HJ Sims Market Commentary: Dancing in the Clouds

by Gayl Mileszko

Tó Neinilii is the sky water god of the Navajo people, a mischievous deity who likes nothing better than to surprise those hoping for blue skies with a good downpour, snowfall or sleet storm. He might show up with his symbolic water pot at a summer wedding or when you are en route to an important business meeting. The Water Sprinkler, as he is known, often displays a good sense of humor. When he is pleased with life around him, he dances in the clouds. But from time to time he cannot help but get into arguments with his fellow god of gambling. In times of drought, loud thunder and bright lightning, it is explained that Tó Neinilii lost his bet with Nohoilpe.

Gambling Parlors

At the annual meeting of Berkshire Hathaway shareholders in downtown Omaha, Warren Buffett described the financial markets over the past few years as a “gambling parlor”. He blamed the financial industry for motivating risky behavior among investors, and attributed his success to being “sane” rather than smart. But his team acknowledged that the amount of speculation in the markets has given this company a chance to spot undervalued businesses. They have just put $106 billion of cash reserves to work with purchases of insurer Alleghany Corp, HP, Occidental Petroleum, and Chevron Corp.

So Long TINA and FOMO?

For years now, market pundits have pooh-poohed the historically low yields offered by U.S. government, municipal, corporate, and asset-backed bonds. Overlooking the semi-annual, sometimes monthly, coupon income, the compounding potential, and relative safety of bonds, proponents have insisted that There Is No Alternative to stocks (TINA) and stoked Fears Of Missing Out (FOMO). But the percentage of American adults who own stock directly or through a mutual fund, index fund or retirement account — 56% — has not changed much in the past few years or even in the last decade. In fact, it is still below the percentage held prior to the 2008 recession when 65% became the peak. In 2020, investors actually pulled a net of $281.6 billion from U.S. equity mutual funds and exchange traded funds according to the Investment Company Institute. In the recovery rally of 2021, they waded back in with $100.4 billion of net investment but, during these last four weeks of volatility, wary investors have already taken back $47.9 billion. Money has moved into money market funds, municipal ETFs, real estate and, apparently, artworks such as the $195 million just sold at auction for an Andy Warhol portrait of Marilyn Monroe.

2022: Annus Horribilis For Investors

After an extremely strong finish to 2021, January was a major disappointment for most investors around the world and conditions deteriorated from there. This has been an annus horribilis, a term last applied by Queen Elizabeth in 1992 to her family travails, but one that now applies to virtually every asset class, excepting only a few commodities. None of the usual mix of sector or strategic diversifications has worked here in the U.S., although some defensive and essential service investments have performed better in terms of interest/dividend income and lower price declines. A number of macro issues on the global political and economic front clearly present long-term challenges. The most recent sell-off in stocks has spurred talk of a bear market. High inflation, excessive valuations, recession and war are four of the usual contributing factors, and they are all present or looming today. Many believe that a recession is not imminent, but some posit that it has already begun. The historical inverse relationship between stocks and bonds has been upended. Interest rates have replaced COVID and inflation and war and perhaps even recession as the principal driver in most markets. Deficits, debt, demographics, and Fed balance sheets lurk as ugly wallflowers for those who have been dancing in the clouds since the Fed, a virtual market deity, has produced blue skies with very few raindrops that it did not itself cause for the past 14 years.

Higher Yields Become Attractive for Those with Cash

The year-long instability in the Treasury market, coupled with the now-distant threats of higher taxes and uncertainty over how much higher the Fed will raise short-term rates, has produced significant volatility in tax-exempts. Yet thousands of opportunities present themselves every day in the $4 trillion muni market. The par amount of bonds traded has skyrocketed to $1.2 trillion so far this year, up 40% over 2021 according to Bloomberg. Returns are down 9.7% for the tax-exempt market in general; certainly, it has been the worst start we have seen since 1980, 42 years ago. Investors who could not get enough of munis last year have pulled assets out of municipal bond mutual funds for 17 straight weeks according to Refinitiv Lipper. But more liquid municipal bond exchange traded funds have seen record inflows totaling $7.1 billion so far this year. And the Municipal Securities Rulemaking Board data, which reports daily trading activity, still shows that buy trades exceed sales. April tax filings have revealed the small number of filers currently subject to the alternative minimum tax; those who are not subject may wish to consider the spread advantage we currently see in AMT bonds. And those who have favored “A” rated corporate bonds should take a look at the higher yields available in comparably rated taxable municipal bonds.

Investment Environment: Uncertain

Much uncertainty abounds, and markets cannot find their footing yet this year. At this writing, in advance of the April CPI data, bond markets appear to be signaling real faith that the Fed will be able to bring inflation closer to 3 percent within the next year. Wild cards, questions, and mischief nevertheless abound. One indicator is with the $105 billion of Treasury auctions this week. But there are many serious questions lingering, including many about the fitness of many world leaders. In addition, China remains locked in a persistent cycle of COVID lockdowns, including Shanghai, whose population of 26.3 million is larger than the top 10 U.S. cities combined. North Korea just flight-tested another ballistic missile but many question with relief why no nuclear missiles were rolled out at Russia’s annual Victory Day Parade. Our Congress appears poised to spend another $40 billion for aid to the Ukraine and NATO, and more is likely to follow before Members disappear in July to campaign in home districts without taking final action on the FY23 budget or many other key matters. Three Fed nominees have yet to be confirmed to fill vacancies. The Supreme Court, completely roiled by the shocking leak of a February draft opinion, may not even rule on this or other highly controversial issues until July, keeping countless number of social, legal and political groups on edge. The Next Federal Open Market Committee meetings are scheduled for June 14-15 and July 26-27; any number of developments, including further major declines in the stock market, can affect announced plans for back-to-back 50 basis point rate hikes, directly affecting all domestic and global lending.

Attractive Tax-Exempt Opportunities

HJ Sims brought a $40 million financing to market last week for the Asbury Maryland Obligated Group last week through the City of Gaithersburg, Maryland. We structured the deal with three terms bonds, including a final maturity in 20 years priced at 5.125% to yield 5.00% for delivery in January of 2023. Among other deals priced in the high yield sector, the Colorado Educational and Cultural Facilities Authority sold $6.2 million of Ba2 rated bonds structured with a 2052 maturity priced at 5.25% to yield 5.30%.

The muni calendar this week is expected to exceed $11 billion, well above average, as the pipeline backed up ahead of the May 4 Federal Open Market Committee decision. We may see as much as $4 billion of taxable muni sales. Many new issue coupons are back in the 5 percent range and discounted prices, after years of high premiums, are available. Redemptions and maturities in the next 30 days total $20.8 billion, so that brings a lot more cash into a market searching for yield. In the below investment grade sector, there are two charter school financings scheduled: the Indiana Finance Authority has a $13 million Ba2 rated financing for Indiana Math and Science Academy, and the Arizona Industrial Development Authority has a $6.7 million BB+ rated sale planned for Academies of Math & Science.

Offerings in the Clouds

Hundreds of municipal and corporate bond offerings are sprinkled every day into the secondary market. While once published only daily in colored sheets circulated between bond dealers, most everything is now in shown on line in various cloud storage data centers. But some offerings are only available on an exclusive basis to our veteran sales and trading teams. With a history dating back to 1935, we work with you to identify sane and smart investment opportunities every day, even in periods of extreme volatility, suited to your needs and goals. We are already nearly halfway into the year, so please reach out and contact an HJ Sims representative to discuss how your portfolio can benefit from all that we have to offer.

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

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