Market Commentary: Allies, Tallies and Rallies

By Gayl Mileszko

Allies, Tallies and Rallies

This is a big year for semisesquicentennials.  An awful lot happened back in 1949. America watched the first televised presidential inauguration as Harry S Truman was sworn into office.  The average American’s annual salary at the time was $3,600, the price of a car was $1,650, and a house cost $14,500.  That year, the first soap opera aired and Hollywood held the first of TV’s Emmy awards.  George Orwell published the novel Nineteen Eighty Four. The U.S. General Services Administration was established. The University of San Diego opened. Seattle-Tacoma International Airport was dedicated. American firearms manufacturer Sturm Ruger was founded.  “Some Enchanted Evening”, Perry Como’s version of the show tune from the movie South Pacific, topped the Billboard charts. Mao Zedong declared the creation of The People’s Republic of China. Israel was admitted to the United Nations. The Union of Soviet Socialist Republics tested its first atomic bomb. And, seventy five years ago, the North Atlantic Treaty Organization was formed by the U.S., U.K., Canada, France, Italy and 7 other nations to provide collective security against the Soviet Union, an alliance that has now successfully protected nearly a billion people for more than seven decades.

Article 5

Over the years, the NATO military alliance has added 20 more members and now includes 32 countries.  The group’s headquarters is in Brussels and it has been led for the past decade by Secretary General Jens Stoltenberg. The reins will be turned over in October to Dutch Prime Minister Mark Rutte, who will next oversee the world’s largest military force of 3.5 million. He will serve at a time when Russia threatens to test the very heart of the NATO Treaty as expressed in Article 5:  “An armed attack against one or more of them in Europe or North America shall be considered an attack against them all.” This Article has been invoked only once over time: after the September 11 attacks on multiple U.S. targets.

75th NATO Summit

NATO leaders have gathered in Washington, D.C. this week for the 75th anniversary summit. It is a Diamond Jubilee year, but there is little jubilation. The times are precarious, war rages in eastern Europe and the Middle East, political turmoil is widespread, and the Russian threat is as serious as it was in 1949. Talks during the three-day gathering are focusing on the war in Ukraine and increases needed in defense spending. As most of the burden has been shouldered by the United States, leaders know that part of their mission this week is to convince American taxpayers that the effort and cost is not only worthwhile but critical. The real spotlight, however, here and abroad, will be on the summit’s host, President Biden, whose fitness for office is in question and re-election bid in serious jeopardy.

Also in Washington This Week

The nation’s capital is a beehive of talk and activity during what are normally the dog days of summer. The Federal Reserve Chair is presenting the semi-annual policy report to the House and Senate banking committees, answering the same questions posed in different ways about when exactly he plans to cut rates. The Treasury Secretary, while closely monitoring the results of her Department’s 10 separate note, bill and bond auctions this week, is on the Hill to give annual testimony on the state of the international financial system; she is being peppered with questions about whether the cabinet has discussed the 25th Amendment. Lawyers, regulators, and lobbyists are still pouring through some of the bombshell rulings made by the Supreme Court before they left town for three months. State Department negotiators are feeling incredible pressure to help produce a Gaza ceasefire and hostage release victory for this Administration. The Bureau of Labor Statistics is readying two key indices for release: consumer prices and producer prices. Republicans are gearing up for the national party convention to be held in Milwaukee next week. And pundits, prognosticators, pollsters, and spinners are in their element, producing predictions and stoking new speculation on the outcome of the presidential and congressional elections as never before.  

Focus of Traders

Financial markets view everything going on in DC as market movers. Traders eagerly anticipate the release of the first few second quarter corporate earnings reports this week. There have been solid results in Treasury auctions, and investors are seeing weaker economic data that hopefully will usher in a series of rate cuts. Futures trading reflects expectations for quarter point reductions in September and December. Near daily record highs are the norm in the S&P 500 and Nasdaq indices but plenty of attention is being given to forecasts by Morgan Stanley, Piper Sandler, and Stifel for a 10% stock market correction ahead of the November election. There is more and more talk of the need to do something about the U.S. deficit and debt. And analysts are working on what they call a “Trump 2.0 Trade” that assumes the former president will be re-elected, thereafter ushering in an era of unfunded tax cuts, bigger tariffs, higher inflation, larger budget deficits, and higher GDP. The strategy assumes that investors will demand higher yields on longer maturity bonds, producing a more normal yield curve, and that stocks and bonds exposed to China and Mexico will suffer. Many other scenarios are being run not only by veteran traders but by various new AI tools.

High Yield Munis Draw All The Bond Market Attention

Municipal bonds rallied in June and have kept up the momentum so far in July. High yield munis remain the stars of the sector, up 4.81% year-to-date, besting investment grade munis at +0.12%, and high yield corporate bonds at +2.84%.  Muni index returns so far in 2024 are still negative for maturities in the 3- to 12-year range, those with ratings in the range of AA to AAA, and in the insured, general obligation, and higher education sectors. Investors received $38.3 billion of principal and interest payments on July 1, the highest redemption period in this year’s cycle, and this deluge contributed to another week of inflows, totaling $290 million, into high yield municipal bond mutual funds and ETFs. Tax-exempt money market funds are also seeing major inflows, bringing assets under management to $131.3 billion. It is not surprising that munis are seeing record high trading levels this year as investors work to lock in higher yields ahead of anticipated rate cuts and potential changes in the tax code next year. Bond investors only have about 40,000 corporate names to choose from, but more than a million different municipal credits.

Latest Muni Pricings

Last week saw a very small municipal new issue calendar at $653 million as a result of the July 4 holiday, but this week’s slate is expected to total $12 billion.  Underwriters are still working with some anomalies in tax-exempt pricing given the partial inversion of the yield curve for the past 18 months. The 1-year AAA municipal general obligation benchmark yield at 3.10% is still higher than the 15-year yield at 3.09%, and not far from the 30-year yield at 3.73%. The 7-day SIFMA yield just dropped from 3.88% to 2.98% last week.  Among recent negotiated sales is a $150 million BBB+ rated Lee County Industrial Development Authority financing for Shell Point Retirement Community in Fort Myers, Florida; the final maturity in 2054 was priced at a premium with a coupon of 5.25% to yield 4.60%. In the charter school sector, the Senoia Development Authority in Georgia brought a $16 million non-rated transaction for Coweta Charter Academy that included a 30-year term bond priced at 6.50% to yield 6.75%. The Florida Capital Trust Authority issued $33.9 million of non-rated bonds for Central Florida Preparatory School structured with a 2054 maturity that priced with a coupon of 6.625% to yield 6.875%.

HJ Sims as Your Ally in the Rally

We at HJ Sims are hoping that you are enjoying the start of this summer season. We have worked hard to position you for the second half of the year, knowing that of your concerns and needs in this new era of higher rates, domestic and geo-political uncertainty, inflation, and market volatility on top of many present weather challenges and all the numerous alternative investment opportunities being offered.  As you take time to review your portfolios and strategies for the months to come, please reach out to your HJ Sims representative to help review all your options in this rapidly evolving environment. Our teams in banking, analysis, trading and sales stand by to help guide you as we have throughout all the market conditions that have prevailed since our founding in 1935.  Consider us, as always,  your key ally.