Market Commentary: Consistency

by Gayl Mileszko

Edgerton “Ketchie” Welch, a lifelong resident of Chillicothe, Missouri began his career at his family’s Edge-Mar Dairy but later came to run the local Citizens Bank & Trust Co., serving for a total of 55 years. At various points in his role as CEO, he reported an investment performance that beat the nation’s biggest banks and insurance companies. When interviewed by Forbes on his exceptional success, he admitted that he was not smart enough to play the stock market and never even heard of modern portfolio theory. Instead, he admitted that he subscribed to Value Line and bought all the stocks that had its highest rankings and were also highly rated by analysts at the two brokerage firms he used. He held onto each stock until all three companies dropped their ratings, at which point he promptly sold. He basically had three simple rules tied to buying and one for selling and that was it. Forbes concluded that his secret was not a system per se, but quite simply his own consistency.

Taking Emotion Out of the Equation

Having such a simple strategy is not necessarily the best one for investors to have in every situation. But for long term investors having consistency as an investment discipline, sticking with your strategy year after year even when the crowd piles into another one, and regularly surveilling your holdings with the trained eye of a market professional, make a lot of sense. It takes emotion out of the equation. Granted, it is extremely hard to remain steady and unemotional when unexpected events like a pandemic occur, or when we see three banks fail in less than a week, and particularly when we see governments intervene in markets in increasingly unprecedented ways. So when the rules are suddenly changed, sometimes you have to change your game.

Wild Swings, Fast-Moving News

There has been historic volatility in the bond markets. We have seen some wild swings this year, reminiscent of 2008. The MOVE Index gauge that traders use jumped more than 100 percent from 97.3 on February 1 to 198.71 on March 15 and hovers near 162 at this writing. In just the last three weeks, the 2-year Treasury yield has fallen 65 basis points to 4.16% but had climbed as high as 5.07% and got as low as 3.97%. The jerky movements reflect investor uncertainty on numerous fronts with shifting priorities: the Federal Reserve’s next actions with respect to rates, the soundness of the banks where we keep our cash, concerns over government shoring up poorly run businesses and wealthy depositors, high inflation and declining retail sales, escalating household debt, and menacing threats by the leaders of China, Russia and North Korea. The day-to-day inconsistencies have had a major impact on all other markets and are amplified by the disparity between short and long maturities, the yield curve that has been inverted for more than eight months. In the global rush to safe havens, the highest yielding Treasury is the 6-month bill at 4.97%, followed by the 3-month at 4.76%, the 12-month at 4.67% and the 2-year at 4.22%. The spread, or difference, between the 3-month and 10-year (which yields 3.61%) is 115 basis points. The longest maturity, the 30-year, yields 3.73%, the highest it has been in nine years but average for the past three months. Treasury bond index returns month to date stand at 3.15%.

The Battered and The Buoyed

Stocks have been alternately buoyed and spooked by the behavior of their bond counterparts. The banking sector has clearly been the worst battered but oil prices are down nearly 10% this month. On the other hand, Bitcoin is 19% higher, and gold and silver prices are up more than 6%. In the corporate bond market, issuance was frozen last week. The high yield primary market has been closed for two weeks and month to date returns are negative 1.04%. Investment grade sales resumed on Monday with some issues more than 10 times oversubscribed, and the IG index is up 1.60% this month. In the municipal bond sector, issuance is down 24% from last March and 25% year over year. The 2-year AAA municipal general obligation benchmarks yield at 2.51% has dropped 44 basis points this month. The 10-year yield is down 21 basis points to 2.38%, and the 30-year has fallen 14 basis points to 3.42%. Muni debt maturing in 10 years now yields 66.5% of Treasuries. Investment grade munis are returning 1.53% thus far in March while high yield munis are up 0.84% and taxable munis have gained 1.84%.

Recent Municipal Sales

The light calendar has only produced two charter school financings in the past week. The Leman Academy of Excellence had a $37.5 million Aa3 rated sale through the Colorado Educational and Cultural Facilities Authority; bonds were structured with four terms including a final maturity in 2058 priced at 4.50% to yield 4.73%. The St Paul Housing and Redevelopment Authority issued $50.9 million of Ba1 rated bonds for the Community School of Excellence structured with 2063 term bonds priced at 5.50% to yield 5.675%. Elgin Math and Science Academy Charter School came to market through the Upper Illinois River Valley Development Authority with a $16 million Ba2 rated limited offering that featured a final maturity in 2063 priced at 6.00% to yield 6.25%. And Excel Academy Public Charter School had a $14.2 million transaction with non-rated bonds issued by the Wisconsin Public Finance Authority due in 2033 priced at 7.60% to yield 8.351%. Two more charter school financings are scheduled for this week but we have not seen a senior living deal in the market since March 6 when Lindengrove Communities placed a $37.4 million non-rated deal through the Wisconsin Health and Educational Facilities Authority.

Market Movers This Week

There are several market moving events taking place this week. In addition to the ongoing discussions over the terms of the UBS-Credit Suisse shotgun merger and efforts to support B+ rated First Republic Bank while auctioning off the deposits or assets of Silicon Valley Bank, the Russian President and Chinese Premier hold three days of meetings in Moscow and former President Trump is rumored to face a potential indictment by a Manhattan grand jury. On top of all this we have eight Treasury auctions scheduled and data releases on new and existing home sales, and durable goods. But the headline event is the second meeting of the Federal Open Market Committee and the press conference with Chair Jay Powell to follow. At this writing the Wall Street consensus is that rates will be raised by another 25 basis points to 4.75%, the eighth consecutive increase, in an ongoing drive to quell inflation while assuring the world that they are closely monitoring developments in the banking sector. Futures trading is reflecting expectations for cuts to begin in July and slowly settle at 3.00% by December of 2024.

Too Big to Fail

Bank of America investment strategists measure Wall Street as six times the size of Main Street and “too big to fail” but that does not mean markets cannot be upended by any number of events, predictable or not. Many economists arguing for a pause in the Fed’s tightening program cite the increased risk of a recession. BofA counts 14 major world recession since 1870 all driven by either war, pandemics or banking crises. Yeoman’s efforts are current underway to prevent the latter but we are certainly in the midst of the other two and, if and when it comes, a recession will certainly be the most highly anticipated one in history.

For guidance in navigating market conditions including these volatile times, reach out to your HJ Sims representative. Since 1935, we have been committed to consistency and excellence in service to our clients and partners.

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