Market Commentary: Aiming for Amazing

by Gayl Mileszko

1784 was another one of those years when nothing was normal. The Treaty of Paris with Great Britain was ratified, ending the American Revolutionary War.  New guidelines were being adopted for adding to the original 13 states. The New York Governor asked Congress for a declaration of war against Vermont. The first successful daily newspaper was published in Pennsylvania, and the bifocal spectacles needed by some to read it were invented by Benjamin Franklin. In Massachusetts, Governor John Hancock signed the charter for Leicester Academy, a private school initially funded by the town and its citizens, later supported for a time with state monies. Its purpose was to “promote true piety and virtue” along with the study of the English, Latin, Greek, and French languages, arithmetic and the art of speaking. Soon after its founding, the Academy broke some new ground by admitting young women. Among its earliest graduates was Eli Whitney and one of its most prominent buildings was a stop on the Underground Railroad.  Over the decades, the school moved, expanded and contracted several times, adapted to new laws making education compulsory and then prohibiting public funding of private schools, and trained cadets that served in the Union Army and World Wars I and II. The Academy eventually merged with Leicester Junior College in 1954 and with Becker Business College in 1977. Becker College, as it became known, features two campuses six miles apart in Leicester and Worcester, and offers 40 undergraduate degrees including veterinary science and e-sports management along with master’s degrees in nursing and mental health counseling. It has been the home of the state-designated Massachusetts Digital Games Institute and proudly features one of nation’s the top five video game design programs.

As with many small, private colleges, however, Becker has suffered from declining enrollment in recent years and in the 2020 Fall Semester the total fell to a low of 1,500 students. Several years of hundred thousand-dollar deficits were plugged with endowment funds that have rapidly declined to $5 million. College leadership tried mightily to bolster its finances by renegotiating contracts, selling assets, consolidating departments, cutting staff and salaries, and aggressively pursuing affiliations and mergers. But the Pandemic exacerbated the revenue loss and no alliances materialized. Despite $3.31 million from the Paycheck Protection Program, and $1.6 million of CARES Act funds, the state’s Department of Higher Education concluded in early March that the school’s financial situation was such that it was unlikely to make it through the next academic year. After a weekend of agonizing discussion, the school which has boasted its status as one of the 25 oldest academic institutions in the country, just announced on Monday that it would close in August and arrange for its students, all Becker “Hawks”, to transfer to one of 18 other local schools to complete their degrees.

The closings of longstanding schools and businesses — unimaginable just one year ago — continue to make headlines, although at a rate well below the terrifying forecasts of last Spring in large part due to the $5.2 trillion of federal stimulus that has propped up income for millions. The American “can-do” spirit is, however, never to be discounted. Despite many devastating losses, more than 4.4 million new businesses have been created in the past year according to the Census Bureau, a half million this past January alone. This is an extremely hopeful sign for those of us who still remain hesitant to take public transit, sit in a crowded stadium, attend a church service, wedding or college graduation, or open or expand a dream business whether it is a restaurant, barber shop, senior living facility, charter school, mask distributor, ionizer manufacturer, entertainment venue, residential and commercial building contractor, home care provider, or reliable news source.

We join the hundreds of millions thrilled with every new report of students returning to classrooms, workers returning to offices, drivers back on toll roads, fans back in arenas, shoppers returning to brick and mortar stores, travelers booking flights and hotel rooms, seniors and their families once again scouting best places for retirement and care. The first quarter of 2021 has come to an end and the country yearns for what some call a return to normal, with hopes fueled by the widespread COVID-19 vaccinations. But the Google searches for “normal” which spiked highest last April, ebbed then rose once more with the start of the new school year and again over Thanksgiving, have since fallen off.  With no disrespect to our veterans and the sacrifices that they and their families  have made in time of war, this Pandemic has cost our nation in dollar terms far more than World War II and it has a death toll now counting greater than that of WWII, Korea and Vietnam combined.  Our aspirations for having control over our lives once again have escalated but we are still unsure about how persistently vicious this coronavirus and its variants could be.  After 14 months of the unthinkable, we are adjusting to a new normal, perhaps and hopefully on its way to a becoming better one. As the poet Maya Angelou once so aptly put it, “If you are always trying to be normal, you will never know how amazing you can be.”

In Washington, where no day is ever normal, and the cherry blossoms have peaked early this year, intelligence agencies are scouring for details of the new 25-year, $400 billion China-Iran pact. Among other threats, our military is monitoring the three Russian nuclear submarines putting on a show in the Arctic. Immigration and border patrol agents are overwhelmed with the migrant surge on the Mexican border. Health officials are studying whether new vaccines or treatments will be needed to counteract new variants in countries with low vaccination rates, if booster shots will be required in four or six months, how much value to place in the recent World Health Organization study on the origins of Covid-19. Labor and Commerce officials are exploring the implications of various policies for mandating vaccinations for certain employees, for requiring proof of vaccinations for certain activities. Education officials are addressing the myriad of issues related to in-person versus virtual instruction. NASA is focused on the Mars rover searching for signs of past life and its potential for habitation.

On Wall Street, throughout this Pandemic and indeed for the past 13 years, most normal days have involved rallies for stock and bond investors. Many are being rattled by the prospect of inflation linked to federal stimulus that may exceed $8 trillion by the end of the year if another $3 trillion of major infrastructure proposals are adopted. In response, Treasury yields have risen alongside the belief that the Federal Reserve will step in to raise rates well in advance of the 2024 target reflected in its latest dot plots. As if we have not had enough of new entries in the U.S. record books, we have just seen one of the largest margin calls of all time. Archegos Capital Management is a family office that has been employing total return swaps to amass huge stakes in major companies without having to disclose them to regulators. Archegos (Greek for “one who leads the way”) has leveraged trading partnerships with major banks including Nomura Holdings Inc., Morgan Stanley, Deutsche Bank AG and Credit Suisse Group AG, all of whom have had to liquidate huge chunks of shares in block trades at many fire sale prices. The first quarter results of these banks are now being impacted to the tune of $5 to $10 billion.

In the wake of years-long risky high yield trading and huge IPO and SPAC investment by those in desperate search of positive real yield and returns, traditional risk management tools developed in Manhattan, London, Zurich and Tokyo appear no longer appear to prevail. With respect to risk to the global supply chain, last disrupted by the shutdowns in the airline industry, the world has truly been shaken by the sight of hundreds and hundreds of ships laden with cargo blocked from entry into the Suez Canal by just one beached container vessel, the Ever Given. In the context of data privacy, hackers have reduced and revealed the little that apparently remains.

At this writing, with two days to go until the close of the first quarter in the financial markets, stocks are up across board since the start of the year. The Dow is up over 8%, the S&P 500 more than 5%, the Nasdaq over 1% and the Russell 2000 well over 9%.  Oil prices at $61.56 have gained 27% while gold is down 9.6% to $1,713 per ounce and silver is down 6% to $24.75. Bitcoin has doubled in value to $57,610. In the bond markets, yields in short maturities have been stable: over the past three months, the 2-year Treasury has increased only 2 basis points to 0.14% while the tax-exempt AAA municipal general obligation bond yield has remained flat at 0.14%. The comparable Baa rated corporate bond yield has fallen 5 basis points to 1.73%. The 10-year and 30-year Treasury benchmark yields have, however, risen by more than 76 basis points to 1.70% and 2.40%, respectively. 10-year Baa corporate yields are up 61 basis points to 3.26%.  Municipals have outperformed their taxable counterparts by the most of any quarter since 2009, although intermediate and long-term yields have increased by more than 34 basis points since January: the 10-year AAA muni currently yields 1.10% and the 30-year yields 1.73%. Returns in the general municipal market are expected to be in the range of negative 0.3% for the quarter, while Treasuries will end the quarter down 4.2%. High yield municipal bond returns are among the fixed income leaders, with index returns in the range of 2.11% year-to-date.

Investor demand for tax-exempt securities has been magnified by tax chatter in Washington. The Biden Administration is proposing some of the largest tax increases since 1942 and this is enhancing the perceived value of munis, even at these still relatively low historic yields.  There are also several other favorable conditions prevailing for muni buyers. Investors have added $26.1 billion to muni bond funds and ETFs so far this year, reflecting retail demand for every available tax-advantaged dollar. History also shows that the muni market does well during the first 100 days of a Democratic president’s first 100 days in office. In addition, supply has been suppressed as state, local and nonprofit borrowers have awaited news of agreement on the extent of stimulus funds for more than six months. Now that federal funding has reduced the need for some deficit borrowing, volume could decline for several months to come.  On top of all this, the IRS has delayed the 2020 tax filing deadline to May, which forestalls the need for some of the usual seasonal sales for another month.

This is a week in which many around the world celebrate very precious holidays. We at HJ Sims wish you and your families happy and healthy celebrations. Your HJ Sims representatives look forward to sharing the best of these moments and, based upon your investment goals and sensible risk parameters, helping you to try and improve results you have come to see as normal in your portfolios. We appreciate all that you have endured and managed during this past year and stand alongside you as you look to move forward with your investment and borrowing plans.  We are dedicated to working for you and, as always, aim for amazing.

Exclusive Opportunities For Our Clients

Aging Redefined

How old "we feel" is changing our expectations about retirement

The world is preparing to welcome a new generational powerhouse in that of “seniors” and those considered of “retirement age.” A transition is occurring, establishing the largest projected population of retirees and senior citizens in human history. This trend can be attributed to various factors, including the reduced physical demands of many jobs today, advancements in healthcare, a greater focus on healthy living, and technological advances, which are expanding global lifespans and the median age of adults.

Dr. Joseph Coughlin, Director of the MIT AgeLab, (also keynote speaker of this year’s HJ Sims Annual Late Winter Conference), discusses the trends of aging and longevity. Drawing upon his extensive and varied experience in academia and advising global firms, Dr. Coughlin shares insight gained from his position as instructor in MIT’s Department of Urban Studies and Planning and Sloan School’s Advanced Management Program. Dr. Coughlin is also the author of The Longevity Economy: Inside the World’s Fastest Growing, Most Misunderstood Market.

 

Dr. Coughlin cites the leading indicators of the pattern of retirees and consequent implications for product and service providers in countries throughout the world.

 

  • In Germany: the country is recognizing the trending population of older adults and creating an anti-aging beer
  • In Japan: the sale of adult diapers has surpassed those sold for infants
  • In the U.S.: an adult turns the age of 75 every seven seconds and 13% of all online dating services are being utilized by persons aged 65+ and older

With the population aging as whole, in the U.S., the baby boomers will redefine the standards of retirement. These standards are being driven by educated consumers and corporations recognizing the demand of this growing population with expectations and wants that differ markedly from prior generations. If combined into an aggregate economy, the “aging population” would create the world’s third largest driver of global spending. Furthermore, adults above the age of sixty have the highest concentration of wealth in the world, and are living longer now.

 

Not only are adults living longer, they are staying active. A growing majority of these aging adults are the baby boomers who grew up in a counter-culture era soaked in rebellion and quasi-revolution. Dr. Coughlin amusingly quotes the musician Jimmy Buffet describing baby boomers as, “the people our parents warned us about.” This “warning” is being increasingly heeded by consumers and producers. The stereotypical parent of a baby boomer was polite, hardworking, patient and easily appeased, explains Dr. Coughlin. These generational qualities helped shape many of the current products and services for seniors.

 

For context, Dr. Coughlin draws a parallel to product offerings, between the two age groups, using coffee, as an example. The current population in their mid-70’s and older most likely had two options for coffee growing-up: decaffeinated and caffeinated. The younger generation has experienced a multitude of options from which to choose: frappuccinos, lattes, espressos and even white chocolate caramel macchiatos served hot, warm, chilled and iced. “They (baby boomers] are creating a new generational gap, a gap of expectations,” exclaims Dr. Coughlin. That gap is what will drive innovation and pave the way for what Coughlin defines as the Longevity Economy.

 

Dr. Coughlin notes that, in fact, even the word “retirement” has changed meaning throughout time. Originated as a word to describe the stage when a person ran out of “vital life” and ability to perform physical labor, retirement meant one could no longer function as a member of the working economy and likely would result in a person falling victim to poverty. The modern definition of retirement could not be further from its root of origin. Today, people will live almost one third of their adult lives as retirees. With this extended period of time, Dr. Coughlin characterizes retirement as having four phases:

 

  • Ambiguity: Should one keep working or not?
  • Big Decisions: Does one downsize, move or travel?
  • Complexity: Should decisions like housing, healthcare, etc. be  managed by a third party?
  • End of life: When does one begin preparing for the final chapter of life?

As it relates to the first three phases, observed trends indicate that when aging or retired baby boomers move-out of their current homes, they are often down-sizing into smaller townhomes or apartments in the community-at-large or in “active adult” communities. A meaningful component is also relocating, whether to warmer/more hospitable climates, locales that offer amenities of interest and to be closer to children/grandchildren, which may include smaller communal towns throughout the country.

 

A key desire among retirees is for a sense of community. This latter observation is coupled with the fact that advancing technology enables aging adults to remain in their homes longer. Dr. Coughlin cites numerous technologies; for example, utensils that indicate nutritional value of the food people consume, mirrors that can measure blood pressure, and, even a toilet that can gauge nutrient deficiencies. All of these tools possess the capability to upload information to a healthcare database for use by a product/services provider. Brands like Amazon, Walgreens, Best Buy and Walmart are developing in-home platforms for aging seniors that will likely enable adults to remain in their current homes for a longer period of time.

 

To conclude, the experience of retirement, like the approaching baby boomers, will not conform to the past. The notion of retirement or aging, as we have known it, has taken on a new definition with today’s more active and demanding adult consumer.

 

On your own terms

At HJ Sims, we recognize that retirement is neither traditional, nor is it dictated by a calendar or specific age – it’s a mindset, a second-act and an opportunity for a new journey. You are more interested in pursuing passions and creating a lifestyle to match your mindset. This is about your personal growth, identity, freedom and flexibility. Whether your investment goal is to save for milestones or retirement, our wealth experts take our entirement® approach, looking at your entire wealth picture, along with your lifestyle goals and needs. We work tirelessly to construct a portfolio that helps to enrich your life and the lives of your family members for years to come.

 

It’s your adventure: Planning for your journey should be exciting, freeing and empowering. Contact an HJ Sims’ Financial Professional today.  

Market Commentary: Galloping in on a White Horse

by Gayl Mileszko

It is said that the difference between a good lawyer and a bad lawyer is that a bad lawyer can let a case drag out for several years while a good lawyer can make it last even longer. This is just one of the dozens of jokes we tell about attorneys. But it is no laughing matter when we have been hurt or wronged and need to hire the best legal mind to represent us. In the wake of the Pandemic, hundreds and hundreds of claims have been filed in state and federal courts against airlines, cruise lines, fitness chains, hospitals, colleges, insurers, and nursing homes, among others, challenging decisions made by companies, institutions and government officials during the crisis. These cases reflect much of the devastation, loss, and hardship suffered by individuals, families, employees, patients, residents, citizens, and consumers. They remind us of the steep economic toll that the coronavirus has taken, and that it is still rising.

Hunton Andrews Kurth is just one firm tracking cases and complaints related to the Pandemic. At last count, there were 9,521 in the U.S. Some ask for corrective actions, others seek monetary damages. There are family members who accuse senior care facility managers of failing to protect their residents and public health departments for failing to properly monitor the facilities they regulate. There are nurses suing the hospitals, cashiers suing grocers, ticket takers suing railways where they work for failing to provide proper protective equipment. Concert-goers and frequent flyers and cruisers are seeking cash refunds, students want tuition refunds, prisoners are seeking release, laid off workers are chasing unpaid wages, hospitals are suing patients for outstanding medical debt, restaurants are trying to have their business interruption insurance claims paid. Landlords, wedding reception venues and others are testing force majeure and other legal concepts alongside workplace class actions on compensation and discrimination. No doubt new standards if not precedents will be set in the months, perhaps years, to come.

To forestall waves of action, a number of states have imposed various immunity measures for certain health care providers. Discussion of liability shields or protections for businesses has been underway in Washington for the first time since Y2K. Financial markets have been provided with a form of loss prevention shield for more than a dozen years now. The Federal Reserve has stepped in to protect, if not sustain, and propel markets in every way imaginable with dozens of heretofore unheard-of programs. Starting with tools first brought out in 2008 and new ones devised within days of the 2020 Pandemic’s declaration, the Fed has shielded the so-called free market from itself and kept the global markets afloat as well. Since March of 2009, there has been intermittent volatility, sometimes very pronounced, but the Dow is up 330 percent, the S&P 500 is up 394 percent, the Russell 200 has gained 436 percent, and the Nasdaq has gained 436 percent. Gold prices are up 89% to $1,740, and silver prices have doubled to $25.73. The 2-year Treasury yield has fallen 82% to 0.14%. The 10-year is down 37% to 1.69% and the 30-year has fallen 32% to 2.39%. The 10-year Baa corporate bond yield has dropped 409 basis points to 3.25%. In the tax-exempt market. The 2-year AAA general obligation bond benchmark yield has fallen more than 80% to 0.19%. The 10- and 30-year yields are down 63% to 1.16% and 1.79%, respectively.

This week, the Fed chair and Secretary of the Treasury appear together before the House Financial Services Committee and Senate Banking Committee to discuss the government’s response to the Pandemic plus the fear du jour – inflation – and explain why the Treasury and central bank have to keep galloping in on a white horse to save markets that were meant to be driven by supply and demand, not controlled by central authorities. Our economy is widely expected to surge in the next few months as a result of the nation’s extraordinary vaccination campaign and the multi-trillions of federal stimulus funds. Inflation, as calculated by the PCE (personal consumption expenditures) index will be 2.4% at the end of 2021 according to the Fed’s median forecast. But the Administration is planning another package of relief that could add another $3 trillion to the deficit. There could be some offsetting tax hikes proposed simultaneously or separately. Markets have suddenly turned aflutter over the prospect of big jumps in consumer prices, China’s new posture, the Fed’s decision to end regulatory capital relief for banks, and the resiliency of a Treasury market which will see $183 billion of new sales this week alone.

Municipal bonds have reacted with somewhat of a yawn to most of the goings on in Treasuries and the stock market. The Fed’s plan to keep short term rates as low as possible until 2023 and continue buying $120 billion of corporate and mortgage-backed bonds every month came as no surprise to the tax-exempt market, which has been fueled by all the Democratic leadership talk of tax increases, continued inflows into bond funds and ETFs, and light supply. High yield issuance, the center of most demand, has been paltry. Last week, buyers scooped up $1.25 billion of State of Illinois general obligation bonds at the lowest end of the investment grade scale at Baa3/BBB-/BBB-. The huge demand for bonds from the Land of Lincoln elevated prices to the point that buyers could only register a 2.75% maximum yield which came on term maturities in 2046. Among other higher yielding new issues, the Government of Guam sold $58 million of Ba1 rated refunding bonds due in 2040 with a 2.66% yield. Brooks Academies of Texas borrowed $42.9 million through the Arlington Higher Education Finance Corporation, including non-rated 2051 term bonds priced with a 5% coupon to yield 4.20%; Royal School System came 3 days earlier with a $9.9 million deal due in 2051 with a 6% yield. Oak Creek Charter School of Bonita Springs in Florida sold $17.8 million of non-rated revenue bonds structured with a 2055 term maturity that priced at par to yield 5.125%. As always, we encourage you to contact your HJ Sims representative for our latest views on pricing and our secondary market offerings.

Exclusive Opportunities For Our Clients

Market Commentary: Go For It and Dream

by Gayl Mileszko

Alena Wicker is one of several thousand applicants who just received the life-altering news of her acceptance to college. What makes her stand out is that she graduated from high school at the age of 12 and, for the past 8 years, has had the goal of becoming a NASA engineer. She is pursuing a double major in astronomical and planetary science and chemistry and, if all goes well, her dream will come true when she turns 16. Alena, who begins her studies this summer at Arizona State University. is not the youngest person ever to enroll in and graduate from college. That record is held by Michael Kearney, also homeschooled, who was accepted at the University of South Alabama at the age of eight, graduated in 1994 with a bachelor’s degree in Anthropology at the age of 10, and taught college courses while earning masters degrees in chemistry and computer science by the age of 18. But Alena says she is proof that the stars are the limit if you put your mind to it. In an inspiring message for a pandemic-weary world, she reminds us that: “It doesn’t matter what your age or what you’re planning to do. Go for it, dream, then accomplish it.”

Arizona State University is also the site of another dream come true during COVID-19. After more than five years of planning and 500 laborers on a site that broke ground in February 2018, a new $252 million non-profit intergenerational living and lifelong learning life plan community for older adults opened to its first residents on December 28 just before the start of the spring semester.  Mirabella at ASU was built by bonds on land in the heart of downtown Tempe owned by the university and features 246 independent living units, 52 health care units, an indoor pool, wellness center, physical therapy gym, theater, art museum, lecture hall, salon, spa, dog park, valet parking and four restaurants. It is 20 stories tall with environmentally friendly features and overlooks the Tempe Butte and South Mountain, providing new homes for those with an average age of 76 who are being challenged to become “master learners” by taking one of 117 classes and having full access to the university library, faculty seminars, sporting events, and all the amenities available on the nearby campus. So far fifteen percent of residents have signed on to become mentors for some of the 70,000 students on the largest of ASU’s five campuses. Although other retirement communities with ties to Oberlin College, Stanford University, Berry College, the University of Florida and the University of Michigan, or those planned by universities such as SUNY Purchase, may argue, ASU President Michael Crow dubbed Mirabella at ASU “the world’s coolest dorm.”

Big dreams and bright futures for college frosh, lifelong learning retirees, and millions of others have by no means been quashed by the COVID-19 pandemic. The CNN/Moody’s Analytics “Back-to-Normal” Index currently registers at 83% but hopes and expectations across the country are much higher as vaccinations now total 111 million and the $1.9 trillion stimulus was just signed into law by President Biden. The American Rescue Plan comes on the heels of the $900 billion December aid package and included $40 billion for public and private institutions of higher education, with at least half going toward emergency grants for students, $8.5 billion for rural hospitals, $8 billion for airports, $14 billion for airline payroll support, $30 billion to mass transit, $350 billion in state and local government aid, $1,400 per person stimulus checks for eligible individuals and families, $242 billion of supplemental unemployment insurance through September, and $5 billion for small business. As reflected by the party-line vote, many stimulus provisions were not without controversy. Democrats dubbed it the “largest anti-poverty measure in a generation” while Republicans called the bill a “blue state bailout” and “slush fund that has nothing to do with COVID”, estimating that only 7% of the funding in the bill was directed to fighting the coronavirus through public health spending, and arguing that the excessive spending puts the economy in serious danger of overheating. Moody’s estimates that the Plan could add up to 7 million jobs.

Financial markets have taken a sunnier view of the hundreds of billions that continue to rain down on America and, like much of the country, appear to be betting on a huge post-pandemic boom. The markets long ago assumed passage of another two trillion stimulus without much concern for the details as economic data continues to reflect a recovering economy with only slight inflation and a very upbeat consumer profile. The stock market was jittery again last week in response to a fourth week of rising Treasury yields but closed with the Dow at record highs. Volatility as measured by the CBOE VIX has fallen 28% this month to 20.03. U.S. Treasuries continued their selloff, and auctions for $120 billion of 3-, 10- and 30-year bonds met with some mixed investor demand. Midway through March, the 2-year Treasury yield at 0.15% is up 3 basis points, the 10-year yield at 1.60% is up 20 basis points, and the 30-year at 2.36% is up 21 basis points.

Amid astonishing levels of corporate bond issuance, demand has not tapered off. Last week alone saw $53.5 billion of investment grade corporate issuance and $15.6 billion of high yield corporate sales. Investors did pull $5.33 billion from high yield corporate funds last week but added $1.1 billion to municipal bond funds. There was a fairly heavy new issue muni calendar at $10 billion yet municipal bond prices ended higher as the massive stimulus was seen as supporting sectors across the board, reducing fears of deteriorating credits and the likelihood of increasing defaults. Talk in Washington of the Administration’s plans for tax and infrastructure measures also served to buoy the outlook for tax-exempts. So far this month, AAA general obligation muni benchmarks are down across the board: the 2-year at 0.09% is down 10 basis points, the 10-year at 1.02% is down 12 basis points, and the 30-year at 1.65% is down 15 basis points. This week’s calendar is expected to exceed $10 billion but, once again, with very little in the way of yield offered to income-seeking investors who are reliant on their financial advisors and brokers to patiently sift through secondary market offerings for gems.

The markets remain highly sensitive to Federal Reserve announcements, what is said and not said, and how the statements are phrased. The greatest fears are of rate hikes and inflation coming too soon and too fast. Some traders fear a drop in liquidity if the Fed starts to taper its $120 billion per month bond-buying program now that nine of the emergency lending programs have expired and three more will end on March 31. Without much else to focus on for now, investors clung onto every word, pause and tone in Wednesday’s press conference. Housing starts, building permits, new and existing home sales data, several fourth quarter earnings releases and IPO activity are also drivers for a week where some dream, others accomplish, and a few—as always at this time of year—caution “Beware the Ides of March”.

Exclusive Opportunities For Our Clients

Market Commentary: Miracle Vaccines Pave the Road to Recovery

by Gayl Mileszko

Albert Martin Gitchell was a 28-year-old self-employed butcher living in Ree Heights, South Dakota who was drafted into the U.S. Army as a cook and stationed at Camp Funston, a military reservation of 54,000 troops in Fort Riley, Kansas during World War I. On March 11, 1918, he woke up complaining of a bad cold with a sore throat, headache and muscular pains. He was hospitalized with a 104 degree fever and became the first documented case of the Spanish Flu in the U.S. By noon that day, 107 of Private Gitchell’s fellow soldiers were also admitted for treatment. Within three weeks, more than 1,100 were sick enough to require hospitalization and thousands more were sick in barricades.

By April of 1920, more soldiers had died from the 1918 flu than were killed in battle during the war. Conditions including global troop movements, overcrowding, and poor hygiene helped to spread the flu in waves as it mutated. By the time the pandemic ended in 1921, there were 500 million cases and 50 million deaths worldwide with an extraordinarily high mortality in healthy people in the 20- to 40-year age group. The average life expectancy in America plummeted by a dozen years as there was no vaccine to protect against influenza infection and no antibiotics to treat secondary bacterial infections. Microscopes were unable to see something as incredibly small as a virus until the 1930s. The first licensed flu vaccine and mechanical ventilator did not appear in America until the 1940s. Over the course of the deadly 1918 pandemic, 675,000 Americans perished. The 1918 virus in fact remained the seasonal flu strain until 1958 and it was not until 90 years later, in 2008, that researchers announced what made it so deadly: a group of three genes enabled the virus to weaken a victim’s bronchial tubes and lungs and clear the way for bacterial pneumonia.

One Hundred Years Later, Another Deadly Pandemic

One hundred years after the Fort Riley admission, an unnamed 35-year old man entered an urgent care clinic in Snohomish County, Washington with a four-day history of cough and fever after his return from a family visit to Wuhan, China. He was the first confirmed U.S. case of the novel coronavirus. Hospitalized with viral pneumonia, he was placed in an isolation pod, treated with supplemental oxygen, and put on Remdesivir. Like Private Gitchell a century before, he was lucky and survived. Five days after the experimental treatment, he was discharged. But within two weeks, the first COVID fatality occurred in Santa Clara, California. Twelve months later, more than 28.8 million U.S. cases have been confirmed and more than 523,000 have died. Americans have lost one year of average life expectancy as a result of this virus that has reached around the globe faster than any pandemic in history. And despite all the advances in intensive care, antiviral drugs, and global surveillance over time, the most effective measures have remained the same as in 1918: social isolation, masks, sanitation, quarantines and good nursing care.

Unprecedented Speed of Vaccine Development

Vaccine development is a long, complex process that often takes ten to twelve years of public and private investment and is characterized by a failure rate as high as 93%. The mumps vaccine held the previous record at four short years. But, after 30 years and untold billions of spending, there is still not an AIDS vaccine effective enough to be licensed. So, the speed with which researchers and pharmaceutical companies have responded to the 2019 Pandemic is unprecedented and nothing short of miraculous. As of this writing, 92.1 million vaccines have already been administered. Daily hospitalizations have declined by 74% from the high on January 5. Daily deaths have declined 87% from the high on April 15 and 84% from the most recent peak on February 12.

Lifting Restrictions One Long Year Later

The Centers for Disease Control announced this week that people who were fully vaccinated two weeks ago can now meet safely indoors in small groups without masks. They can dine indoors, hug unvaccinated grandchildren and visit with others who have no pre-existing conditions. Officials still recommend against large events and travel. They still advise wearing masks and social distancing in public spaces, but some states such as Texas, Wyoming and Mississippi, and some companies like Albertsons’s have removed the mask mandate. The White House now says that all American adults will be able to get a vaccination by the end of May and 69% of the public intends to get a vaccine – or already has.

Long-Term Care Facilities

Most attention is, of course, still focused on COVID’s impact on long term care facilities. These include some 28,900 assisted living communities and 15,600 nursing homes with a combined 2.7 million licensed beds, 5 million residents and 1.5 million workers. The COVID Tracking Project reports 1.3 million cases and 174,474 deaths have been reported in 33,639 of these locations as of March 4, 2021. COVID has had an estimated $15 billion impact on senior living communities but this is a needs-based industry and the increasing needs of our aging population will continue to drive its recovery and growth. A recent survey of prospective residents and their adult children by ASHA found that the appeal of senior living communities has actually increased. Since vaccinations began in December, the great news is that there has been a 90% drop in COVID cases in these facilities from 30,000 per week to 3,000, according to the American Health Care Association (AHCA). 80% to 90% of long-term care residents have taken the vaccine in the past three months and many providers are now reporting zero cases. The concern is with staff acceptance, which is still averaging only about 40%. But AHCA and LeadingAge have set a target of June 30 for having 75% of care-providing staff vaccinated.

Vaccine Hesitancy

In 2019, the World Health Organization named vaccine hesitancy – a reluctance or refusal to vaccinate – as one of the ten biggest health threats facing the world. Although the vast majority of Americans (81% according to a recent Pew Research Survey) continue to view the coronavirus outbreak as a major threat to the economy, the Census Bureau reports that 23% will either probably or definitely not get vaccinated. Several of the factors involved include complacency, inconvenience, fear, and lack of confidence. Some believe that natural immunity is more effective than a vaccine, others are worried about safety given the limited amount of research conducted, particularly on pregnant women and women of childbearing years. The U.S. Conference of Catholic Bishops questions one vaccine’s moral permissibility, saying it was developed, tested and produced using abortion-derived cell lines. Quite a few among those we know worry about side effects, tolerability, and long-term effects on immune systems. There are millions who do not get vaccines in general, do not think they need it, are afraid that personal information collected will be used for immigration-related purposes, or have been alarmed by past mistakes in the medical care system. Researchers point out that human evolution has hard-wired us for laziness, so some of us simply don’t want to look into the science, navigate confusing websites, or wait in line.

Issues with Vaccine Mandates

In order to provide safe conditions for customers, safe working environments, reduce illness and hospitalization-related workforce shortages, and return to normal operating practices, employers are reviewing rulings and guidance from the Occupational Safety and Health Administration and the Equal Employment Opportunity Commission. While awaiting availability as well as more data from the FDA and CDC on the efficacy and duration of immunity for the three vaccines currently available, most companies are encouraging but not mandating vaccinations or proof of vaccination as a condition of employment. There is a legal question as to whether an employer can mandate a vaccination that only has the FDA’s emergency use authorization. But to incentivize individuals and groups to take the vaccine, some companies are requiring an educational session to inform decision-making, offering cash bonuses, holding raffles or giveaways. McDonald’s is providing four hours of paid time and Trader Joe’s is giving two hours’ worth of pay. Target offers $15 each way for staff who use Lyft to get to their appointments. Other employers are lessening PPE requirements or eliminating daily temperature checks for those receiving full doses. 

Some companies like Atria Senior Living decided to make vaccinations a mandatory condition of employment for its 11,000 workers. Quite a few other enterprises see a competitive advantage in being able to claim that all employees have been vaccinated and may try to adopt a compulsory inoculation requirement. But collective bargaining agreements may mean negotiations with unions are necessary. And under the Americans with Disabilities Act, workers who do not want to be vaccinated for medical reasons can request an exemption; employers would have to provide reasonable accommodation, such as allowing the employee to work remotely. In addition, if taking the vaccine is a violation of a “sincerely held” religious belief, these workers would also potentially be able to opt out Under Title VII of the Civil Rights Act of 1964. 

Liability

If an employer does choose to mandate the COVID vaccine, experts say that a company is not generally liable should an employee develop side effects from a vaccine; any claims would likely be routed through worker’s compensation programs and treated as an on-the-job injury. Immunity laws and orders offering certain protection from lawsuits arising from the pandemic vary widely by state. Provisions may apply to injuries, deaths, care decisions, and/or property damage, may apply only during the declared emergency, and generally make exceptions for gross negligence and willful misconduct.

Impact on the Municipal Bond Market

A recent study by the Federal Reserve Bank of St. Lois found that the COVID-19 pandemic has affected the U.S. municipal bond market on several different fronts. Demand for municipal bonds had been steady and strong for years as investors sought to meet safety, income and after-tax return goals but perceived risk spiked and a wave of selling began once the pandemic was declared. Bids were disconnected from the fundamental value of many bonds. Prices suffered their biggest weekly decline in 33 years. Yields increased sharply in March of 2020 until the Fed announced that it would accept bonds as collateral for certain loans and established a Municipal Liquidity Facility. Increased expenditures including unemployment aid and health services, along with a decrease in revenue associated with the extension of tax filing deadlines, had an immediate impact on states but most had built up large reserves as a result of ten years of economic growth.

After a period of considerable stress across all sectors in the primary and secondary markets, investors came to realize the essentiality of services such as water, power, and sewer, the value of stable revenue streams, and the difference between full faith and credit pledges versus unsecured corporate bond pledges as bankruptcies began to mount. But high-risk issuers including health care facilities, senior living facilities, sports and entertainment complexes, public transit, and college dormitories were hard hit as were communities reliant upon tourism. Federal relief packages and talk of more aid helped to buoy the market. Debt sales began increasing again in June 2020 as concerns over credit fundamentals eased and the liquidity crisis resulting from huge outflows from mutual and exchange-traded funds ended. Revenue disruptions persist in certain sectors including airports, toll roads and senior care facilities but these are expected to be temporary.

The Muni Market Today

Demand continues to outpace tax-exempt supply, fundamentals remain generally strong, and more federal stimulus is on the way to bolster state, city, airport, school, college and public transit finances. But the size of the latest proposed aid package, along with strong economic data, have raised concerns for inflation, which in turn has produced fresh volatility in stock and bond markets.  Many of the sectors experiencing the greatest stress one year ago, including life care and student housing, are still struggling. Bloomberg Intelligence reports that nine credits with par value of $595 million have become distressed so far this year versus four at this time last year with par value of $171 million. Twelve bonds with par value of $842 million have defaulted in 2021 while the first two months of 2020 saw only $73 million of defaults.  Nevertheless, the vast majority of bonds in the $3.9 trillion muni market are paying on time and in full. Rates are still near historic lows, so borrowers continue to enter the market with new money and refunding issues. Investors have added $24.1 billion to municipal bond mutual funds and ETFs bringing asset totals to $956 billion. The new Administration and Democratic House and Senate bring the potential for tax policy changes; the mere talk of hikes increases the value of tax-exempt securities.

The 2-year AAA municipal general obligation bond yield at 0.13% is 6 basis points lower than where it began the month of March, 1 basis point below where it started the year, and 50 basis points below where it stood one year ago.  The 10-year benchmark yield at 1.11% is 3 basis points lower in March, 30 basis points higher than where it stood at the new year, and 15 basis points above the yield on March 5, 2020. The 30-year yield at 1.76% has fallen 4 basis points this month but is 37 basis points higher on the year and 20 basis points higher than where it stood last year at this time. Municipals have outperformed Treasury counterparts so far in March, year-to-date and over the past year. High yield municipals are returning 1.69% so far this year, leading all fixed income performance with the exception of convertible bonds.

Last week, HJ Sims brought a $102.1 million non-rated deal for Fountaingate Gardens to construct 129 independent living entrance fee units adjacent to the campus of Gurwin Healthcare System on Long Island. Bonds were issued through the Town of Huntington Development Corporation in New York and structured with three term maturities with a maximum yield of 5.375% in 2056. We believe that this is only the second new senior living construction project to come to market since December of 2019 and the strong market reception reflected investor support for this essential service sector. Among other high yield transactions, the Indiana Finance Authority sold $88.8 million of Caa2/B- rated bonds due in 2026 for United States Steel priced at par to yield 4.125%. The South Carolina Jobs-Economic Development Authority issued $17.1 million of non-rated bonds for Horse Creek Academy in Aiken that featured 2055 term bonds priced at par to yield 5.00%. The Public Finance Authority sold $13.6 million of non-rated bonds due in 2051 for Discovery Charter School in Bahama, North Carolina that priced at par to yield 5.50%.

We at HJ Sims understand that this virus is going to be with us for a very long time, even after the pandemic phase passes, and that the life we knew in 2019 will not return in the same form. But today we are heartened by the pace of vaccinations, the dramatic drops in case counts, hospitalizations and deaths, the positive economic trends, the daily announcements of school, restaurant, life care community and stadium re-openings, the recognition of the need for critical infrastructure improvements, the introduction of fantastic new technologies to make our lives safer, the number of non-profits and for-profits reaching out for advice on refinancings for savings and new projects in line with long-term plans that address coming demographic changes. We encourage all readers to take the time to become better informed on the available vaccines and treatments, on how to help build a collective defense against the virus, and on how to encourage family, friends, colleagues and staff to do the same. We thank all the unsung heroes among our readership and, as always, invite information exchanges with our HJ Sims representatives.

Exclusive Opportunities For Our Clients