal Reserve is warning more interest rate increases are coming as soon as next month. Announced buybacks, the biggest source of equity demand in the seven-year bull market, dropped 38 per cent in the last four months, the number of dividend boosts is the lowest since 2009 and earnings are in free fall.

"M&A, buybacks, flows into equities - they've been like safety nets for the market, and if something goes wrong, it's likely to be more exaggerated in their absence," Thomas Melcher, the Philadelphia-based chief investment officer at PNC Asset Management Group, said by phone. "It doesn't mean the market can't sustain these levels, but it does mean it's walking on a tightrope."

Companies are putting on the brakes at a time when most investors are nursing losses. The S&P 500 is down 3.5 per cent in 12 months and has gone a full year without setting an all-time high, a fallow period that has just two precedents in past bull markets. Declines of comparable length have usually been the start of bear markets, defined by a 20 per cent retreat in prices.

Futures on the S&P 500 expiring next month added 0.2 per cent at 9:17 a.m. in London.

Other sources of corporate largess are slowing down. In the first quarter, capital spending at US companies dropped by the most since 2009. That's against the backdrop of the fourth straight quarter of declining profits and the fifth quarter of shrinking revenue.

Near-zero interest rates and a deluge of so-called mega deals valued at $20 billion or above pushed merger activity to $5 trillion in 2015 -- a record-setting level, before a handful of terminated transactions. Scrutiny by antitrust enforcers and the US Treasury's stand against corporate tax inversions were to blame.

Deal-making remains stalled, with just $300 billion in the first quarter, the least since the first quarter of 2014, according to Bloomberg data. The S&P 500 gained less than one per cent in that period, as one of the fastest rebounds in history erased an 11 per cent loss. "It's about economic, regulatory and capital market uncertainty," said Marc Zenner, co-head of corporate finance advisory at JPMorgan Chase & Co's investment banking unit in New York. "The high-yield market is virtually shut down and the equity market is not lending itself to as many deals, so companies are not as willing to engage in M&A if the money is not going to be there."