by Gayl Mileszko
The Atlantic Hurricane season is upon us, having arrived late but with lethal force. It typically runs from June to November, but this year the first major hurricane did not arrive until September 20. The focus is currently on the Category 3 storm headed to Tampa Bay but the remnants of Fiona are still being felt in Puerto Rico and eastern Canada. For people already exhausted by the pandemic, weakened by inflation and battered by investment losses, hurricanes seem to symbolize the hazardous conditions we face in 2022. There are still three months left in the year, but we would all like to evacuate now.
Long before a storm morphs into a monster hurricane, it has been given a human name by the World Meteorological Organization. In earlier times, storms were described with adjectives further distinguished by year or simply by their coordinates. During World War II, U.S. Air Force and Navy meteorologists found a better way to track tropical storms occurring at the same time, and they began to name them after wives and girlfriends. In 1945 the newly formed National Weather Bureau—later to become the National Weather Service—introduced a system based on the military phonetic alphabet, but they ran out of labels by 1953 and returned to assigning women’s names. But many soon took offense to having their gender associated with disaster, destruction and devastation. One brightly suggested the use of senator’s names instead as they tend to delight in having things named after them. In 1979, the NWS and the WMO finally switched to alternating lists of both men’s and women’s names.
A New Low, A New Name for This Market
On Wall Street, we have entered what is labeled a Bear Market, one of prolonged price declines, and it may be cyclical or it could last for many years. As the polar opposite of a Bull Market, there is typically a drop of 20 percent or more from recent highs amid widespread pessimism and negative investor sentiment. At this writing, the Dow is down 19.5% on the year, the S&P 500 has fallen 23.3%, the Russell 2000 has lost 26.3%, and the Nasdaq is down 30.9%. On the bond side, prices have dropped even more dramatically. The 2-year Treasury yield at 4.34% is 361 basis points higher. The 10-year BAA corporate benchmark yield at 6.55% has increased 335 basis points. The 30-year AAA tax-exempt MMD benchmark yield at 3.79% has risen 230 basis points.
Rotating storms that spin up in oceans around the world are known as tropical cyclones or depressions. When their maximum sustained winds reach 39 miles per hour they become tropical storms and are assigned a name. There are six lists of names which rotate every six years and begin with the letters A-Z. If the alphabet letters run out as they last did in 2005, the Greek alphabet is then used. When winds in a named tropical storm exceed 74 miles per hour they are designated as hurricanes. The most devastating — with major loss of life and economic impact, such as Andrew, Katrina, Harvey, Irma, Maria and Nate — are permanently retired.
The last measure of inflation in the U.S. showed it rising 8.3% year over year in August, causing nearly 70% of us to look for extra work and 85% of us to change our spending habits. Fifty percent of companies, according to a recent PwC survey, are reducing their overall headcount or instituting hiring freezes as a result of inflation and higher interest rates. As a result of supply constraints, the Russian invasion of Ukraine and elevated energy prices, the inflation rate is just under 10% in Great Britain; in Turkey and Argentina, annual inflation is forecast at 80%, and in Lebanon it already reached 161.89% in August. When we see slow growth, high unemployment and rising prices appear simultaneously, it is called stagflation. When inflation reaches 50% or more per month, with rapid and uncontrollable increases in prices and in the supply of currency, it is termed hyperinflation. Almost all cases are caused by government budget deficits financed by currency creation. The U.S. has never experienced it and hopefully never will, but the Confederacy did. Venezuela just broke a four-year bout, one of the longest in history. Ukraine and Syria are on the cusp right now.
Aegrescit Medendo: The Cure is Often Worse Than the Disease
NASA just successfully hit an asteroid with a spacecraft to try to change its course, but we have not yet figured out how to re-route or prevent hurricanes or how to tame inflation without causing significant pain for households and businesses. Our central bank supports an inflation rate of 2 percent as healthy and they are attempting to lower the one that has been soaring to that level with a series of aggressive rate hikes. Those efforts may not be enough, given all the underlying causes. But persistently high prices could lead to even more interest rate hikes and trigger economic distortions leading to a recession – a deep, widespread and prolonged downturn in economic output, consumer demand and employment, usually preceded by an inverted yield curve and marked by two consecutive quarters of decline in gross domestic product. The World Bank just warned that the threat of global recession is growing as a result of the simultaneous efforts by central banks to raise interest rates and urged policymakers to shift their focus from reducing consumption to boosting production.
Surviving and Thriving in Bear Markets
By naming inanimate things like storms, it is said that we humanize them, causing us to pay more attention to them and care more. By describing falling stock and bond prices as a Bear Market, we conjure up the clear image of a bear attacking its prey by swiping its paws downward. Since our founding in 1935, we have seen and survived many of these markets before – most recently in March 2020, when the dot-com bubble burst in March 2000, and during the financial crisis of 2007 to 2009. Short-selling, and buying put options or inverse exchange traded funds are some of the ways that investors have endeavored to make money in such times. But there are others. We encourage you to contact your HJ Sims representative to look at alternative products that may offer attractive yield with less volatility, as well as individual higher yielding bonds, currently available at discounts, that can provide a stream of tax-exempt income on a quarterly or semi-annual basis. About 88% of the high-grade corporate bonds in a popular Bloomberg index are trading below par, so there are bargains to be found.
Recent New Issues in the Market
Last week in the corporate market, Royal Caribbean sold $2 billion of Ba3 and B3 rated bonds due in 2029 in two parts at yields of 8.25% and 9.25%. In the municipal market, the Arizona Industrial Development Authority issued $35.4 million of BB+ rated bonds for a student housing and athletic facilities project at Greenville University in Illinois; it had a single 2053 term bond priced at 6.50% to yield 7.00%. And the Aspen Public Schools Obligated Group came to market with a $13 million non-rated charter school financing through the California School Finance Authority that featured 40-year term bonds priced at 6.25% to yield 6.40%.
As of the close on Monday, consumer sentiment towards the stock market remains negative for the ninth consecutive month. Volatility as measured by the VIX Index is up 25% in September. The Dow fell below 30,000 for the first time since November of 2020. The S&P 500 fell to 3,655 and the Nasdaq to 10,802. Oil prices at $76.71 are down 14% this month while gold prices at $1,631 are down 5% and Bitcoin at $19,082 has fallen 4.8%. The 10-year Treasury yield stands at 3.92%, up 73 basis points with 4 more trading days left in the quarter. The 30-year benchmark at 3.74% is down 45 basis points. The 2-year AAA municipal general obligation bond yield at 3.02% is 74 basis points higher and the 10-year at 3.79% is up 50 basis points.
Market Movers as the Third Quarter Closes
The third quarter of the year ends on Friday as does the federal government’s fiscal year. The Congress is at work on a continuing resolution to fund the government for a period most likely running past the mid-term elections which occur in 40 days. These events are enough to cause volatility on their own, but markets are aflutter over the tax cuts being announced by the new government in England, the results of the elections in Italy, the North Korean missile fired into the Sea of Japan, and the Russian president’s nuclear threats. The U.S. Treasury curve has been upside down since July 5; today the 12-month bill yields 4.13%, more than the 30-year bond at 3.83%. Traders will follow the path of Hurricane Ian as well as eight Treasury auctions, 16 Federal Reserve officials speaking at public events, lots of housing data, an updated read on second quarter GDP, and key personal consumer expenditures reports for August.
These past few years, we have had countless reasons to reach out to family, friends, neighbors and colleagues to wish them well, hope for better days, pray for good fortune and implore swift recoveries in perilous moments involving the pandemic, crime, floods, heat waves, drought, wildfires and tornados. We at HJ Sims do so again this week, as we bade Godspeed to all impacted by Hurricanes Fiona and Ian. Please let us know if and how we may be of assistance.
For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.