A perfect example of how economic optimism affects risk-on trading is the rise in U.S. stocks on February 19, as markets pushed these equities higher amid strong data related to investor sentiment and merger and acquisition (M&A) activity.
The benchmark S&P 500 Index finished the day 0.7 percent higher at 4 p.m. in New York, while the Dow Jones Industrial Average closed up 0.4 percent at 14,035.67, according to Bloomberg. As a result of these gains, both of the highly-visible indices finished trading at their highest level since October 2007.
Transaction volume was higher than normal, as data provided by the media outlet indicates that 6.5 billion shares were traded on U.S. exchanges, which was a figure 6.5 percent higher than the three-month average.
Reuters reports that a major contributor to market participants pushing stocks higher is recent announcements for M&A deals.
"Equity investors have to be encouraged by M&A since, if the number crunchers are offering large premiums, that shows how much value is still in the market," Mike Gibbs, co-head of the Memphis, Tennessee-based equity advisory group at Raymond James, told the news source.
Data provided by Thomson Reuters Deals Intelligence indicates that companies have announced total M&A deals exceeding $158 billion this year. This figure represents a surge of more than 100 percent over the same period last year.
Separate data compiled by Bloomberg reveals that more than $140 billion worth of transactions have been announced this month at the time of report on February 19. In comparison, companies declared $99.6 billion of these deals during the first two months of 2012.
Major potential deal
An individual with direct knowledge of the proceedings told Bloomberg that OfficeMax Inc. and Office Depot Inc. may announce a merger as early as the week ending on February 22, which caused the shares of the former company to surge 21 percent and the stock the latter to gain 9.4 percent.
"Recent mergers and acquisitions are further evidence of just how high the mountain of cash has grown for corporate America," Andrew Fitzpatrick, director of investments at Hinsdale, Illinois-based Hinsdale Associates told Dow Jones Newswires. "These companies are starting to be forced to possibly pursue deals, raise dividends or buy back stock, all of which are key drivers that could move stocks higher."
Rising investor confidence
There are various signs that investor confidence has been improving, according to Bloomberg. Data provided by nonprofit The Centre for European Economic Research reveals that the sentiment of German investors recently rose to its highest in close to three years.
Another factor that points to the strong sentiment of market participants is the daily fluctuations of U.S. equities. Data compiled by Bloomberg reveals that the individual stocks contained in the benchmark S&P 500 Index have plunged to 0.43 percent this year compared to the average of 1.08 percent of the last five years.
This low volatility has been cited by bulls as a reason that market participants should put their money into stocks, the media outlet reports. These individuals who are optimistic about the future returns of equities also cited valuations that are lower than average and analyst predictions that earnings will tick upward.
The assertion of bulls that stocks will move higher as a result of robust earnings is supported by Thomson Reuters data through Monday morning, which indicates that approximately 71 percent of the 402 S&P 500-listed companies that have provided figures during the earnings season have surpassed the predictions of analysts. Comparatively, 62 percent of firms listed in the benchmark index have beat profits since 1994.
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