HJ Sims Market Commentary: Adjusting the Sails

by Gayl Mileszko

Awash in cash, investors at the start of 2023 are anxious to put their money to work but most uncertain about what to do after a year of painful losses. Few have been singing “Auld Lang Syne” — times fondly remembered — with regard to 2022. Worries are worldwide and abound. They concern economies heading into a recession, stagflation, layoffs amid labor shortages, massive and increasing debt, a war in Europe entering its second year, a pandemic in its fourth year, pervasive global unrest. Those at the helm of monetary and fiscal policy have put an end to a gravy train that transported individuals, businesses and entire markets for some 14 years. We wonder: what to do, what to do now? Do I buy that house, that car, that new stove? Do I take a loan to start my business, grow my school, expand my community? Do I sell, merge, invest, divest, cash out, buy low?

Pessimists, Optimists and Realists

William Arthur Ward, the mid-20th century American author who has inspired and motivated millions with his poems, articles, meditations and inspirational quotes, once observed: “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

Winds of Change

This new year with its winds of change requires quite a bit of adjustment but, as with every new beginning, it brings a jolt of excitement, a yearning for change, for betterment. There may be worry but there is hope and underlying it all is our unquenchable American can-do spirit and drive. There are problems to solve, and we will find the ways. We not only carry on, we prevail in new and challenging conditions.

Fair Seas So Far

Winds and seas have been fair for many buyers during these first six trading days of 2023. Stock and bond indices are up, as are most commodities. Stock market volatility as measured by the VIX is down more than 4 percent; at 20.58, it is in line with 20-, 30- and even 40-year averages. The Dow at 33,704 is 556 points higher so far this year, up 1.7%. The S&P 500 at 3,919 is 2.1% higher. The Nasdaq at 10.742 has gained 2.6%, and the Russell 2000 at 1,822 is up 3.5%. Bitcoin at $17,328 has bounced back a bit and is 4.9% higher in 2023. Copper, zinc, platinum and coal prices are all up while aluminum, nickel, iron ore and steel prices have all fallen; oil at $75.12 a barrel is down 6.4%, and natural gas has declined about 19%.

Bond Markets Sail

Bond markets have sailed alongside stocks. Volatility as measured by the MOVE Index is down 1.7% in these opening days. But conditions are by no means normalized. Parts of the Treasury curve have been inverted since last Independence Day.  At this writing, the 3-month Treasury yield at 4.68%, the 12-month Treasury at 4.74%, and the 2-year Treasury at 4.23% are all higher than the 10-year at 3.57% and the 30-year benchmark at 3.70%. The 10-year Baa corporate bond yield at 6.18% has dropped 26 basis points since January 3, exactly in line with the 10-year Treasury. Tax-exempts have strengthened even more. The 2-year AAA general obligation MMD benchmark yield at 2.34% is down 26 basis points in the first six trading sessions of the year. The 10-year at 2.41% is 22 basis points lower. The 30-year at 3.35% is down 23 basis points. But the short end of the muni curve has also been inverted, since December 9, an extremely rare situation. The one-year yield now stands at 2.52%, higher than the 10-year and 11-year maturities. The 2-year yield is 9 basis points higher than the 8-year. 

First New Issues of the Year

The upside-down muni and Treasury curves have, of course, impacted the schedules for some borrowers coming to market. However, the investment grade corporate slate is operating in a parallel universe; more than $80 billion of new deals have sold in the first five trading days. The primary municipal market is typically quiet in early January and is again this year. Last week’s muni calendar saw only $1.2 billion. Most offerings came as investment grade. In the high yield sector, the Wisconsin Public Finance Authority sold $93.3 million of 6.50% non-rated multifamily housing revenue bonds due in 2053 for Tree House Apartments in Jacksonville, Florida; bonds were sold in $100,000 denominations to accredited and qualified investors. This week, the muni calendar totals $4.3 billion with $2.9 billion of negotiated deals including a $17.4 million Ba1 rated Arizona Industrial Development Authority sale for Benjamin Franklin Charter school and a $15.7 million BB+ Authority issue for the Academies of Math & Science.

Tax-Exempts Attract Cash

Despite another week of heavy municipal bond mutual fund outflows totaling $3.09 billion, and in the face of a new Consumer Price Index reading on Thursday likely reflecting a 6.5% to 7% year-over-year increase, and another 25 basis point Fed rate hike likely to come on February 1, demand for tax-exempt munis remains strong. The calendar of new issues for the next 30 days totals only about $6.4 billion while redemptions and maturities producing cash for reinvestment at $14.8 billion will exceed that. Investors already had $24 billion of principal and interest hit their accounts on January 1 after they took in $42.2 billion in December. While some of this money has been temporarily placed into municipal exchange traded funds and tax-exempt money market funds awaiting higher yields, better prices, or suitable credits, investors have also actively sought out  individual bonds in the secondary market. An average of $12.6 billion of bonds traded in each session last week with a buy-to-sell ratio of 1.61 to 1.  Some longer dated maturities have already returned over 2% so far in January.

Market Waves and Swells

This week, traders are watching the new committee assignments being made in Washington and the first legislative action taken now that a new House Speaker is in place and 222 Republican and 212 Democratic Members have been sworn in. Wall Street is also closely attuned to the results of the weekly Treasury auctions, of which there are eight scheduled, and remarks made by Federal Reserve officials at each of the five public events on tap.  Investors have an eye on the first corporate earnings reports for the fourth quarter, the nurses strike underway in New York City, floods and power outages in California, the FAA grounding operation, protests in Brazil and Iran, and the President’s travels to El Paso and Mexico.

Sailing in the Gulf of Mexico

Meanwhile, in Sarasota, Florida, the countdown to the HJ Sims Late Winter Conference begins. Only 34 days remain until we gather on February 14 at the Hyatt Regency. This year’s event features three days of educational sessions and networking opportunities for professionals in the charter school and senior living sectors, as well as a variety of activities including sailing, golf, yoga and fishing. We invite you to review our agenda and speakers and contact your HJ Sims helmsman or helmswoman for further information.

For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.

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