Pullback Does Little to Slow Down the IPO Market

The 5% pullback in January sent waves of panic through Wall Street. It had little effect on the IPO market.
There have been more IPOs on U.S. markets in January and February than at any point in the last decade. Thirty-five companies have gone public on U.S. exchanges so far in 2014 – and that’s with another two weeks still to go in February. Even in 2013, the best year for stocks since 1997, there were only 20 IPOs in January and February.
Returns in the IPO market have been strong too. Three IPOs have already more than doubled since their debut. Three others have risen more than 30%.
Most of the IPOs have been small-time biotech and pharmaceutical companies – companies that tend to go public when times are good on Wall Street. They try to ride the coattails of a bull market, even if they’re not financially sound enough to go public yet.
Clearly, the mini-slump on Wall Street in January didn’t dissuade these types of small-cap, speculative companies from going public. They didn’t seem to think that the correction would last. Perhaps that was as good a sign as any that the recent pullback was little more than a blip on the radar amid a bull rally that is now five years in the making.
There are plenty of ways to gauge investor sentiment on Wall Street. The VIX – or volatility index – is one of them. The higher it rises, the more afraid investors are. And the VIX certainly spiked in late January, hitting its highest level in over a year. Now it’s fallen back to where it was throughout most of 2013.
Consumer confidence, the housing market, earnings reports – those are other good gauges of which way the market winds are blowing, or will soon blow.
Don’t discount IPOs as another useful measuring stick. And really, it’s a simple one. If a lot of companies are going public, that’s typically because they think the market will remain strong for the foreseeable future. It’s no coincidence that only 31 companies went public in 2008, just as the Great Recession was taking hold. Conversely, it’s no coincidence that more companies went public last year than at any point since the dot-com boom.
So if you’re ever feeling uncertain about which way the market is headed, just look at IPOs. If companies are still going public in rapid succession, chances are a market crash isn’t coming.

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