Federal Reserve's unexpected hike on the discount rate last month marked an important step in the process of exiting from ultra low monetary policy, one which the market has waited and feared for some time. But this news, even coupled with somewhat disappointing economic data, has not shaken the U.S. equity market, which remains largely flat year to date. Offsetting the negative news are positive corporate announcements such as increasing dividends, share buybacks and M&A.

Leading Index points to Weaker Recovery

Data on the U.S. manufacturing sector and housing market have missed forecasts lately. Both ISM Manufacturing PMI and pending home sales fell. The ECRI (Economic Cycle Research Institute) Weekly Leading Index, which has gained reputation and popularity in recent years, suggests moderating economic growth ahead. The Index's growth rate, although still positive, has been declining for 11 weeks.

Corporate actions offer more confidence though. In February, 47 companies within the S&P 500 raised or initiated quarterly dividends, while only one company cut dividend. For the past three months, the ratio is 79 to 2. Boosting dividends mean real monetary reward for shareholders and send a message that management is confident on the company's earnings prospects and financial positions.

Dividends, Buybacks, M&A gain

Share buybacks is also on the rise. In February alone, 62 companies within the S&P 500 announced buybacks valued at $40.1 billion, the most since the Lehman Brothers debacle. In Q4 last year, buybacks increased 37% from Q3, according to S&P estimates. Share buybacks signify management confidence, and suggest shares are deemed undervalued.

Increased mergers and acquisitions is another positive sign. Prudential's acquisition of AIA for $35.5 billion grabs global headlines. There have been over a thousand other M&A deals in the U.S. which amount to over $140 billion, rising almost 50% from a year earlier.

Such corporate actions show increased confidence and risk appetite among U.S. companies, and should lend support to equity markets at least in the short run. However, it should be noted that dividends, share buybacks and M&A activities are still way below levels seen before the financial tsunami. These positives alone may not drive markets much higher. Concerns over sluggish economic growth and central banks' exit strategy will likely limit upside potential. As such, chances are U.S. equities may remain range-bounded for some time.

Noble Apex Research Team
Noble Apex eNewsletter Issue 336