Despite a dismal quarter for deal-making to start the year, signs continue to point toward a positive climate ahead for mergers and acquisitions.

The core elements needed for M&A — hefty cash balances, low costs of borrowing and increased confidence — are in place even though it would be hard tell by corporate behavior to start 2012.

With $184 billion in the books, M&A volume in the U.S. has dropped by fully one-third over the same period in 2011, marking the worst start to a year since 2003, according to Dealogic. This has occurred as stock market valuations remain attractive even as they continue to rise off the October lows, and business optimism is growing, at least among CEOs.

"You see evidence of renewed confidence most everywhere you look, both from businesses and consumers and investors for that matter," says James Paulsen, chief market strategist at Wells Capital Management in Minneapolis. "You'd think that would show up in M&A."

Most likely holding back the confidence it takes to get deal-making rolling has been a series of geopolitical headaches, from the sovereign debt crisis in Europe to the political gridlock in Washington.

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