Last week, I pointed out some statistical errors in a chart suggesting that Rupert Murdoch’s bid for Time Warner was a sign of the market’s top. The chart had enough omissions to render it useless.
Today, I want to show you a (slightly) better version of the same idea.
The chart above comes to us from James Mackintosh's appropriately titled article in the Financial Times: “When investors are complacent, stupid deals happen.” Mackintosh highlights the increased volume of mergers and acquisitions running parallel to the rise in equity prices.
Although the chart is less than ideal for the point I want to make, it's a step in the right direction. At the very least, the chart avoids cherry-picking to only show deals in years when market tops occurred. (I would prefer to see a much longer period).
The chart shows that M&A activity can increase for quite a few years before the market reverses. During the dot-com boom, for example, we had three years (1998, ‘99 and 2000) of increased activity before markets collapsed. Just before the latest financial crisis, there was a partial increase in 2005 and then the market climbed to its peak in 2006 and ’07.
In the latest cycle, there was a minor increase of activity in 2013 and a big spike in 2014 (on an annualized basis). With this year just half over, we might want to wait to see if this huge increase actually continues. Additionally, these indicators seem to be coincidental, not leading.
Regardless, it's hard to say that the bull-market cycle is over based on a two-quarter increase in M&A activity.
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Barry L Ritholtz at email@example.com