HJ Sims Market Commentary: As the Page Turns

by Gayl Mileszko

A new year began on Saturday and residents on part of the island nation of Kiribati in the Central Pacific were among the first to ring it in and flip the calendar page from 2021 to 2022. Then, hour by hour, the countdowns began in Samoa, Tonga and New Zealand, Eastern Australia and Japan, then China, Indonesia, India, Iran, Turkey, and Greece, followed by Germany, Ireland, Argentina, Puerto Rico, New York, Chicago, Arizona and Nevada, then Alaska, Hawaii, and American Samoa. Finally, 25 hours later, 2022 rolled through the flora and fauna on Baker Island, an uninhabited atoll and U.S. territory southwest of Honolulu, the last spot on Earth to officially greet the new year.

Hope, Awe and Polar Plunges

A fair percentage of the 7.91 billion people on earth bid farewell to the old year and welcomed the new one as always with a mix of hope and awe. Many of us viewed fireworks. Some watched the ball drop in Times Square, smooched a loved one, made resolutions, or sang songs like Auld Lang Syne, while others followed local traditions by jumping over seven waves, taking a polar plunge, opening all the windows in the house, smashing plates, eating 12 grapes or a dish of black-eyed peas.

New Year’s Resolutions and Old Counts

The turning of the calendar year page is often viewed as a chance for a fresh start, a new beginning. This year, once again we committed to lose weight, exercise more, fight for that promotion or change jobs, pay off debt, save more for retirement, quit a bad habit, or volunteer our time. 330 million of us in the U.S. dreamed new dreams. But once the sparkling lights faded and champagne bottle emptied, we woke up on the first day of this new year and found that the landscape is exactly as we left it. Nothing feels normal. We are in the third year of a global pandemic and some of us have just contracted the coronavirus — or some virus — for the first or second or third time in as many years. There are now more than 56.1 million confirmed cases and we have lost more than 827,000 souls according to the Johns Hopkins Coronavirus Resource Center. This week, on top of Delta and Omicron, yet another variant has been detected.

Same Old Song and Dance

We might be in quarantine, unemployed, underemployed, or struggling to keep our business afloat while caring for others. Family obligations, fear, desire to relocate, or resistance to mandates caused four and a half million of us just up and quit our jobs in November. The prices of gas, of milk and coffee, food, clothing and just about everything remain painfully high. The average price of a used car is now $29,000. News and weather reports are glum and when we look for entertainment from our favorite college and pro teams we find their games cancelled or postponed due to COVID-19. We hear our elected officials in vicious public fights over issues that matter little to us while our major concerns are unaddressed. There are long lines everywhere. Supply and service shortages persist. It is hard to determine whether any or all of the policy proposals being circulated pertain to us. Guidelines keep changing. We struggle to screen opinions from fact and find the number of trustworthy sources narrowing. Neighbors are packing up and moving to Vermont or Florida. Colleagues are dabbling in cryptocurrencies we have never heard of. Tensions with Russia, China, North Korea, Iran and elsewhere seem to be escalating.

Stars and Stripes and Eagles Fly

After reviewing this dismal lay of the land and sorry state of affairs, most of us just rolled up our sleeves and started moving and working again on January 1. We Americans are go-getters, relentlessly ambitious and optimistic. We are confident and determined. The latest Rasmussen poll found that we rated 2021 as one of the worst years ever, so we are going to make sure that 2022 will be much better. Our scientists, teachers, entrepreneurs, manufacturers, inventors, builders, growers, athletes, entertainers, caretakers, laborers and many, many of those in the service sector might be tired, but they remain inspired and motivated. As consumers, our spending accounts for almost 70% of our $23 trillion economy, and our high confidence and expectations in December has set the stage for continued growth in these first months of 2022.

Stock Market Records

The U.S. financial markets, one of the most clear reflections of American spirit, drive and prosperity, have been on a major roll for not only the last 12 months but the last 12 years. It runs against all logic, given the extent of the great recession and global pandemic. However, expanding upon the Fed’s 2008 activism, in 2020 and 2021, markets were protected in an historically unprecedented way from major downturns by massive central bank interventions and trillions in federal aid. Federal Reserve Bank liquidity programs along with fiscal stimulus have boosted performance across the board for U.S. equities as well as many commodities and fixed income assets. After a tumultuous year, volatility in the stock market as measured by the VIX declined 24% year over year. The S&P 500 gained 26.89% to close at 4,766, primarily on the strength of the top five technology stocks. The Nasdaq at 15,644 rose 21.3%, the Dow Industrials at 36,338 were up 18.7%, and the Russell 2000 at 2,245 ended 13.7% higher. Oil prices finished at $75.21, up 55% on the year. Bitcoin did even better: with a closing price at $47,013, it finished 64% higher. Gold and silver both lost ground; at $1,829 an ounce, gold fell more than 3%, and silver at $23.30 an ounce fell by nearly 12%.

Best Performers of 2021

The absolute best performers amongst assets in 2021 proved to be lithium (up 477%), ethanol (up 125%), coal (up 111%), oats (up 90%), coffee (up 78%), gasoline (up 62%), and propane (up 61%). In fixed income, CCC rated corporate bonds did best on the year, with returns totaling 8.6%. The high yield municipal bond benchmark came next, gaining 7.74% while leveraged loans added 5.42%. Convertible bonds returned 3.87%, and preferred stocks were +2.24%.

Weaker Performance in 2021

Among the weaker performers were investment grade munis at +1.83%, taxable munis at +1.41%, high grade corporate bonds at -0.95%, mortgages at -1.21%, U.S. Treasuries at -2.38%. Yields remained near historic lows and most, after accounting for inflation, were negative in real terms. The 2-year Treasury yield closed at 0.73% up more than 61 basis points since the start of the year. The 10-year finished at 1.51%, 60 basis points higher. The 30-year benchmark ended at 1.90%, higher by 26 basis points. The lowest investment grade corporate bond (Baa) benchmark yield for a 10-year maturity gained 55 basis points to close 2021 at 3.20%. The tax-exempt municipal bond sector was less affected by volatility and less correlated to Treasuries for a second year in a row. The 2-year AAA general obligation benchmark at 0.24% finished the year 10 basis points higher. The 10-year yield at 1.03% ended 32 basis points higher. The 30-year at 1.49% rose only 10 basis points. Combined flows into muni mutual funds and ETFs hit a new record high at $104 billion, beating the 2019 level of $103.9 billion and inflows have been positive for 43 straight weeks, bringing assets under management to a new high of $1.06 trillion. Taxable mutual funds and ETFs took in a net of $177.11 billion, bringing assets under management to $3.22 trillion.

Big Challenges Ahead for Fiscal and Monetary Policymakers

The U.S. has yet to enact an appropriations bill for the fiscal year ending September 30; the government has been operating on a series of temporary spending measures, so there is still much work to do in this election year. The budget deficit in 2021 was $2.77 trillion, the second highest on record after 2020’s peak at $3.13 trillion; for the first two months of FY22, the deficit totaled $356.4 billion. The federal debt at $28.4 trillion is at an all-time high, and its limit was raised a few weeks ago by Congress by another $2.5 trillion. We paid more than $562 billion of interest on our debt in Fiscal Year 2021 according to the U.S. Treasury and for every one percentage-point increase in rates, the interest payment will go up by about $290 billion per year. Federal Reserve assets have more than doubled in the past two years in an effort to stabilize the market for U.S. government debt and hold down long-term interest rates for consumers and businesses. The central bank now holds a portfolio of $8.76 trillion in Treasury and mortgage securities, and has announced a plan to wind down new purchases in the next few months. The Fed may or may not keep holdings steady by reinvesting the proceeds of maturing securities; that discussion will continue at the next Open Market Committee meeting to beheld on January 25 and 26.

2022: Already an Unforgettable Year

This year may prove to be unforgettable in many ways unrelated to the pandemic. Midterm elections take place in November and control of the Congress appears likely to change one year from now. Ahead of the voting, 25 incumbent Democrats and 11 Republicans in the House as well as six U.S. Senators have announced retirements. The Supreme Court plans to rule on a number of abortion, gun rights, vaccine mandate, and other high profile issues. Our NASA astronauts plan to return to the moon. The rollout of 5G service is being delayed over concerns over potential air travel and cargo shipment disruptions. Our Olympic athletes head to Beijing for the Winter Games beginning on February 4. Apple has become the first company to reach a valuation of $3 trillion. After five years, Puerto Rico may finally exit bankruptcy if the U.S. district court approves its debt restructuring plan.

Outlook for New Issue Bonds

In 2022, municipal bond supply projections range from $390 billion to $550 billion. We are seeing slight increases in yields as the market prepares for the Fed to hike rates, most likely for the first time in the second quarter. Municipal Market Advisors projects that 8% of all outstanding bonds, about $260 billion, are set to mature or be called by the end of this year, so investors will continue to present heavy reinvestment demand, especially as talk of tax increases, potentially retroactive to January 1, persists on Capitol Hill. There is typically a slow start to the year for new issues but we expect borrowers with rate-sensitive refundings and more urgent cash needs to bring deals to market early. Muni buyers have already received $27 billion of principal and interest payments this year from coupons and bonds called or matured on January 1, so demand remains unsatisfied as has been the case for several years. Bloomberg estimates that negative net supply (demand exceeding available supply) already totals $11.8 billion. On the taxable side, CreditSights is expecting as much as $1.2 trillion of new investment grade corporate bonds this year with at leasat $125 billion coming this month, and up to $500 billion of high yield corporate bonds in total with about $30 billion coming in January.

We will be back next week with more on our outlook for 2022 as well as some previews of our 19th Annual Late Winter Conference, which will be held in-person in Orlando, Florida from March 1 to 3. In the meantime, we invite you to contact your HJ Sims representative for more details on the education sessions and special events we have planned, as well as on our current bond offerings. Start the year out right by having your investment portfolio and strategy reviewed and putting your cash to work.

For more information on the municipal bond market and current market trends, please contact your HJ Sims representative.

For more information on our 19th Annual Late Winter Conference, please view the details here

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