U.S. equities were almost unchanged in May despite the heightened volatility seen throughout most of the month. April’s sell-off continued well into the month, as the S&P 500 dropped below the bear-market threshold on May 20th. While the market has rallied since that point, investors are skeptical whether that rebound represented a real move off the bottom or a bear-market rally. As Q1 earnings season came to a close, companies highlighted the impacts of higher inflation, a challenging labor market, rising interest rates and ongoing supply chain woes.
The Russia-Ukraine war, which now has lasted over three months, has sent economic shockwaves through Europe and the rest of the world. Supply chain disruptions and surging commodity prices, caused by the war in the Ukraine-Russia region, have greatly increased the prices of energy and food costs worldwide. Unfortunately, it does not look like the conflict will be resolved any time soon, and it is difficult to see how a Putin-led Russia would be re-integrated back into the global economy.
M&A activity remained robust in May with more than $453 billion in announced deals in the month. This was only 3% lower than May 2021, and a sequential increase compared to the $421 billion announced in April of this year. Through the end of May, deal volume totals $1.9 trillion, a decline of about 10% compared to the record breaking activity in 2021. The combination of market volatility, and the expectation for continued Fed rate hikes to combat persistent inflation, contributed to spreads widening on pending deals.
In the face of wider spreads, deals continued to receive regulatory and shareholder approvals, and to close including Zynga’s (ZNGA-NASDAQ) $12 billion acquisition by Take-Two, Mimecast’s (MIME-NASDAQ) $5 billion acquisition by Permira, US Ecology’s (ECOL-NASDAQ) $2.5 billion acquisition by Republic Services, Inc., and Bottomline Technologies’ (EPAY-NASDAQ) $3 billion acquisition by Thoma Bravo. In early June, Oracle completed its $29 billion acquisition of medical records company Cerner (CERN-NASDAQ), and we expect Chevron will complete its $3 billion acquisition of Renewable Energy Group (REGI-NASDAQ) in the coming days.
Convertibles had another down month as underlying equities lagged and credit spreads continued to widen. With equity markets declining, we have seen premiums expand substantially in some convertibles. Convertible Issuance has been a hot topic over the last few years with record issuance levels in 2020 and 2021. The primary market has slowed significantly in 2022 but we have seen a number of companies test the waters with potential deals only to pull them given the market conditions. These companies and many more will still need capital to operate, and the convertible market remains one of the least expensive ways for them to raise that capital. We saw a few new issues in May, and we are optimistic that issuance will pick up through the second half of the year. In past downturns, the convertible market has been one of the first markets to rebound both from an issuance and performance perspective. This is because convertibles can be issued quickly and less expensively than traditional bonds or equity. The equity optionality allows investors in these issues to participate in the upside as the market recovers.
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