By Gayl Mileszko
Boiling Over
Volatility prevails these days – in politics, markets, and even in each of our homes as the summer — which still technically lasts for another 6 weeks — has nevertheless sadly come to an end for millions of students now beginning their fall terms. Stock market volatility as measured by the VIX was up 136% in just the first three trading days of August and more than 209% since the start of the year. Bonds, the major beneficiary of the selloff in equities for all of two days, have seen market volatility as measured by the MOVE Index jump 22% this month. There are 42 long days until the next Federal Open Market Committee announcement, and anything can happen. Same in the political arena, where the Democratic National Convention will begin in 12 days, and Election Day is just three months away. But we see have already seen spikes periodically accompany major developments and generate the so-called Trump or Harris trades. Many investors on lake, mountain, and seaside retreats have cast aside cares for the time being and that has, in part, helped to keep the latest global market rout from tipping over into a crash.
Burnout
The scales have tipped one way or the other in courtrooms across the country this year. It is said that Justice may be blind until she gets the person that blinded her, and then it is payback time. Courts, from those at the local level all the way to the highest in the land, have been very busy this year dispensing justice. Our litigious society sees case after case, and appeal after appeal, filed. It’s no wonder that applications to law school have been increasing each and every year since 2015 and that applicants were willing to pay an average of $220,335 to get a J.D. degree last year. According to the American Bar Association, there are 1,331,290 attorneys, an increase of 30% since 2000, and they have been busy. The Institute for the Advancement of the American Legal System reports that over 100 million lawsuits are now filed in state trial courts annually, and over 400,000 cases federally.
It All Boils Down to SCOTUS
The U.S. Supreme Court, in its 2023 session just ended on July 1, ruled on 60 cases. That was below the 17-year average of 74 decisions, but this term saw quite a few humdingers. These rulings addressed everything from presidential immunity to offshore income, abortifacients, bump stocks, the obstruction charges against January 6 protestors, redistricting, homeless camps, bankruptcy settlements, social media platform content, restrictions on firearm use, and limits on federal regulatory authority. Depending on your position before the big bench, your side claimed payback for various mistaken rulings in the past or injuries caused by overreach from one branch of government or the other.
Regulations Have Caused Some to Boil Over
One major ruling overturned the so-called Chevron Doctrine and, in another part of this newsletter, we explore how this could have a major impact on proposed federal regulations impacting senior living. State and local agency administrative rulings are not affected and, in education as well as for senior housing and care, the federal rules on the books remain in effect unless overturned or changed — and nothing will happen right away. But on the table for review by the nation’s 800-plus federal judges could be rules involving Title IX, the federal Charter Schools program, the Individuals with Disabilities Education Act, accountability measures, accreditation, and debt relief, among others. Aside from the fishing inspection matter that spurred the appeal to the Supreme Court and led to the decision in Loper Bright Enterprises v. Raimondo, some of the first challenges to agency regulations could involve the Environmental Protection Agency, the Food and Drug Administration, the Securities and Exchange Commission, the Federal Trade Commission and various environmental, social, and governance departmental and agency directives. The scope of the ruling is far-reaching and may also soon impact current and pending regulations involving immigration, cybersecurity, labor, emissions, renewable energy, electric vehicles, and fair housing.
Coming to a Boil
Market volatility spiked last week on worries that the U.S. economy is more fragile than has been portrayed. Fingers pointed at the Federal Reserve’s interest rate policy as being a culprit in creating this climate of vile, stubborn inflation. Steam built up in the markets with every new data point. Hiring slowed in July, manufacturing activity worsened, and several big technology companies reported disappointing profits. Signs of recession, ignored on and off for more than two years, received new attention. The yield curve that inverted two years ago, suddenly un-inverted. The “Sahm rule” unemployment formula evidence flashed indications of a recession already underway. The leading economic index has remained below zero for one of the most extended periods on record. The “Taylor Rule,” measuring inflation and several indicators of economic slack, flashing a warning that the Fed is an astonishing seven rate cuts behind where it should be. Given this assortment of dismal factors, all of which the Fed surely must have known or forecasted, there was a hue and cry from some investors over its failure to take action at the meeting last Wednesday. Economists floated the idea of a 50 basis point cut at the next meeting in December; some suggested that an emergency meeting could be in order. The Fed has held 22 such emergency meetings or votes since 2008, most of which involved major crises: the pandemic, the debt ceiling, the possible U.S. credit rating downgrade, and the global financial crisis that began in 2007. As Chicago Fed President Austan Goolsbee reminded us, there is “nothing in the Fed’s mandate that’s about making sure the stock market is comfortable.”
The Boiler Room
As typically happens when traders are surprised, there was an overreaction that began last Friday producing a major selloff of risk assets. Algorithmic trading programs were triggered, adding momentum to the nosedive, until losses reached a point that triggered a robotic reversal. The VIX gauge of volatility had risen more than 135% from the start of the month, and the CNN Fear and Greed Index reflecting investor sentiment fell deep into the “Fear” range. Investors flocked to asset havens such as Treasuries, bond ETFs, money market funds and investment grade U.S. bonds. By the close on Monday, the Dow had fallen more than 2,100 points, the S&P 500 lost 5.2%, the Nasdaq fell 8% and the Russell 2000 took a 9.6% hit. Oil prices fell more than 6%, Bitcoin lost 18% and even gold finished down 1%. A recovery rally ensued on Tuesday and Wednesday and, at this writing, the stock indices have recovered some of these losses.
Hot Bond Market
Yields fell across the board in the bond market during the two-day equity meltdown. The 2-year Treasury fell 33 basis points, and the 10-year and 30-year dropped by 23. At this writing, yields have risen as investors returned to the risk markets. the 2-year yield stands at 4.01%, the 10year at 3.94%, and the 30-year at 4.23%. High grade municipal indices reflected the gains in the tax-exempt market as well. The 2-year, 10-year, and 30-year AAA general obligation bond benchmark yields all fell by about 29 basis points since the start of the month. At this writing, tax-exempts have mostly held onto their gains. The 2-year top-rated yield stands at 2.58%, the 10-year at 2.54%, and the 30-year at 3.43%. The 7-day SIFMA index rate was reset at 3.51%.
Full Steam Ahead
More than $8.3 billion of municipal bonds were issued last week, led by a $1.1 billion of AA rated New York City general obligation bonds. In the high yield sector, the University of Memphis sold $73 million of BB+ rated student housing bonds that were structured with a 2056 maturity that priced at 5.25% to yield 5.18%. No senior housing, charter school, or private school bonds came to market. But this week, we have a $67.2 million BBB-minus rated transaction for Garden Spot Village in New Holland, Pennsylvania coming through the Lancaster Municipal Authority, and a $20 million offering from the Florida Development Finance Corporation for BBB+ rated Saint Andrews School of Boca Raton.
On the Front Burner
As usual, there is a plethora of market movers for investors to contend with. Headlines from the trade press as well as mainstream media reflect many matters that impact investments and issuance. Fears of a full-scale Middle East war, the new positioning of U.S. naval assets, the Venezuelan election results, the Administration’s handling of a plea deal with the 9/11 terrorists, the public absence of the President, the announcement of the Democratic vice presidential candidate, the disclosure of Berkshire Hathaway’s stunning $277 billion of cash holdings, the big Jackson Hole gathering that begins on August 22, the 10 Treasury auctions scheduled for this week, the major corporate earnings reports coming out, the economic data on trade, inventories, and consumer credit. The municipal market is focused on a $17 billion calendar, happy with the last $1.1 billion net inflow into municipal bond funds and ETFs, and a major pick-up in institutional buying since mid-July. High yield muni index returns this year exceed 6.67%, exceeding U.S. Treasury, corporate, leveraged loan, convertible, preferred and mortgage performance. There is a lot to monitor and assess here at the mid-point of the third quarter. Never get close to a boiling point – reach out to your HJ Sims representative to dial down the heat and benefit from our firm’s 90 years of cool thinking.