Dow Jones Industrial Average Gains Because M&A’s Return Means the World Isn’t Ending

15 Sep 2020

Barron's

Dow Jones Industrial Average Gains Because MAs Return Means the World Isnt Ending

A slew of deals helped rally the market Monday, and put the tech-heavy benchmark back above an important technical level just one day after falling below it.

Hip, hip hooray! The stock market didn’t fall today!

Why are we celebrating? Because last week was bad, really bad, for the Nasdaq in particular, which suffered its worst weekly drop since March 20 when it fell 4.1%

On Monday, though, the Nasdaq Composite gained 1.9%, while the S&P 500 rose 1.3%, and the Dow Jones Industrial Average advanced 1.2%, or 327.69 points.

What was responsible for today’s rise? Chalk it up to renewed M&A activity. Nvidia (NVDA) bought ARM from Softbank for $40 billion; Gilead Sciences (GILD) agreed to pay $21 billion for Immunomedics (IMMU); and Merck (MRK) took an 11% stake in Seattle Genetics (SGEN). Coming less than a week after LVMH bailed on its acquisition of Tiffany (TIF), the deals help demonstrate that corporate risk appetite is alive and well.

Or maybe it’s just the November election that’s getting companies to play Let’s Make a Deal. “Super merger Monday saw dealmakers delivered $69 billion in M&A over the weekend,” writes Oanda’s Edward Moya. “With a tremendous amount of uncertainty on what trade and taxes environment after the election, companies are taking advantage of the low cost of raising capital.”

Whatever the reason, the Nasdaq 100 rallies 1.7% and finished the day back above its 50-day moving average, just one day after falling below it. Friday’s drop had ended a 105-day streak above the 50-day moving average, and Monday’s rise was just the third time out of nine that the Nasdaq 100 has seen a streak of 100 or more days above that moving average end, only for it to rise above it the next day, according to Bespoke Investment Group. The good news: The Nasdaq 100 went on to gain more than 20% over the next year in all three cases, which occurred in 1995, 1997, and 2017. When it did not, the market gained only 50% of the time.

Still, we shouldn’t get comfortable just yet. Instinet’s Frank Cappelleri notes that today’s rise was the sixth 1% move in either direction in September--after just nine trading days--three up, and three down. In all of August, there were three 1% moves, all to the upside.

That elevated volatility means that we can’t make too much of big moves in either direction.

At least not yet.

Write to Ben Levisohn at Ben.Levisohn@barrons.com