Merger, acquisition activity to increase

Stocks

have yet to come up with a comprehensive solution to the region’s woes, they appear to have a better handle on the region’s problems than they have for quite some time.

Stocks fell in the second quarter of 2012 as investors fretted that the euro region’s government debt crisis was about to engulf Spain and possibly Italy, increasing the chances of a dramatic slowdown in global economic growth.

“There is still some heavy lifting that needs to be done in Europe,” said Bulko. Now, though, “we are dealing with much more manageable risk than we have had in the past few years.”

The new year could also see an increase in mergers and acquisitions as companies seeks to make use of the cash on their balance sheets, says Jarred Kessler, global head of equities at broker Cantor Fitzgerald.

While the number of M&A deals has gradually crept higher in the past four years, the dollar value of the deals remains well short of the total reached five years ago. U.S. targeted acquisitions totaled $964 billion through Thursday, according to data tracking firm Dealogic. That’s slightly down from 2011’s total of $1 trillion and about 40 percent lower than in 2007, when deals worth $1.6 trillion were struck.

M&A deals are good for stock prices because the acquiring company typically pays a premium for the one it’s buying.

Falling interest rates also set off a rally in the bond market. Concerns about swings in stock prices prompted investors to switch money out of stocks and into bond funds. If investors decide that the bond rally may be nearing an end, that flow of funds may be reversed, providing a support for stocks.

“Equities are the best house in a bad neighborhood,” said Cantor’s Kessler. “Bonds are, not priced to euphoria, but they are definitely rich compared to equities right now.”

Not all investors are as sanguine about the prospects for 2013.

The rally in stocks in 2012 had less to do with company earnings and the economy and more to do with monetary stimulus from the Federal Reserve and other central banks around the world, said David Wright, a managing director and cofounder at Sierra Investment Management in Santa Monica, Calif.

Federal Reserve Chairman Ben Bernanke announced Sept. 13 that the central bank would add another round to its bond-purchase program, known as “quantitative easing” on Wall Street, which is intended to lower borrowing costs and boost growth.

Speculation that more stimulus was coming had pushed the S&P 500 index to 1,466, its highest close of the year, a day earlier. The Dow peaked for the year at 13,610, Oct. 5.

“The Fed has done everything it can do and is probably pretty close to having used its last bullet,” said Wright. While 2012 was a good year for stocks, “we think that’s an artifact of monetary stimulus,” he said.