When we launched The Strategy Session in June, I listed three keys that would enable a market rally:
- The return of M&A (mergers and acquisitions)
- A rise in IPO (initial public offering) Activity
- A hike in interest rates
With the summer near its close, we took the opportunity on yesterday's show to grade each of the three and gauge their effect on the market.
First, M&A. Our mission statement promised to give you the best analysis on dealmaking, so we have monitored this one extremely closely. I gave M&A a "five out of ten" on the show as I feel deals are coming back a bit. The size of the deals may not be where we would like them to be, but we are seeing a return of bidders paying a premium for acquisitions. This gives investors some confidence, but we need more follow-ups and less one-time deals.
Also important for confidence are IPO's that are priced and traded well. When this occurs, portfolio managers have more money to play with, and in turn, add fuel to a market rally. I see IPO activity improving at about the same rate as M&A, and give it the same grade. Considering the "two" grade I would've given it back in June, this is a marked improvement, but we need much more successful activity.
Which leaves us with the lagger of the trio: the need for higher interest rates. Now that we have all indications that rates will stay near-zero levelsuntil at least 2012, the next presidential election, we have a significant hurdle for a market rally to cross. Higher rates tell me the economy is growing and that corporations are thriving. I am not sensing this happening at all.
The question is, do we need all three keys for a true market rally?
Yes.
Actually, one affects another. If we don't see M&A and IPO activity rise above "five" levels (and those were a bit generous), it will be hard to envision rates rising and therefore, a growing economy worthy of a market rally.
Programming note: "The Strategy Session," hosted by David Faber and Gary Kaminsky, airs weekdays at Noon ET on CNBC.
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