Around the Street
What's Next for Stocks, M&A, and the Dollar?
Is the bull showing signs of fatigue? Investors might begin to wonder, especially after the big-cap benchmark Standard & Poor's 500-stock index advanced an additional 2.5% last week, bringing its total rise since March to 58%. The flip side of the equity rally has been a steady decline in the dollar vs. other major currencies, another widely discussed topic on Wall Street.
BusinessWeek compiled comments from Wall Street strategists and economists on these and other topics on Sept. 21:
Tobias Levkovich, Citigroup
The S&P 500's surge already reflects an impressive industrial recovery. In considering the equity market's better than 57% rally off of its March lows, one could conclude that the environment is less attractive if it already intimates a sharp economic rebound. Indeed, we suspect that investors are allowing stock prices to get ahead of themselves, and this suggests a growing risk for a market correction even as it does not rule out a possible further overshoot by latecomers who feel worried they have missed the potential for additional appreciation.
While one can assume that a powerful industrial production recovery will occur after the sheer collapse earlier this year, one should not presume that the market has not yet figured that out. In discussions with investors, we find many arguing that they have concerns about the economy's durability and if gross domestic product growth is sustainable in the future. Yet they seem more anxious about missing the next step up in equity benchmarks than about corrections and admit that portfolios are positioned to benefit from further index gains as underperformance this late in the year is an unacceptable outcome.
Sam Stovall, Standard & Poor's
The takeover talk is picking up once again, and that's not too surprising, in our opinion. Besides, what else are companies going to do with all that cash on hand? According to S&P's Index Services, which operates independently of S&P Equity Services, cash on the books of nonfinancial companies in the S&P 500 hit a record of more than $700 billion as of June 2009, up more than 8% in the past year and 16% above the level of two years ago.
Companies certainly aren't spending their cash on shareholders in the form of stock buybacks or dividend increases. In a Sept. 15 press release, S&P's Index Services announced that "preliminary results show that S&P 500 issues spent $24.2 billion on stock repurchases during the second quarter of 2009, representing a 72% decline from the $87.9 billion spent during the second quarter of 2008, and an 86% decline from the record $172.0 billion spent on stock buybacks during the third quarter of 2007." What's more, data compiled by Howard Silverblatt, senior index analyst, released on July 1, 2009, showed that "a record low 233 of the approximately 7,000 publicly owned companies that report dividend information to S&P's Dividend Record increased their dividend payment during the second quarter of 2009."
As a result, blue-chip companies are flush with cash and likely to put it to work, in our opinion, should the economic backdrop continue to show improvement. Yet a meaningful pickup in merger-and-acquisition activity hasn't really materialized, since the $310.38 billion in global transactions year to date through Sept.18 is the lowest quarterly level in the past three years, according to S&P's Capital IQ, which operates independently of S&P Equity Services.
Nick Bennenbroek, Wells Fargo Bank
After what has been a couple of tough weeks for the dollar, the greenback is starting this week on a better note. There is only a limited flow of news today, and today's price action appears primarily to reflect some dollar consolidation and correction ahead of this week's events. The most noteworthy of those should be the Federal Reserve monetary policy announcement, where no change is expected to the Fed funds target range of 0% to 0.25%, or to the Fed's bond purchase programs. Market participants are also keeping one eye on the G-20 Leaders' Summit taking place in Pittsburgh late this week, which may very well include the topics on bank capitalization and banker compensation.
In addition to the waiting period ahead of the events, general equity weakness is perhaps contributing to some of today's dollar resilience. And with speculative U.S. dollar shorts also at their highest since March 2008, it is possible that market positioning may become a more relevant factor for currencies. Overall, this week could be a better one for the dollar than the last couple have been, though it will not necessarily be a decisive one for the dollar's longer-term trend.