Market Commentary: To Jab or Not To Jab

by Gayl Mileszko

In Act 3, Scene 1 of the Shakespeare play, Prince Hamlet asked, “To be or not to be?” bemoaning the pain and unfairness of life amid a sea of troubles, but acknowledging that the alternative might be worse. Nine months into our current global calamity, enduring the “whips and scorns” of this pandemic, so many of us have weighed our chances of contracting and surviving or spreading the coronavirus against chosen behaviors. In the United Kingdom as well as the United States, some of our most recent choices involve taking one or more of the emergency use authorized vaccines. Here, the Pfizer-BioNTech and Moderna COVID-19 rollout has been underway for about a month now and 31.1 million doses have been distributed. States are individually responsible for implementing programs but priority has been given across the board to health care workers and those in long term care facilities. CVS and Walgreens are critical to the plan and they aim to make at least initial visits to nearly all nursing homes by February. Some states are already making inoculations available to those over age 65 lest we “lose the name of Action” or momentum in our struggle. 

The American Health Care Association reports that about 45% of long term care workers have already been vaccinated. But surveys indicate that 29% of those who work in health care delivery settings said they would probably not or definitely not take the vaccine even if it were free and deemed safe by scientists. Hesitancy mirrors that of the general public where as many as 40% plan to wait and see or pass for now due to worries about the lack of long-term studies on side effects compounded by the need to have two doses, concerns over the type of antigen itself or misinformation about genetic impacts that messenger RNA vaccines could have, general mistrust of government and perceived profits being made by the pharmaceutical companies, and concerns about duration and effectiveness against the new and more contagious variants of the virus that have begun spreading. Refusal rates this high can certainly jeopardize our ability to achieve what many believe is the critical need: population immunity.

Unfortunately, no one is expecting the pandemic to subside by this spring. There is talk and hope of having most American citizens vaccinated by the third quarter of this year. The new administration proposes additional stimulus to speed up the testing and vaccination process. Health care providers are offering an array of incentives to employees and requirements for prospects. The U.S. Equal Employment Opportunity Commission in December released guidance stating that employers can require proof of COVID-19 vaccination from employees — with some exceptions. Dialogue in the coming months will include various “immunity passport” initiatives affecting all of us that may be highly controversial but could prove to be a first critical step in restoring a return to air travel, hotel stays, mass transit, restaurant dining, tourism, conventions, sporting events, commercial real estate, and the entire continuum of senior care from independent living to assisted living to memory care and skilled nursing.

Some parts of the economy are being permanently altered by SARS-CoV-2 as is trust in certain institutions, notably including the media. At the federal, state, community, and business/institution levels, it is extremely challenging to communicate effectively with stakeholders who have so many diverse political, legal, medical, religious, investment, and historical views. Skepticism is rampant. One recent survey by communications firm Edelman found that we not only have a pandemic but an “infodemic,” an era of information bankruptcy and poor “information hygiene”. Communications from “my employer” have now become the most trusted source of information at 61%. CEO’s must take this message to heart and redouble efforts to be transparent and to safeguard information and product quality as well as to protect and upskill workers and inform and engage their communities and investors of these efforts.

Quarterly corporate earnings reports for the most recent period have just began and analysts are scouring the last three months of performance while peppering leadership with questions on plans and forecasts for the start of 2021. Traders and investors are also carefully listening to the statements and testimony from key incoming members of the Biden Administration on the many new policy proposals and their potential market impacts. Much has not yet been “baked in” to evaluations and certain markets as the shift in Congressional leadership is still being assessed. 

Most U.S. markets nevertheless remain on fire going on three weeks into the new year, buoyed by our central bank’s policy of unprecedented accommodation for the foreseeable future. This week’s investment grade corporate new issuance is again expected to exceed $25 billion. So far this year $22 billion of high yield corporate bonds have priced and this could be the busiest months on record for this sector. Initial public offerings proceed apace. Record inflows into high yield municipal bond funds are a perfect reflection of the ongoing demand from individuals for some tax-exempt “oomph” in portfolios that may otherwise be producing nothing more than negative real returns. 

Income investors are advised to contact their HJ Sims representatives for recommendations of individual bonds tailored to their risk and capital needs profiles. The general muni market, as reflected in the ICE BoAML Index is up 0.04% this year while the HY muni index has gained 1.03%. High yield corporates are up 0.37%, and convertible bonds are returning a whopping 4.84%, primarily driven by gains in TESLA. U.S Treasuries, by comparison are down 1.15%,

We live amid a raging pandemic but the season has changed and we know that many other changes lie ahead. In many ways, we have not been down this path before. A new president is being inaugurated while an article of impeachment is pending against the former president. We have an unusually close relationship between the incumbent Chair of the Federal Reserve and his predecessor, the incoming Treasury Secretary. The central bank has the greatest single impact on markets and may use yield curve control, more liquidity support, potentially set a negative interest rate policy or exploring the use of digital currency. Major policy reversals are possible, impacting everything from taxes to health care, to energy and the environment, to immigration and corporate regulation. We may face inflation, a weakening dollar, and more horse trading than usual, given the thin margins in both the House and the Senate. We at HJ Sims wish godspeed to all assuming new public office and working to speed a recovery in each and every sector while supporting our essential services and entrepreneurs and the promising economic future ahead. As Shakespeare wrote in another famous play: “Come, love and health to all. [We] drink to the general joy of the whole table.”

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The Bethel Methodist Home, d/b/a The Knolls, is a non-profit Continuing Care Retirement Community located on a 29-acre campus in Valhalla, New York in Westchester County. The Knolls offers a full continuum of care with independent living, assisted living and skilled nursing services on a single campus.

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Market Commentary: Narrowing the Distance Between Independence and Constitution Avenues and Us

by Gayl Mileszko

There is only a week to go until the Inauguration of our 46th President. The weather forecast for January 20 is for a partly cloudy day with temperatures in the mid-40s. But other conditions are not so favorable for this time of year and for these traditional American quadrennial ceremonies in which we all ask for God to bless America. The pandemic has already nixed most of the festivities that have accompanied the swearing-in since 1805, including celebratory inaugural balls and parades. But now in the wake of the storming of the U.S. Capitol on January 6, law enforcement is on the highest possible alert. The FBI is warning about armed protests at all 50 state capitals in the days leading up to the recitation of the oath of office by the Chief Justice. Fifteen thousand National Guard troops are being deployed to the historic grounds that lay between Independence and Constitution Avenues, the People’s House.

Two hundred thirty miles away on Wall Street, markets have barely flinched over these events. Many months ago, markets baked in assumptions of a peaceful transition of power. Investors and traders, as good at counting votes as any party whip, were unfazed when the House of Representatives approved articles of impeachment against the 45th President on December 18, 2019. They are again unfazed by this Wednesday’s vote in the south end of the Capitol. Dozens of major U.S. companies have responded with pronouncements that they are suspending political donations to some or all Members in the upper and lower chambers. Insiders understand that these bans are largely toothless as no one is fundraising at this part in the cycle with more than 660 days to go to the next election. Time and time again, we find that a lot not only can but does change in two years.

Since the start of the year, not a lot has changed in the financial markets. Prices on most assets are still extremely elevated, and rallies continue across most sectors on the expectation that additional fiscal stimulus will speed up our economic recovery. Although bonds have slightly weakened since the Georgia elections turned Washington “light blue”, as pundits label the razor thin Democrat majority in D.C., yields remain in historically low ranges. With expectations for even heavier federal spending. additional borrowing, and higher taxes, intermediate and long U.S. Treasury yields have jumped by about 24 basis points. This moved the 10-year past a 1% touchstone, but bear in mind that this yield exceeded 3.80% ten years ago. The 10-year yield is at 1.14% and the 30-year at 1.88%. The 2-year is relatively unchanged at 0.14% so far in 2021. It goes without saying that all these yields are producing negative real returns for investors.

The prices of all bonds are linked in some manner to Treasuries. So as government prices have dipped, BAA Corporate 10-year benchmark yields have risen by about 17 basis points to 2.82%. These rates nevertheless remain at historic lows, so corporate borrowers are still lining up for market entry. And both investment grade and high yield corporate bond issues cannot come fast enough to satisfy domestic and foreign demand. High yield sales total $13.2 billion so far this month with orders exceeding offers by more than three times, while investment grade issuance is already at $55.6 billion with recent trades more than 2.4 times covered. Corporates have clearly been buoyed by stock prices. At this writing, the Dow, S&P 500, and Nasdaq indices are each up about 1.2% this year while the Russell 200 is up nearly 6%. Oil is up more than 7%, but gold prices have fallen more than 2% and silver prices are off by nearly 5%. Among digital currencies, Bitcoin has been extremely volatile but is up nearly 15% in 2021.

Municipal bond yields have also inched higher since the start of the year, but Bloomberg is reporting that valuations are currently at record highs. The ratio of top-rated tax-exempt yields to U.S. Treasuries at 67% is the lowest since 2001, a huge drop from where it stood ten months ago at 215%. The 2-year AAA rated general obligation bond MMD benchmark at 0.15% is largely unchanged from last month. The 10-year and 30-year benchmarks have added 7 basis points and stand at 0.78% and 1.46%, respectively. Imagine that: top rated borrowers are still getting rates of under 1.50% for maturities in 2050! These are fantasy conditions still prevailing for most non-profit borrowers. For lower-rated and non-rated sectors, there are few deals so far this year to help us gauge the market. The Illinois Finance Authority brought a $26.6 million non-rated deal for the McKinley Foundation with a single 35-year maturity priced at par to yield 5.125%. The Wisconsin Public Finance Authority sold $6 million of non-rated bonds for St. Francis College in Brooklyn at par to yield 5.50% in 2024.

Investors cannot source enough tax-exempt product as many state, local and non-profit borrowers are taking advantage of low rates prevailing in the taxable and corporate bond markets to refinance higher coupon bonds. The 115th Congress removed the ability of tax-exempt borrowers to refund most long-term debt at tax-exempt rates, but many in the muni market hope that the 116th Congress will appreciate the urgent pleas from non-profits who are lobbying to restore the authorization and allow them to refinance outstanding debt at these extremely low rates. Record levels of taxable issuance would likely decline if, as some predict, tax reform legislation is enacted later this year or next with a provision restoring the exemption. This would significantly increase the supply of traditional munis for those looking to offset potentially higher individual tax rates.

We at HJ Sims are looking forward to this new year and cheer those states with the safest, most rapid and successful vaccine rollouts for health care workers, long term care residents and those greatest at risk of contracting the coronavirus. Along with our investors, we simultaneously root for those entrepreneurs and manufacturers of cost-effective air and surface cleaning and filtration technologies. While we share the concerns of millions over the civil unrest, the key but often controversial role of social media, the prospect of inflation, the status of mortgage, rent, student loan and other delinquencies, our growing federal and state debts and deficits, and the unprecedented year-long financial stress on most every non-profit and for-profit enterprise, we pause to count our many blessings and pledge to make our voices heard even louder this year.

For more than 85 years, we have worked with colleagues in our industry to improve market access for our borrowers, market intelligence for our investors, and public understanding of the key role that the municipal market has in facilitating essential purpose project financings. We are proud of our role in helping to originate the quintessential social good bonds and encourage our readers to join us in working collaboratively to provide and protect the safest living and learning options for our seniors, our disabled, and our young going forward. Please contact your HJ Sims representative to share your thoughts on how we can collectively enhance our advocacy on behalf of our country’s greatest needs in 2021.

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Market Commentary: Tinkering with Time

by Gayl Mileszko

Speed is of the essence when it comes to delivering vaccines, election outcomes and aid to unemployed workers and locked down businesses. There are ways to measure baseball’s fastballs, touchdown sprints, and high-frequency trading executions. But some gauges can be a bit tricky. The speed of the Earth’s rotation, for example, varies constantly due to the motion of its molten core, oceans and atmosphere, as well as the impact of celestial bodies like our moon. Tides and the change in distance between the Earth and the moon all make for daily variations in the speed the planet rotates on its axis; even heavy mountaintop snow that melts in summertime can cause a shift. Given all the unprecedented events of 2020 around the world, it should come as no surprise that our Earth has literally been spinning unusually quickly of late. In fact, the shortest day on record was July 19, when the planet completed its rotation in 1.4602 milliseconds less than usual. Records were broken 28 times last year and the Earth in 2021 looks to be moving at an average daily pace that is 0.5 milliseconds faster than the standard 24 hours.

In recent decades, the Earth’s average rotational speed had been consistently decreasing. Scientists at the Paris-based International Earth Rotation Service who monitor the planet’s rotation inform countries six months in advance when “leap seconds” need to be added to align with solar time.  And, since the 1970s, official timekeepers have made 27 adjustments to keep atomic clocks in sync with the slowing planet. Most recently this occurred on New Year’s Eve in 2016. Now, for the first time on record, a negative leap second may be needed. The World Radiocommunication Conference members will make the decision when they next meet in 2023.

A more common standard measure of time, the Gregorian calendar, has been in use since 1582 and has just flipped into 2021. But for some, the new year began on December 14 when the first health care workers and nursing home residents were administered the Pfizer-BioNTech COVID-19 vaccine. Four days later, the U.S. Food and Drug Administration authorized a second vaccine from Moderna for emergency use. The two mRNA vaccines have shown remarkable effectiveness of about 95% in preventing COVID-19 disease in adults when given in two doses at 21 days and 28 day intervals, respectively. At this writing, 4.56 million Americans have received injections. All of us on Main Street and Wall Street are closely monitoring the rollout of this historic mass vaccination program, fervently hoping that it puts an end to the illness and loss suffered here and around the world.

Although there is federal guidance and $8 billion of federal funds, states are responsible for running the COVID-19 vaccination campaigns and prioritizing residents. There have been issues with public information as well as with storage, handling and administration of the doses. There is also an issue of public confidence. Not everyone is anxious to get the vaccine. Many have adopted a wait-and-see approach. The sheer number of healthcare workers and long term care residents at the head of the line means that there will be many months before others become eligible. Some have objections on religious grounds. More than 20.8 million Americans have already had the coronavirus; those who have recovered may believe that they have some level of immunity. Some cite concern over the speed with which the vaccines were developed and are worried about potential side effects. Those who look in the rearview mirror can find mis-steps on the part of the federal, state and local officials and may distrust the ability of elected and unelected government workers to handle anything having to do with the pandemic. Some find the matter political, others are skeptical of the big pharmaceutical companies who are benefiting financially from the rush to market. For those with cognitive issues, consent procedures can prove vexing.

As the majority await evidence of the effectiveness and safety of the vaccines, entrepreneurs are hard at work on other approaches. Some nursing homes, hospitals, restaurants and cruise ships are installing air purifying systems using needlepoint bipolar ionization technology to disrupt surface proteins of viruses and bacteria, and de-activate harmful pathogens. Hotels, schools and offices are installing ultraviolet light emitting diodes in heating and cooling systems to disinfect surfaces, ventilation and water systems. These technologies, or others yet to come, may also help to generate public confidence and resurrect businesses and institutions severely damaged by the pandemic and related lockdown policies.

Long-term care facilities have experienced significant drops in occupancy as a result of the deadly toll that the coronavirus has taken on the frail elderly population.  Some 40% of all reported COVID-19 deaths are said to have occurred in nursing homes. Rebuilding public confidence in the safety of these care communities is critical to the industry and will, in many cases, require considerable time and plenty of documentation and testimonials. Providers are exploring the expanded use of infection preventionists, recommending changes to Medicaid reimbursement rates to boost the salaries of their health and personal care workers, and working to develop improved regulatory reporting procedures.

While nursing homes, assisted living, and memory care facilities may take longer to return to pre-coronavirus levels, other battered sectors of the economy are primed to reverse if not soar once herd immunity appears imminent, federal and state efforts meet with widespread support, and vaccines and technologies are proven successful.  When does that happen? There is a colloquial expression attributed to Supreme Court Justice Potter Stewart: “I know it when I see it” that described his threshold test for obscenity. This is the type of test we will apply to determine in our own non- epidemiological ways when the end to this hideous pandemic is near. It will involve a combination of federal and state pronouncements, toned down and redirected media coverage, personal anecdotal experience, and the emergence of green shoots in our respective neighborhoods. 

Industries most impacted by the pandemic stand to gain the most in a world about to be restored to something akin to the 2019 version of “normal”. In the interim, and for the foreseeable future, rallies are unlikely to abate in markets for industries proven essential to day-to-day, stay-at-home life in the past year:  grocery stores, pharmacies, home improvement, on-line retail sites with rapid home delivery service contracts, information technology, household durables, fast food restaurants, agriculture, farm equipment, personal and health care supplies, key ports serving cargo ships, vacation rentals, recreational vehicles, golf-related products, testing services, cybersecurity, defense and other key domestic manufacturing, utilities, water and sewer, solid waste, affordable housing, technical schools, alcohol and tobacco.

Investors with cash and foresight will look to position portfolios for a post-COVID-19 economy. We will look to capitalize on the slow but sure rebound in oil and gas exploration and storage, steel, energy equipment and services, larger hospital systems, health care technology, banks, life and health insurance, property and casualty insurance, and toll roads with steady commercial traffic. In addition, steady reversals over time should occur in homebuilding, automobiles, aerospace, public colleges and universities. Among the sectors likely to take the longest to improve as there have been major and perhaps irreversible shifts in remote work and recreational choices. Our lives have changed in major ways since March and therefore partial rebounds will likely lag for airlines, hotels and resorts, rental cars, textiles and apparel, beauty products, mass transit, parking, casinos, gyms, cinemas and theaters, convention and sports venues, finer dining restaurants, jails, small private colleges, student housing, and commercial real estate.

Scrutinizing the relative differences in fundamentals including governance, geography, balance sheets, and COVID-19 case and death statistics, will take time but will pay off for well-advised investors. Regular and transparent reporting by for-profit and non-profit entities is required. Few of the old precedents apply; last year brought dozens and dozens of new pre-packaged bankruptcy cases with unexpected outcomes for senior bondholders having less than majority votes.  Changing consumer preferences and potential new regulations are bound to adversely impact holdings, including certain media. Population shifts are underway. Some entities have significantly diluted equity and incurred strangling debt loads. Governments at every level will need to re-prioritize budgets given the costs of debt service and urgent social and infrastructure needs. Underfunded pensions and other post-employment benefits may threaten future general obligation bond debt service as well as interest and principal on state and local revenue bonds with weak security protections.

For bondholders, 2020 was a year in which fixed income was largely redefined as lacking income.  Top-rated 30-year yields dipped well below 1.40% for tax-exempts and 3% for corporates. Even below investment grade and non-rated municipal and corporate securities sold at premium prices producing yields well below 5%.  The chart below depicts 12 months of declining yields and illustrates the decade long decline in benchmark bond yields. It also reflects the significant volatility and gains in the stock and commodity markets, and the growing acceptance and risky participation in digital cryptocurrency markets.

Source: Bloomberg; Thomson Reuters Refinitiv

At the start of the new trading year, starting valuation levels for stocks and bonds are extremely high. Traders have been expecting prices to normalize for years and years; seasoned ones understand that this is bound to happen at some point. But our Federal Reserve has intervened in the markets for the past 12 years now and it is unclear when we should expect them to back away from hyper-accommodative policies. Central banks were the quickest to respond to the pandemic by creating and supporting liquidity facilities for every domestic market and some foreign ones as well. Their balance sheets have exploded. Few can argue with the value and timing of their tinkering.  How and when they unwind, and with what impacts, are questions not faced before in our history. How our fiscal leaders respond after the past rounds of stimulus at a time when the debt and deficit are at levels not before seen is another question that investors, domestic and foreign, pose.

Gauges of sentiment from organizations including the American Association of Individual Investors, show bearishness at multiyear lows despite the global surges in COVID-19 cases, questions over the origins of the virus, and uncertainty over U.S. elections and various national policies. The major near-term risks to the financial markets include larger-than-anticipated increases in inflation rates, increases or decreases in zero-range and negative interest rates, downgrades in sovereign credits, a lower dollar, increased regulatory action, and any unexpectedly large defaults in the corporate, mortgage, and muni space.

2020 will go down in multiple record books. We saw the first president to be impeached and then run for reelection. Both the presidential candidates won more popular votes than any other in our history. We suffered the largest GDP quarterly decline followed by the largest quarterly increase, and witnessed a record-breaking single year increase in the national debt and market swings we could barely stomach. A quarter of U.S. adults say they or someone in their household has been laid off or lost a job because of the coronavirus outbreak, and 32% say they or someone else in their household has taken a pay cut due to reduced hours or demand for their work.

The $3.97 trillion muni market saw $474.05 billion of issuance in 12,940 deals in 2020 compared to $426.35 billion in 11,596 transactions in 2019 and setting a new record.  Add to that private placements, corporate CUSIPs, and direct bank lines of credit which took so much tax-exempt paper out of the market and failed to satisfy a relentless demand. Corporate CUSIPs grew 223% over 2019 and landed at $40 billion for the year. The general muni market returned 5.26%, a seventh straight year of gains. High yield munis ended higher by 4.8%. Taxable munis with $140 billion of primary market sales closed up 11.82%. Zero coupon bonds were up 8.88%. Investors added about $33 billion to municipal bond mutual funds and the oldest gauge of municipal yields, the Bond Buyer 20 General Obligation Bond Index, which tracks yields on 20-year munis, touched 2% on Aug. 6, the lowest since 1952.

A record $1.75 trillion of investment grade corporate bonds was sold in 2020. High yield corporate issuance ended the year with approximately $432 billion of record issuance. The U.S. High Yield ICE BoAML Index ended the year up 6.17% and at all-time low yields of 4.18%. The U.S. Investment Grade corporate bond Index ended 2020 with returns of + 9.81%, a record; $1.75 trillion of new debt was sold in 2020. 

A new year has begun and it is time to tinker with your portfolio. We at HJ Sims hope that 2021 brings only happy, healthy and prosperous days for you and your family. To that end, we encourage you to be in regular contact with your HJ Sims financial professional, to carefully add individual high yield credits we recommend to select income portfolios, to limit exposure to certain bond funds and ETFs, to consider preferreds, convertibles, zeroes and and taxable munis for retirement accounts, to prepare to take best advantage of the re-opening of our economy, to build up your emergency funds, to ensure that all your affairs are in order, to revise your monthly budgets, and to appreciate all the people, moments and little things that we took for granted at this time just one year ago.

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Market Commentary: Tidings of Comfort and Joy

by Gayl Mileszko

The holidays are upon us so this is the last full trading week of December and our last market commentary of 2020. We sigh because this year on the trading desks there is none of the usual cheerful talk about travel plans, baby gifts, and family gatherings. In fact, the trading desks are vacant as they have been for the last 10 months. Like others in so many industries, our fixed income traders have been hard at work in home offices in New Jersey, Massachusetts, Florida, North Carolina and Virginia, communicating by Skype and cell phone, email and Bloomberg, Webex and landlines for most of the year. Like our banking, sales, and operations teams in Connecticut, Texas, Pennsylvania, Maryland, Illinois, Minnesota, California and Puerto Rico, they have juggled busy work and home lives without missing a beat in serving our valued clients thanks to their professionalism and our marvelous tech staff. And, like the rest of us, they are united in their desire for the next two weeks to be joyful and peaceful ones, grateful for the opportunity to count blessings with loved ones and count down to a brand new year, a turnaround year for our economy and the people, businesses, schools, institutions so badly hurt by the pandemic.

In Washington, these are the final days of the 116th Congress, a lame duck session. As is typical for this time of year, lawmakers are late in trying to hammer out the details of the $1.4 trillion omnibus government spending bill for the fiscal year that began on October 1. They are also moving toward an agreement on that frustratingly elusive second stimulus to bring relief and some measure of comfort to small businesses and non-profits, the unemployed, those in health care and education, and all in need of vaccinations. Main Streets are quiet, pedestrians and decorations are sparse. Households are advised to limit holiday celebrations, order gifts on-line, reinvent caroling, and Zoom with Santa. It is only on Wall Street where things jingle as the Fed-fabricated Santa Claus rally which began in late March is still underway.

This has been a year like no other. The world experienced its first deliberate policy-induced recession in a concerted effort to suppress the spread of a virus. Governments took control over almost every aspect of life and corner of the world. There have been tragic losses. As the brightest minds, the largest dollars, and highest priorities have been devoted to finding treatments and vaccines, negative rates continue to dominate global markets, and government borrowing has risen to mind-numbing levels. But U.S. stocks and bonds have had a wonderful life. The usual correlations are askew and returns disconnected from the reality experienced by billions around the globe. Central banks have opened wide all the money spigots. Their massive asset purchases have created some artificial markets. The Bank of Japan, for example, has become that country’s largest single owner of equities. Here, the target federal funds rate was lowered from the target of 1.50-1.75% at the start of the year to 0.00-0.25% on March 16 and appears likely to remain in that range for several more years. Our Fed has been buying $80 billion a month in Treasuries and $40 billion in mortgage securities since June. Within a very short period, they created and ran 11 new funding, credit, liquidity and loan facilities supporting everything from commercial paper to corporate and municipal bonds to foreign monetary authorities. As a result, market confidence has soared and new issuance and performance records have been set and re-set.

At this writing, the Dow has risen more than 4.6% this year to surpass 30.000. The S&P 500 is up nearly 13% to 3,647. The Russell 2000 has gained almost 15% and stands at 1,913. The Nasdaq has been the biggest winner at 12,440 with gains of more than 38%. More than $140 billion has been raised in nearly 400 initial public offerings this year, exceeding the last full-year high in 1999 during the dot-com boom. Volatility has flared and abated throughout 2020 on lockdown, vaccine, election, Fed, and stimulus news. The VIX currently stands at 24.72 after starting the year at 13.78 and hitting a high of 82.69 on March 16. In the commodity markets, oil prices have fallen 23% from early January but have now steadied in the $47 range after sinking to the unheard of negative $37.63 on April 20. Gold prices are up 20% this year to $1,828 but rose as high as $2,060 on August 6. Bitcoin is among the year’s biggest winners, having advanced 167% to $19,135.

In the bond markets, debt issuance has surpassed expectations and smashed records. With interest rates at historic lows and liquidity needs at all-time highs, issuance has soared. Investment grade companies have sold about $1.7 trillion in the primary market, a new record. High yield corporate debt sales have exceeded $428 billion. Municipal bond issuance at roughly $425 billion will likely exceed the records set in 2007 and 2016. In the global flight to safety, investor demand for short Treasuries brought yields to new lows. When adjusted for inflation, many yields turned negative. The 3-month Treasury yield stands at 0.08%. The 2-year yield has plunged 93% from 1.56% to 0.11%. The 10-year Treasury yield at 0.89% has been cut in half and since the start of the year. A new 20-year Treasury bond began trading on May 21 and currently yields 1.47%. And the 30-year yield is down 32% from 2.38% to 1.62%. In the corporate bond market, 10-year BAA rated bond yields have fallen 100 basis points to 2.70%. In the tax-exempt space, mutual funds have seen inflows of $31.1 billion and muni ETF’s have taken in $13.1 billion. AAA muni benchmarks have all toppled more than 70 basis points. The 2-year MMD has fallen by 86% to 0.14%, the 10-year is down 51% to 0.70, and the 30-year at 1.38% is 34% lower than where it began the year at 2.09%.

Years from now, when rates eventually rise, we look back and marvel at the low rates available to borrowers and the miniscule yields confounding investors from households to mutual funds, life insurers, banks and foreign buyers. Last week, the Puerto Rico Aqueduct and Sewer Authority was able to sell $1.37 billion of non-rated bonds at a premium to yield 4.15% in 2047. New York’s JFK International Airport sold BBB rated bonds for the Terminal 4 project yielding 2.11% in 2042 last week. Scholarship Prep Schools in California sold non-rated bonds at 5.00% in 2060. The University of Connecticut just issued $279 million of A1 rated bonds yielding 1.69% in 2041. HJ Sims brought a $30 million financing through the Westchester County Local Development Corporation for The Knolls continuing care retirement community in Valhalla that we structured with noon-rated bonds due in 2055 priced at a premium to yield 4.90%

Investors who have been in the market all year have done very well across asset classes. On top of all the gains in the equity market, U.S. Treasuries are up 8.28%, high yield corporates 4.2%, investment grade corporates 9.3%, convertibles 44.3% and preferreds 5.1%. Municipal bond indices are up 4.99% and within the muni sector, taxable bonds are up 11.52%, and hospital bonds are returning 6.05%. High yield munis are up 4.48% and are likely to be among the stars of 2021.

Before the year comes to a close, we have the 13th and final Federal Open Market Committee meeting of 2020, data releases on retail sales, housing starts, home sales jobless claims, inflation, spending, consumer sentiment. We approach the end of 2020 with sadness over coronavirus losses and angst over the damage wrought on our nation. There are 10.7 million unemployed, and 17 million behind on rent and mortgage payments. Just two months into the new fiscal year, our federal deficit totaled $429.3 billion. The national debt at $27.4 trillion amounts to $218,704 per taxpayer. U.S. corporations owe more than $10.5 trillion to creditors in the form of loans or bonds. Household debt stands at $14.35 trillion.

But we end on a merry note, with the hopes of millions resting in small doses as one vaccine is being delivered to hospitals and nursing homes, and another one is nearing FDA approval. We will be back in a few weeks to take a look at the some of the market-moving trends carrying us into 2021. For now, all of us at HJ Sims simply wish you and yours a joyful holiday season with all the comforts of home and family, and only healthy and successful days in the new year.

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Market Commentary: Cascades and Stratovolcanoes

by Gayl Mileszko

The Cascade Mountain range, named for the great cascades found near the Columbia River Gorge on the Oregon-Washington border, extends for more than 700 miles from Lassen Peak in northern California through the Fraser River in southern British Columbia. The highest peaks in the range include Mount Hood and Mount Ranier. These mountains are part of the Pacific Ocean’s Ring of Fire where nearly 90% of the world’s largest volcanic eruptions occur. There are said to be 452 volcanoes in the Ring, and they fall into three main kinds: cinder cones, shield volcanoes, and composite volcanoes. The latter, also known as stratovolcanoes, have steep profiles and periodic explosive eruptions with swift, avalanche-like, ground sweeping pyroclastic flows of gas and rock, steam and water. Of the three types, stratovolcanoes pose the greatest hazard to civilizations.

Forty years ago, the most deadly and economically destructive eruption in U.S. history occurred at Mount St. Helens in Washington, a stratovolcano located 96 miles south of Seattle. On May 18, 1980, an earthquake caused the entire north face to slide away, creating the largest landslide ever recorded on Earth. An eruption column rose 15 miles into the atmosphere and deposited ash in 11 states and 2 Canadian provinces. The debris avalanche was of such proportion that it would fill all 32 NFL stadiums in the country 31 times over. In total, Mount St. Helens released 24 megatons of thermal energy. Approximately 57 people were killed, hundreds of square miles were reduced to wasteland, and damages exceeded $2.7 billion. President Carter surveyed the damage and said that the area looked more desolate than a moonscape. Two years later, President Reagan designated the area as the Mount St. Helens National Volcanic Monument, to be used for research, education and recreation. Although seismic activity continued there for the next 28 years, hundreds of thousands still visit.

In 2020, the impacts from the coronavirus pandemic continue to cascade. In the state of Washington alone, cases total 184,404 and deaths total 2,941 as of December 7. More than 24% of staffed adult acute care hospital beds there were occupied by suspected and confirmed COVID-19 patients. The Institute of Health Metrics and Evaluation at the University of Washington projects that, without a vaccine rollout or the re-imposition of social distancing mandates, global cases will peak on January 20. As we approach the end of a deadly and destructive year, one in which several entire industries have been laid to waste and nearly every sector of the economy has been damaged, we cling to more optimistic projections for 2021.

Financial markets trade on expectations and we have seen irrepressible optimism since late March lows. We do not know the exact timing, but we can visualize the return of students to campus and fans to stadiums, the rescheduling of facelifts and knee surgeries, the booking of business flights and hotel stays, the pampering at spas, celebrations at restaurants, train trips to shop in the city, and booms in Boomer generation searches for dynamic life plan communities. The city streets may be desolate right now, but we are thinking long-term, venturing out of our cocoon havens, and willing to assume some investment risk because we know there will be a massive recovery, an economic and ecological regeneration such as the one that occurred at Mount St. Helens after the big blast. During the first week of trading in December, the Dow is up 1.5%, having broken through the 30,000 level, the S&P is up nearly 2% to 3,691 and the Nasdaq has gained 2.6% to 12,519. Oil is up 1% to $45.76 a barrel and gold prices have risen 5% to $1,865. So far this month, 10- and 30-year Treasury yields have climbed 10 basis points to 0.92% and 1.67%, respectively, while 10-year BAA rated corporate bond yields have dropped 6 basis points to 2.72%. Top-rated municipal bond yields have held steady at 0.72% for 10-year maturities and 1.42% for the 30-year primarily due to the lack of supply and demand for tax-exemption.

HJ Sims is in the market this week with a $30 million financing for The Bethel Methodist Home, better known as The Knolls, an entrance fee community with assisted living and skilled nursing in Valhalla, New York. The non-rated transaction is structured with a tax-exempt and taxable series and has a 35-year final maturity. Market demand for higher yielding maturities is exceptionally strong, supply has been light, and borrowers have been rare beneficiaries. Last week, three muni deals with Baa3 or BBB-minus rating came to market with 5% coupon bonds due in 35 years: the Glendale Industrial Development Authority brought a $90.7 million issue for Inspirata Pointe at Royal Oaks in Sun City, Arizona that priced to yield 3.58%; the Maryland Economic Development Corporation had an $80.8 million deal for student housing at Morgan State University yielding 4.09%; and the California Enterprise Development Authority sold $55.9 million of student housing revenue bonds for San Diego State University that yielded 3.02%. The Public Finance Authority of Wisconsin issued $37 million of Ba1 rated bonds for Charter Day School in Leland, North Carolina yielding 3.81% in 2055. And the Utah State Charter School Finance Authority sold $8.2 million of non-rated bonds for Paradigm High School structured with a 2051 maturity that priced at par to yield 5.125%.

There are technically three weeks remaining for issuers to access the markets, but one week from Friday trading and sales will wind down for the year. As you finalize your 2020 tax planning and plan your strategies for next year, we invite you to contact your HJ Sims partner today for guidance and recommendations tailored to your specific profile and needs. In the meantime, for all those celebrating the Festival of Lights, we wish you and your families the warmth of joy, the sparkle of health, and the glow of happiness and prosperity.

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Market Commentary: Shell Shock

by Gayl Mileszko

Ecdysis, commonly called shedding, occurs when a lobster extrudes itself from its old shell. Unlike animals that are soft-bodied and have skin, a lobster’s shell, once hard, will not grow much more. But all forty species of lobster continue to grow throughout their lives, so when the shells become hard and inelastic they must be shed. This happens periodically. As a result, lobsters spend much of their time preparing for, or undergoing ecdysis and arranging safe burrows for the time it takes for the new shell to harden. The overall process of preparing for, performing, and recovering from ecdysis is known as molting. Lobsters molt five or six times in the first season, but the length of time between molts increases as the lobster ages such that an adult will molt only once or twice a year and females may go two years between molts when they are carrying eggs. Many factors including water temperature, food supply, and availability of shelter control when and where a lobster will molt. The actual shedding process only takes the lobster twenty or thirty minutes, depending on environmental conditions and the size of the animal, but this is when it is most vulnerable to predators.

The start to a new decade has made clear our vulnerabilities as well as our adaptability. The predator, a pandemic, has caused us to shed our plans, routines and ways of thinking. Many of us have experienced a sea change in how and where we live, work, travel, learn and communicate. The only constant is change and, in 2020, it has been sudden and massive. The impacts have certainly varied. Some individuals, institutions, communities and systems are well along in the recovery process while others have been shell shocked and suffered painful losses, or still remain in the burrow. There are less than thirty days left in the year and yet we cannot be sure how it will end and what comes next. There are still so many variables – including political, social, scientific and economic ones — at our local, state, national, regional, and global levels.

The financial markets have enjoyed favorable environmental conditions and year-long shelter from central banks. This in and of itself is shocking as is our expectation that it rallies will continue ad infinitum. In spite of global upheavals and tectonic shifts in demand, manufacturing, distribution, and technology, stock and bond markets have been in rally mode for all but about five weeks this year. Stock market volatility as measured by the VIX CBOE Index has risen from 13.78 to 20.57, but it is down 83% from the peak level of 82 in mid-March. So far in 2020, the Nasdaq is up 36%, the S&P 500 is more than 12% higher, the Russell 2000 is up 9%, and the Dow has gained nearly 4%. More than $140 billion has been raised in approximately 383 initial public offerings, exceeding the full-year record high set during the peak of the dot-com boom in 1999. The BAA corporate benchmark yield has dropped 92 basis points to 2.78%. Investment grade corporate issuance is well over $1.7 trillion and high yield corporate bond issuance exceeds $400 billion so far this year. After rising to record highs and dipping again, gold prices are still up 17%.

On the bond market side, the 2-year Treasury yield has fallen from 1.56% to 0.14%. The 10-year yield has dropped from 1.91% to 0.83%. The 30-year yield is down 82 basis points to 1.56%. The AAA municipal tax-exempt benchmark yield has fallen from 1.04% to 0.15%, the 10-year from 1.44% to 0.72%, and the 30-year from 2.09% to 1.41%. Municipal volume is on track to smash all records this year as borrowers have clawed or rolled their way to market to secure funds to undertake new, renovation and expansion projects, bolster liquidity, and refinance outstanding debt at low rates, often including low corporate and taxable rates.

Although the municipal calendar shrank to the smallest of the year at $18.8 billion in November as issuers elected to avoid possible volatility surrounding the elections, year-to-date issuance exceeded $440.8 billion as of November 30. Muni price performance has recently been the best in three decades. Among non-rated senior living deals priced in the past few weeks, Wesley Communities of Ohio brought a $69.5 million transaction with a final maturity in 2055 priced at 5.25% to yield 5.09%. St. Andrews’s at Francis Place in St. Louis had a $37 million deal structured with 2053 term bonds priced at 5.25% to yield 5.75%, Vivera Senior Living of Jeffersonville brought a $20.4 million deal that had 20-year term bonds priced at 5.25% to yield 5.20%, and Morningside Senior Living (TX) had a $15.3 million financing with 30-year bonds priced at par to yield 5.125%. In the non-rated education sector, Crossroads Christian Schools sold $20.5 million of bonds due in 2056 priced with a coupon of 5% to yield 4.75%, Columbia College in South Carolina had a $16 million issue structured with 2045 term bonds priced at par to yield 5.75%, and Blinn College had a student housing bond sale that included a 2057 maturity priced at par to yield 5.00%.

At HJ Sims, we welcome our investing clients to contact us for our thoughts on how to re-invest the $51 billion of muni bonds maturing or being called in December and January, how to prepare for year end, and how to position for 2021. We are always available to our banking clients and prospective borrowers looking for guidance on market rates and access. As we look to bring the best possible conclusion to a year that no one ever envisioned, we welcome your input, comments and questions.

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