by Gayl Mileszko
The New Year begins with fireworks on Capitol Hill as Members of the Senate celebrate their swearings-in to the 118th Congress while Members of the House, not yet sworn in, are still voting to select their new Speaker. At this writing, horses are being traded but the outcome remains something less than certain. Historians have dusted off record books dating back to the 34th Congress which saw the longest and perhaps most divisive contest for the Speaker’s gavel. It lasted from December 3, 1855 to February 2, 1856 and involved 21 candidates and 133 ballots. Nathaniel Prentiss Banks of Waltham, Massachusetts and the American (or “Know Nothing” Party) was eventually elected the nation’s 21st Speaker by a vote of 103 to 100 after Members agreed to drop the requirement for a majority and adopt a plurality rule to break the deadlock. Banks, who had also run under the banner of three other political parties, served 10 terms in the House and came to preside over a chamber split by conflicts over slavery and immigration. When Democrats won control of the House in 1857, he retired and returned to Massachusetts to run against and beat the incumbent governor, then launch a campaign for the Republican presidential nomination in 1860, and later serve as a Major General in the Union Army during the Civil War.
House Speaker Election
There is a lot of “inside baseball” at play in Washington and new coalitions being formed. As was widely noted about the process of lawmaking, the election of party leaders is also like sausage-making — better not see it. But the 118th House Speaker will be second in line for the Presidency, after the Vice President and ahead of the President pro tempore of the Senate, the Secretary of State and the Secretary of the Treasury. He or she will be one of the most visible faces and key principals in the U.S. government for the next two years, charged with forging consensus within the Republican Party as well within as the House and guiding the nation as a whole. The Constitution provides that all bills for raising revenue originate in the Speaker’s House and, by tradition, so do all spending bills. And spending has exploded — rising from 21% of the nation’s gross domestic product in 2019 to 30% in 2022, creating a current national deficit of $336.4 billion and a published national debt exceeding $31.3 trillion. The new Speaker faces a formidable, perhaps historic, challenge and we all have a stake in his or her success.
Investors Seek That Elusive Certainty
Wall Street is monitoring the goings-on in Washington with a mixture of concern and glee. Generally, traders like to see gridlock, a divided government incapable of legislating major change or adding to the pile of uncertainties they already face every day in the pits. And there have been plenty of uncertainties of late – everything from the pandemic to the war in Ukraine to a series of 75 basis point rate hikes, relentless cyberattacks, and aggressive regulation. But investors also want to know exactly who their leaders are and see peaceful transfers of power. We are nevertheless reminded from time to time that, as Robert Kennedy once said, democracy is messy.
2022 is Now Behind Us
The year just passed was messy. It was nasty and brutish and lasted twelve months. There were openings and opportunities, but mostly there were losses. No asset class was entirely unscathed, there were no oases. Inflation surged to levels not seen in more than four decades, and the cost of borrowing rose sharply as the Federal Reserve waged war against it and hiked target rates by 425 basis points to levels not seen since 2007 — and shrinking its balance sheet by $400 billion. For many, it was the worst year since 2008 and forecasts of impending recession made it feel like conditions will likely worsen. Volatility in the stock market spiked throughout the year and ended up 26% higher than at the start of the year. The Dow lost 8.8%, the S&P 500 fell 19.4%, the Russell 2000 declined by 21.6% and the Nasdaq dropped 33.1%. Bitcoin prices plummeted 65%, while silver gained nearly 3% and oil prices increased by 6.7%.
Bond Market Déjà vu 2008 and 1953
Bond moves were more extreme and many analysts see 2022 as the worst year in market history. The 2-year Treasury yield surged 369 basis points from 0.73% to 4.42% and the MOVE Index of bond volatility surged 58%. The yield curve inverted in early July and the gap between short and long maturities widened to the point where the 12-month yield which closed at 4.68% was 81 basis points higher than the 10-year yield, which rose 236 basis points during the year, reportedly the biggest annual increase since 1953. The 3-month yield ended 38 basis points higher than the 30-year benchmark at 3.96%. Major Treasury indices report a year-to-date loss of 12.8%. The 15-year rally came to an abrupt halt for bonds in every sector. Corporate bonds were pummeled: the 10-year BAA corporate bond yield weakened by 324 basis points to 6.44%. High grade corporate indices posted losses of 15.4%, and high yield corporates declined by 11.2%. Convertibles lost 20.1% and preferreds were down 14.6%. Mortgage-backed bonds fell 11.9%. The investment grade muni index lost 9% while taxable munis suffered a 20% loss and high yield munis lost about 10% as the Investment Company Institute reported that investment grade taxable bond mutual funds and ETFS saw a combined net of $171.8 billion of net outflows, high yield taxable bond funds had $45.6 billion of net redemptions. Municipal bond mutual fund outflows totaled approximately $144 billion while muni ETFs added a net of $28.7 billion.
Focus on Income and Seize Opportunity
To ring in the New Year, Americans watched the ball drop in Times Square and cheered fireworks displays that began in Australia and ended in American Samoa. It is natural for investors to see and cheer the great promise offered by the coming year. We want to believe that the worst is behind us, that the Fed will ease up on rate hikes and pause before mid-year and cut later in 2023. We also have been reminded not to focus on unrealized losses but on coupon and dividend income as well as the potential for price appreciation. Cash abounds as a result of tax loss harvesting in the fourth quarter and interest and dividend income that has not yet been reinvested. Some borrowers who have been on the sidelines waiting for things to get better cannot wait any longer and are lining up to take advantage of upbeat investor sentiment. Banks project high yield corporate supply to double this year. Dealers are forecasting an average January for investment grade corporate bonds with around $130 billion in new sales. Primary municipal bond issuance in 2022 dropped by 20% from 2021 to $370 billion but may increase to as much as $500 billion, if the Bank of America forecast proves correct and 10-year AAA general obligation bond yields fall from 2.63% at present to 2.20% and 30-year yields drop from 3.58% to 2.70%.
HJ Sims welcomes all the opportunities afforded by the New Year and we wish you and your families, colleagues and employees great happiness, health and success. Please reach out to your HJ Sims representative in the next few weeks to discuss your goals for 2023 and how we can help you to achieve them.
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