Capital Markets Activity and the Current Economic Outlook: Q3 2021 Update
The US economy hit a stumbling block in September after a streak of consistent favorable economic activity. At 2%, growth reduced considerably for US gross domestic product (GDP) in the third quarter, compared to an increase of 6.5% in the second quarter. Compared to 5.9% in June, unemployment had a respectable drop to 4.8% in September, more closely aligned to pre-pandemic rates, recorded at 4.4% in March 2020. Employment rate increases were especially pronounced across sectors such as hospitality, retail, professional services, and transportation and warehousing.
During recent quarters, the market indices remained relatively stagnant after a weaker September wiped out previous gains that occurred in July and August. The S&P ended the quarter with a nominal gain of 0.6%, while the NASDAQ closed on a loss of 0.2%, although the year-to-date performances remain strong for both the S&P and NASDAQ, with 15.9% and 12.7% increases, respectively. A drop-off during September can be attributed to anxiety over rising inflation, supply chain bottlenecks, and the budgetary gridlock in Washington, which nearly led to a government shutdown. The collapse of China’s Evergrande Group has also added more risk in global market activity.
Combined factors such as inflation, the US government’s budget gridlock, and global supply chain struggles could cause an overall economic slowdown during the fourth quarter.
Traditional IPOs to finish strong in 2021
This year, the traditional initial public offering (IPO) market continued its boom with 94 IPOs raising $27.6 billion in capital during the third quarter. These numbers show a cooldown when compared to the 113 IPOs generating nearly $40 billion in the prior quarter, and the 165 IPO deals raising $61.5 billion during the third quarter of 2020, activity possibly attributed to pent-up demand being released after the cautions surrounding the early stages of the pandemic. This year’s activity will likely maintain an accelerated pace as another 94 companies have filed to go public within the past 90 days, notably including the grocery delivery service company Instacart, electric vehicle maker Rivian, and consumer apparel company Allbirds.
IPOs in the third quarter were headlined by the investing app maker Robinhood and a direct listing by the eyewear retailer Warby Parker. Robinhood went public on July 29 to lackluster performance and ended the first day of trading down 8%, but a more favorable week followed, marking a 24% increase on that Tuesday alone. Warby Parker took the direct listing route for its public debut on September 29, closing the day with a 36% increase over its reference price.
SPACs enjoy continued appeal
Special purpose acquisition companies (SPACs) remain a popular alternative method to break into the capital markets in 2021. The third quarter saw an uptick in SPAC activity, during which 88 IPOs raised $16 billion compared to the second quarter’s trough of 60 SPAC IPOs raising $12.8 billion. This more sustainable pace appears to be likely going forward, compared to the first quarter’s lofty peak of 298 IPOs raising almost $88 billion.
Some impacts are emerging after the SEC made announcements earlier this year related to warrant treatment and matters regarding redeemable share balance sheet classifications. Possible impacts include signs of slowing SPAC formations and Form S-1 effectiveness, and sponsors and auditors may be required to provide more thorough documentation around an organization’s accounting policies and internal control matters. Despite the updated guidance from the SEC, SPACs continue to present unique advantages such as speed-to-market tailwind, and SPAC-based approaches will continue to appeal to investors as the economy grows.
Continued momentum across mergers and acquisitions
Mergers and acquisitions (M&A) activity climbed during the third quarter compared to the same quarter last year; also, activity slightly increased from the second quarter of this year. Deal volume during the third quarter totaled 4,979 valued at $832 billion compared to 4,369 valued at $827 billion in the prior quarter. This increase in activity has been fueled by the technology services sector, as it was for the Q2 YoY increase, which saw an increase in deals from 708 in Q3 2020 to 1,099 in Q3 2021. The deals in the third quarter were topped by the proposal from gaming industry company DraftKings to buy Entain PLC for $22.4 billion and technology company Intuit’s agreement to purchase The Rocket Science Group (better known as Mailchimp) for $12 billion.
Keeping an eye on the economy
Although capital markets and M&A activity stayed strong during the third quarter, some investors have concerns about the future due to the underlying economic climate and September challenges reflected in the key indices. The energy sector is focal point as anxiety is building around global energy consumption while demand is rising sharply compared to a tight supply. Countries such as China that are ramping up factory production to fill global orders face a grim outlook as energy supply dwindles. These energy hurdles could be compounded by the existing supply chain bottlenecks to create a tough fourth quarter for global trade.
The index of personal consumption expenditures (PCE) showed a rate of 4.3% in August, and —despite this typical gauge of inflation— Federal Reserve chairman Jerome Powell argued that the rise is temporary due to pandemic pressures and that inflation will fall to 2.2% in 2022. Rising inflation could push the Fed to increase interest rates sooner than expected.
Combined factors such as inflation, the US government’s budget gridlock, and global supply chain struggles could cause an overall economic slowdown during the fourth quarter. Currently, the capital markets appear unbothered by these conditions, presenting a strong potential for continued high activity levels across M&A and IPOs.
