IPO Momentum Builds Despite Slow Start to 2019

After a quiet first two months, the IPO market showed signs of life in March as Lyft’s March 28 debut set the stage for technology unicorns likely to go public in the second quarter.

Friday, April 12, 2019

In the first quarter of 2019, U.S. equity markets recovered from a fourth-quarter rout to post their largest quarterly gains in nearly a decade. Despite ongoing trade tensions between the United States and China, along with underwhelming economic data globally, stocks were buoyed by the news that the Federal Reserve, which had previously announced two rate hikes for 2019, would pause its rate-increase campaign. This dampened concerns that rising rates would be a headwind to corporate profitability and consumer spending in 2019.

During the quarter, yields on 10-year Treasuries dipped below three-month Treasuries, sparking fears of an upcoming recession. It is important to note that although an inverted yield curve has preceded each of the last nine recessions, not all inversions have led to recessions. Analysts expect first-quarter revenue for S&P 500 companies to increase 4.8% on a year-over-year basis and earnings to decline 3.9% year-over-year. Both of these numbers represent a downshift in expectations from three months earlier; however, first quarter 2018 earnings were inflated by the tax cuts that went into effect at the beginning of the year.

Despite these concerns, all major equity indexes posted robust gains in the first quarter, and the CBOE Volatility Index remained below its long-term average since mid-January. The Dow Jones Industrial Average (11.2%) posted its best quarterly performance since the first quarter of 2013, and the S&P 500 (13.1%) posted its best quarterly performance since the third quarter of 2009. Meanwhile, the Nasdaq (16.5%) posted its biggest quarterly gain in seven years as profits continue to increase among technology-focused companies, and the Russell 2000 small-cap index (14.2%) posted its best quarterly performance since the fourth quarter of 2011.

Flows into passive funds continue to dwarf flows into actively managed funds. In the first two months of 2019, active U.S. funds have seen $1.5 billion overall in inflows while passive U.S. funds have seen $55.3 billion in inflows. Passive funds, which have increased their market share of total assets to 49%, are expected to surpass active funds in late 2019.

Highlights include:

  • U.S. government shutdown hampers IPO activity
  • IPO filing activity surges in March
  • Healthcare and technology lead follow-on offerings
  • Outlook: Robust IPO pipeline, low volatility should stimulate second-quarter activity

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