The US stock market continued its upward trajectory in February, as the S&P 500 surpassed the 5,000-point mark for the first time. Building on January’s momentum, the S&P 500 recorded its best two-month start to a year since 2019.
A key role in this sustained performance was played by several mega-cap tech companies often referred to as the “Magnificent 7,” particularly Nvidia (NVDA), Amazon (AMZN), and Meta (META). Their profits were bolstered by tailwinds in artificial intelligence, accelerated growth trajectories, and strategic initiatives aimed at enhancing shareholder value.
While it is unlikely that the Federal Reserve will raise interest rates again, the timing and pace of potential cuts remain uncertain. Federal Reserve Governor Christopher Waller stated that he would need “at least another couple of months” of data to determine if inflation has moderated enough to justify interest rate reductions. The Federal Reserve will persist in its vigilance over incoming data and progress toward achieving its 2% inflation target. Despite investors’ eagerness for an imminent interest rate cut, initiating it prematurely could trigger a resurgence in inflation.
The Russell 2000 outperformed the S&P 500 in February but remains below its all-time high from November 2021. We anticipate a favorable environment for smaller companies in 2024, as rates post-peak and necessary consolidation in certain sectors like media, energy, and banking should lead to a stronger year. Merger and acquisition activity started the year strong, laying the groundwork for the emergence of catalysts in our portfolio of companies.
Merger arbitrage results in February were bolstered by deals that significantly advanced toward their conclusion. Immunogen, a biotech company developing targeted therapies for cancer treatment, was acquired by Abbvie in February for $31.26 cash per share, amounting to $9 billion. Immunogen shares were trading at a 6% discount to the deal terms days before the closure, reflecting uncertainty over whether the US FTC would initiate a phase 2 antitrust investigation, but the FTC approved the deal and it subsequently closed on February 13th.
Trading activity was vibrant in February, offering investors many new opportunities to mobilize their capital, including: the $4 billion deal for Masonite to be acquired by Owens Corning, the $16 billion deal for Catalent to be acquired by Novo Holdings, the $4 billion deal for Cymabay Therapeutics to be acquired by Gilead, and the $2 billion deal for Everbridge to be acquired by Thoma Bravo. Transaction activity in 2024 has improved compared to 2023, and the attractive spreads of deals have created additional opportunities to generate absolute returns.
February was a relatively good month for the convertible market. With a few notable exceptions, many companies reported earnings and issued forecasts better than expected, driving up underlying shares. Additionally, there has been an offering of convertibles that will need to be refinanced next year. In some cases, the issuer themselves has done so, but we’ve also seen some trading up in anticipation of a refinancing round. Issuances have increased significantly, as many companies have returned to our market to refinance their upcoming maturities. This new paper has been largely attractive, offering higher coupons and a greater level of equity sensitivity.
