The first National Convention of the Democratic Party was a three- day affair held in Baltimore in 1832 with delegates attending from every state except Missouri. The incumbent president, Andrew Jackson was nominated for a second term, and former Secretary of State Martin Van Buren of New York defeated John Calhoun to become the vice presidential running mate. The delegates adopted a platform and a number of rules that led to a framework that has since been used by all parties every four years. But over time, delegates could never have contemplated conventions like the ones we are having in 2020 with pre-taped videos, Zoom, empty ballrooms, no hats, no balloons, no streamers, buttons, pennants or cheers, no visible runners or horse-traders. There are 4,750 delegates to the four-day Democratic convention concluding this week. Next week’s virtual Republican convention will include an estimated 2,551 delegates.

For the financial markets, Election Day cannot come soon enough. Traders and investors loathe uncertainty yet, between the pandemic and the polling, the country is enveloped in it right now. Everyone from the top CEOs at investment banks to the young worker just starting to build a retirement account is now speculating on how they will be affected by the November 3 results – if there are results available that night or soon thereafter. If there are widespread ballot integrity issues and we have a repeat of the Bush-Gore contest from 20 years ago with recounts and litigation and unclear outcomes lasting for 34 days or two months, all U.S. markets could slide. It is hard to imagine a contested election lasting beyond Inauguration Day on January 20, 2021, but we have recently seen a lot of developments that were heretofore unimaginable. Two of the more likely possible outcomes would have the greatest impact on stock, corporate, and commodity market volatility for several months, in our view. Under several scenarios, we would also expect some temporary spikes in Treasury prices and yields as the world digests the victories and losses. The steady performer, in our opinion, will likely be municipals. Let us take a minute to explain why.

In a scenario where the incumbent president is re-elected and the House and Senate remain under current control, we anticipate more partisan gridlock blocking further efforts at tax reform. SALT state residents as well as earners in most income brackets will continue to present strong demand for tax-exempt bonds and nontraditional buyers attracted by the yields and credit quality of taxable munis versus corporate credits badly battered by coronavirus will buoy prices. State and local cries for pandemic recovery aid could produce an infrastructure bill with authorization for a national issuer/guarantor or perhaps a subsidized taxable muni product that will prove to be interest to both domestic and foreign buyers. With the Fed remaining in its role as backstop for all markets and protector of liquidity, equities should continue to rally, Treasuries remain in heavy global demand, and municipal yields remain low, bolstered by favorable technical conditions.

Should a new president be elected with control of the House and Senate unchanged, partisan gridlock will thwart attempts at most major policy reversals. Markets would expect a new series of executive orders and actions in the realm of trade, health care and the environment but we can also see the lingering effects of the pandemic likely producing by necessity an agreement on infrastructure as well as state and local aid. This is a neutral to positive environment for municipals but other markets should expect unstable conditions for several months as the details of Democratic priorities and initiatives are rolled out and dissected.

A new president with control of both houses of Congress and a clear mandate would probably lead to action on tax increases, health care reform, tighter environmental regulations, and major stimulus for state and local governments. Nothing happens overnight, but the markets are forward looking and will likely overreact right away. Assuming the absence of another Black Swan, changing fiscal and tax policies are likely to produce prolonged municipal rallies. Demand could be dampened in several states if the state and local tax deduction cap is lifted. But the most volatility would likely be seen in stock, commodity and other markets as new policies take shape and ramifications considered.

Should the incumbent be re-elected and have control of both houses of Congress there might be a clear mandate for further tax reform and the further loosening of regulations, all favorable to equity and commodity markets. Munis could become less attractive. However, there is a wide enough range in philosophies within the Republican party such that consensus on taxes, health care, spending, trade, immigration and other thorny issues may not be so easily reached. In any event, we would expect that pandemic-driven needs for federal assistance will help bolster state and local credits, permit the return of tax-exempt refundings and raise yields enough to offset any loss of interest in tax-exemption as a result of any further tax cuts.

There are 75 days to Election Day. Back in the here and now, investors are focused on the end of summer, very basic back-to-school issues, high-priced assets, and record-setting debt levels and new issuance. Month-to-date investment grade corporate issuance already totals $110.5 billion and high yield corporate issuance so far in August exceeds $47 billion. The U.S. Treasury is on track for a record refunding this month; debt issuance was $2.753 trillion in the second quarter and $947 billion is planned this quarter. The federal government is projected to have a budget deficit of $3.7 trillion during the fiscal year about to end on September 30.

So far this month, equity gains have reversed all the losses suffered since the coronavirus sell-off in March. The Dow is up 5.1% in August, the S&P 500 has just hit an all-time high, and the Nasdaq has gained 4.3%.  Oil prices are up 6.5% to $42.89 a barrel and gold prices have climbed 1.6% to $2,006 an ounce. Treasuries have weakened; the 2-year yield is up 4 basis points to 0.14%, the 10-year has added 14 basis points and stands at 0.66%, and the 30-year at 1.39% is up 20 basis points.  Municipal yields have inched up an average of 2 basis points. At this writing, the 2-year AAA municipal general obligation bond yields 0.14%, the 10-year is at 0.67% and the 30-year is at 1.39%.  Muni investors are adding $32 billion of cash from maturing and called bonds this month and, with a record low amount of dealer supply, have been adding to muni bond fund holdings; funds have taken in new money for 15 consecutive weeks. So far this month, there has been $19.5 billion of new muni issuance, $8.4 billion of which has come as taxable. Last week, the Arizona Industrial Development Authority was in the market with a $250.7 million issue for Legacy Care structured with a 2050 term maturity that priced at 7.75% to yield 7.836%. The National Finance Authority had a $129.4 million B rated resource recovery refunding deal for Covanta due in 2043 that priced at par to yield 3.625%. Florida’s Capital Trust Agency sold $17.6 million of non-rated bonds for Team Success School of Excellence that featured a 35-year maturity priced with a coupon of 5.00% to yield 4.99%. This week’s calendar is expected to add another $12.5 billion to the total, with $4.2 billion of new taxable supply. Among the high yield financings on the slate is a $131.8 million noon-rated deal for MRC Stevenson Oaks senior living community in Fort Worth, a $59.1 million BB+ rated transaction for Milford Regional Medical Center in Massachusetts, and a $14.2 million non-rated issue for UCP Charter Schools in Orlando.

Municipal bonds advanced in price again last week on the strength of extraordinary cash balances and an absence of sufficient supply. Yields fell to their lowest point in 70 years. Looking for places to reinvest the $22 billion from bond redemptions and maturities on August 1, 2020, investors added another $1.4 billion to tax-exempt mutual bond funds last week and $229 million to muni ETFs. The modest new issue calendar of $8.1 billion was quickly absorbed by buyers who are waiting impatiently in line for more. The State of Hawaii brought a $995 million AA+ rated taxable general obligation deal with a maximum yield of 2.293% in 2040. Phoenix Children’s Hospital had a $245 million A1-rated financing with a final term maturity in 2050 yielding 2.12%. In the secondary market, MMA reported on the sticker shock, citing 5% San Francisco general obligation bonds due in 2025 traded at yields as low as 0.07%. In the high yield sector, the Academy of Advanced Learning charter school on Aurora, Colorado came to market with an $8.5 million BB rated transaction that priced at par to yield 4.375% in 2027. The Bond Buyer Municipal Bond Index (based on 40 long-term bond prices) fell two basis points to 3.52% from the week before. The 20-bond GO Index (20-year general obligation yields) dropped seven basis points to 2.02%. The 11-bond GO Index (higher grade 11-year GOs) declined to 1.55%. The Revenue Bond Index decreased seven basis points to 2.44%.

Munis are not the only products in great demand. Initial public offerings are on track to hit highs not seen since the 2000 tech boom.  Equities, as defined by the Dow Industrial, gained slightly more than a thousand points last week to close at 27,433. Gold prices hit an all-time high last week with spot prices climbing as high as $2,070 an ounce. U.S. corporate high yield bond fund inflows totaled $4.39 billion last week and the primary market saw $21 billion of new high yield bonds issued; the year-to-date volume now totals $260 billion. The average yield on investment grade corporate bonds at 1.82% is at an all-time low. There is also an unquenchable thirst for U.S. Treasuries where new issue supply is much heavier and there is a worldwide hunt for yield as the level of negative yielding debt exceeds $14 trillion. This is indeed fortunate as the Treasury plans to sell a record $112 billion in notes and bonds in this week’s refunding auctions. The three-month Treasury finished last week at a 0.09% yield, the 10-year Treasury at 0.56% and the 30-year Treasury at 1.22%

All of  this remains hard to reconcile in the context of quarterly U.S. earnings reports and economic data which, while above expectations, are nevertheless ghastly; rising coronavirus counts that terrify teachers, troopers and tight ends; the looting and riots damaging so many of America’s great cities; trade combat, more often described as “tensions”, with China; pollsters paid to support divisive narratives; fall election lineups featuring consequential face-offs; and inscrutable political strategies holding up the next national fiscal aid package, just to name a few. This is our status quo through Labor Day — and perhaps until November 3. 

We continue to focus on the positives but look under all the proverbial hoods and kick all the tires in our daily analytic, surveillance, and trading work. We encourage you to contact your HJ Sims advisor to review the credit fundamentals in your portfolio, as well as in new offerings we see every day that may be suited to your risk profile and worthy of your investment.

The 1993 box office hit starring Bill Murray portrayed a TV weatherman from Pittsburgh sent with his producer to cover the annual shadow-no shadow show in Punxsutawney, Pennsylvania which, for 120 years, has produced legendary forecasts of early spring or extended winter. He soon becomes trapped in a time loop nightmare that causes him to relive the events of February 2 with the townies over and over and over again. The movie, which was actually filmed in Woodstock and Cary, Illinois with an unknown woodchuck, became one of the most popular romantic comedies of all time and “groundhog day” became our new term for being stuck in a job or life that is mind-numbingly repetitive and unpleasant.

Groundhog Day is the cycle that many of us find ourselves in for five going on six months now. On the personal front, we smack the same alarm button every morning not knowing if is in fact Wednesday or Sunday, April or August. We are mostly limited to our homes, in mostly small spaces, often with family but sometimes alone, and venture out at our risk with mask and gloves to work, shop, or just get some air. Like the character Phil Connors, some of us try counseling, take side jobs, reach out to help others in need, learn to play the piano, fall in love. Others eat and drink too much, lash out, spend unwisely, take crazy gambles. On the work front, our lives are mostly inextricably linked with the very same spaces, people, events and risks. In many ways, our days are as Yogi Berra once said, “déjà vu all over again”. And try as we might to find humor in our daily routines, exercise, socialize with our family and friends, or make plans for the future, these efforts, once so normal and natural, have become a tiresome chore amid restrictions that were tolerable for 15 or 30 or 60 days but now seem quite permanent. We suddenly long for the good old days, no matter how lousy they may have seemed back a mere six months ago, pre-Covid.

The financial markets have generally loved the Groundhog Day cycle since late March, in the same way they have loved all the vaccines administered by the Federal Reserve for the past 11 years. They have saved us from inflation, depression, and most undesirable losses. While federal and state pandemic control-related policies have devastated small businesses and caused communities to split over what to do about schools, prisons, churches, nursing homes, taxes and the kind of government we want after November 3, as investors we have been reliving a reel of rallies.

Last week, as Fitch Ratings lowered the outlook of the United States of America to “Negative” from “Stable,” the 10-year Treasury yield fell to its lowest level not in decades but in centuries — 234 years to be exact — at 0.52% and the $20 trillion market saw volatility fall to a record low. During July, the benchmark yield dropped 13 basis points, the 2-year sank 4 basis points to 0.10% and the 30-year plunged 22 basis points to 1.19%. At this writing, there is speculation that the entire Treasury yield curve will soon be under 1%.

The Nasdaq, just having hit its 30th record high in 2020, added more than 686 points in July, closing at 10,745. The Dow gained 615 points to finish at 26,428. The S&P 500 ended up 5.5% at 3,271. The Russell 2000 climbed 39 points to 1,480. Reuters recently reported that the average holding period for U.S. shares has dropped to 5.5 months versus 8.5 months in December; this is a new record low, beating the turnover seen during 2008 crisis and reflecting investor fear of missing out juxtaposed against the terror of owning overpriced stocks in illiquid market. Oil prices rose $1 a barrel to $40.27. Gold prices spiked 10.8% to $1,975 an ounce and has since crossed the historic $2,000 mark. Gold is up 35% this year, making it one of the best performing assets so far alongside silver which at $26.80 is up more than 50%.

Despite weakening state and local credit fundamentals resulting from the Covid-depressed economy, the municipal bond market is soaring higher based on technical factors that include light tax-exempt supply, strong demand, buyers significantly outnumbering sellers since march 17, lots of excess cash from summer bond calls, coupons and maturities, light dealer inventories, and a steady stream of inflows for 12 consecutive weeks into muni bond ETFs and mutual funds. In July, $7.5 billion was added to mutual funds and the muni rally continued. July issuance was actually the highest in 34 years at $42.6 billion but 35% of the total came in the form of taxable bonds. Year-to-date issuance of corporate bonds by non-profits is twelve times higher than it was last year. The general market was up 1.3% with strong performances by zero coupon bonds. The high yield sector gained 1.2%, and taxable munis outperformed with returns of 2.3%. During the month, the 2-year tax-exempt AAA municipal general obligation bond yield went from 0.27% to 0.13%, the 10-year from 0.90% to 0.65% and the 30-year from 1.63% to 1.37%. The 10-year muni-Treasury ratio currently stands at 124.8%.

In the muni primary market last week, the Public Finance Authority sold $18.4 million of BB-minus rated charter school revenue bonds for Founders Academy of Las Vegas that came with a 2055 maturity priced at 5.00% to 4.59%. In the high yield corporate market, Seaworld Entertainment had a 5-year non-call deal, upsized from $400 to $500 million, with more than $2 billion of orders that priced at par to yield 9.50%. In the corporate bond sector, investment grade bonds gained 2.9% in July while high yield climbed 3.9% and more than half of high yield borrowers had total returns that higher than that, up to 24.8%. Higher rated issuance slowed to $65 billion and high yield deal volume totaled only $25 billion. This week, investors will see 20% of the companies in the S&P 500 index report quarterly earnings. There are approximately $30 billion of investment grade deals on the calendar and $13 billion of high yield deals have priced already as of Wednesday morning. The muni slate totals approximately $7.3 billion.

U.S. markets are not reflecting the condition of an economy that posted gross domestic product of negative 32.9% in the second quarter and is still struggling with how to track and contain the SARS-CoV-2 virus. But performance must be viewed in a global context where negative yielding debt totals $14.3 trillion and there is a worldwide hunt for any yield. In addition, the Fed is suppressing rates at zero, extending its crisis lending through December, and pledging to do whatever else it takes to overcome a downturn characterized by the Chair as the most severe in our lifetimes. The Fed’s balance sheet has expanded to $7 trillion and may well grow to $11 trillion by year-end. There is no agreement between the House, Senate and White House on the terms of the next stimulus, but this has long been expected to wrap up by Friday when the Senate recess is scheduled to begin. The good news will help to reduce fallout from the weak July jobs numbers also expected on that day and the damage wrought by Hurricane Isaias up and down the East Coast.