Gabelli Funds, LLC

Gabelli's October 2022 update on the US market

U.S. equities dipped lower in September, with the S&P 500 recording its worst monthly performance since March 2020. Issues at hand circle around concerns of weaker company guidance, historic interest rate hikes, tighter financial conditions and a rise in hard landing fears. Tensions have been further compounded by geopolitical worries, including the ongoing Russia-Ukraine war and the potential of a global energy crisis. While there are undoubtedly countless factors that could go wrong with the market, much could still go right. Several catalysts will be in focus as potential drivers to push markets higher before year-end, such as an inflection point in the Russia-Ukraine war, U.S. midterm elections or inflation data indicating that prices are no longer rising.
 Merger Arbitrage performance slipped in September as investors attempted to price in future rate decisions by the U.S. Federal Reserve after a third consecutive 75bps hike in September. Uncertainty over the Fed’s and the economic path forward yielded greater volatility in markets and the S&P 500 index declined 9.6% in September. On the positive side, Change Healthcare won its antitrust lawsuit in court and was subsequently acquired by United Healthcare for $27.75 cash per share, or $13 billion. Additionally, Twitter made continued progress in court, and Citrix was acquired for $104 cash per share, or about $14 billion. Spreads widened generally on other positions including Activision Blizzard, Inc., Tower Semiconductors Ltd., and Rogers Corp. We view the mark-to-market widening of spreads as an opportunity to earn greater returns as deals close and gains are crystallized.
 September was the sixth month of negative returns for the global convertible market in 2022, joining June and January as the months seeing the sharpest declines. As noted, investors have become very focused on economic data, interest rates and how the US Federal Reserve's actions to slow inflation will lead to a recession. Discussions abound of a "Lehman moment" or "Bear Stearns moment" where the massive move in rates over the last year will cause a significant institutional failure. The "Fed put" of the past is clearly not on the table until inflation shows signs of slowing. Correlations across asset classes have increased and sentiment is extraordinarily low. We acknowledge the factors that have continued to weigh on markets this year but believe that there is significant opportunity in the market here.