HJ Sims Market Commentary: Georgia On My Mind

by Gayl Mileszko

On Rolling Stone’s list of the greatest songs of all times, the Ray Charles version of “Georgia on My Mind” ranks as number 44. The soul singer known as Brother Ray was in fact a native of Georgia, born in 1930, the same year that Hoagy Carmichael and Stuart Gorrell penned the lyrics. He recorded the classic tune thirty years later on his album The Genius Hits the Road and, in 1979, his rendition became the official state song of Georgia. The Peach State was the last of the original thirteen American colonies to be founded, the fourth state to enter the Union in 1788, the fifth to secede in 1861, and the last to be readmitted in 1870. This week, it is on the mind of millions of people around the world — not for its role as host of the Masters Tournament, or as the birthplace of the civil rights movement, the home of former president Jimmy Carter and baseball legend Ty Cobb — but in the political battle for a U.S. Senate seat and momentum going into the next cycle.

Runoff Marks the Start of the 2024 Presidential Campaign

There was a lot of pressure on the state’s 7.8 million registered voters this Tuesday. Their choice helps to set the course of U.S. policy for the next few years; the significance was made clear in the $380+ million of ad spending that deluged TV, radio, billboards, social media, and other venues all year long. The outcome of Tuesday’s runoff election not only impacts the nation’s domestic and foreign policy, but judicial appointments, the composition of committees, the schedule of the Vice President, and the positioning of both national parties ahead of the 2024 election. Many believe that the next presidential race began and will end in this battleground state, in metro and northern exurban Atlanta, Savannah, the southeastern coast islands, and the bellwether Sumter County.

The Last and Key Election Result That Matters

The Georgia election marks the last one of the season, a huge relief to a nation exhausted by a year of political attack ads, the unremitting pandemic, sky high inflation, soaring interest rates, supply disruptions, our direct but indirect participation in the Ukraine war and mounting threats from foreign foes, just to name a few. The year comes to a close in three weeks and most everyone will be thrilled to kiss it goodbye. Before that happens, investors pummeled by stock and bond markets should not dip too deep into the eggnog. Volatility always surrounds the Federal Open Market Committee meetings and the next one is next week. Any surprises in the producer and consumer price indices could send asset prices spiraling and change the odds on Fed rate action. Current expectations are for a 50 basis point rate increase and an uneventful finish to 2022, but we know what became of expectations we had at the start of 2022.

Worst Year for Bonds

Coming off a year of solid returns in nearly every asset class, rates market jitters soured performance from the opening weeks in January. Hopes for a market turnaround in the second quarter, then the second half, were dashed again. The Treasury yield curve, which reflected investor hesitation, doubt and uncertainty, first inverted in July and signaled a coming recession. Investors turned to ultra-safe, highly liquid instruments: ETFs, money market funds, U.S. Treasuries. Equity funds have suffered 43 straight weeks of net redemptions, and municipal bond mutual funds have had $132 billion of net outflows. At this writing, the S&P 500 Index is down 13.25%. Going into this last trading month of what is arguably the worst year in bond market history, U.S. Treasuries are down 11.28%, mortgages have lost 10.35%, high yield corporates are down 9.85%, and municipals have declined 8.55%.

Sweet Song in November

November turned out to be a fantastic month for municipals– deemed the best since 1986 — and tax-exempt buyers are cautiously optimistic about December and next year. Several other asset classes also did well by the time the dust settled. Lacking direction and conviction, markets had several knee-jerk reactions to headlines throughout the month, but in the end the Nasdaq gained 4.4%, the S&P 500 finished up 5.4%, the Dow rose 5.7%, and gold prices increased 7.2%. With plenty of forward guidance from Fed officials, Treasury volatility was down 14% from October; it was not a smooth path but, by month-end, the 30-year benchmark yield dropped 43 basis points, BAA rated corporate bond yields fell 65 basis points to 6.50%, and the 10-year AAA municipal general obligation yield dropped 68 basis points to 2.71%. The S&P High Yield Municipal Bond Index gained 5.57% on the month and the investment grade muni index returned 4.63%.

Muni Trading Volume at Record High in November

Municipal trading volume reached a new record high at 1.29 million in November as investors came to recognize the value as well as the yield in this sector and sold off lower yielding holdings for tax purposes. Borrowers, however, unsure of when rates would stabilize, stayed on the sidelines and November municipal bond issuance fell below $20 billion, a 23-year low for the month. Elevated demand and reduced supply along with fresh inflows into municipal bond exchange traded funds and $31 billion of December 1 principal and interest payments contributed to favorable technical conditions, offset in part by continuing outflows in conventional muni bond mutual funds. Much of the action was in the secondary market as customer bids-wanted soared were well above average levels, totaling $8.6 billion alone in the week before Thanksgiving. High yield corporate bond buyers also searched in vain in the primary market: October issuance at $3.7 billion marked the slowest month since 2008, and year-to-date volume at $95 billion is also the lowest in 14 years.

Recent High Yield Muni Sales

Among the higher yielding new issues seen in the municipal market this past week the Build NYC Resource Corporation sold $71.2 million of BB+ rated social bonds for East Harlem Scholars Academy structured with a 40-year maturity priced at 5.75% to yield 5.90%. The Arlington Higher Education Finance Corporation issued $46.2 million of Ba2 rated charter school bonds for Magellan International School in Austin, Texas that included 2062 term bonds priced at 6.375% to yield 6.50%. The Wisconsin Public Finance Authority brought a $2.1 million non-rated transaction for Davidson Charter Academy in Lexington, North Carolina due in 2056 and priced at 6.75% to yield 7.486%. This week, the PFA is back with a $39.6 million offering for BBB-minus rated Triad Educational Services in Cary, North Carolina.

Market Movers This Week, Marking the 81st Anniversary of Pearl Harbor

Disappointed U.S. soccer fans will have to wait until 2026 for our next chance at the World Cup. Among others who feel no joy just now are oil traders who have seen U.S. crude prices plummet by 40% since March and sit, at this writing, at their lowest level since last December; uncertainty reigns, given the new Western sanctions on Russian exports and the six-month wait for the next OPEC+ meeting. This is the time of year when major financial institutions issue their year-end recaps and 2023 outlooks; some strategists who have known nothing but rallies throughout their careers struggle to find anything sweet or rosy in the tea leaves, dot plots and global debt data. But investors focused on just this week of trading have an eye on the Congress and how members will handle the soon-to-expire government funding measure and approaching debt limit. Many are monitoring progress in the possible re-opening the major urban centers of China. All will follow the five Treasury auction results and carefully parse the weekly economic data releases for signs on where the economy is headed. This week, we have factory orders, durable goods, trade balances, productivity, the producer price index, inventories, and consumer sentiment. Economists continue to scrutinize the U.S. Treasury curve that has been warning of an approaching recession for five months. In the upside -down government market at this writing, the 3-month Treasury at 4.34% yields 81 basis points more than the 10-year note at 3.53% , the widest spread of the year. The 12-month Treasury at 4.75% yields 121 basis points more than the 30-year Treasury at 3.54%. By contrast, after the Pearl Harbor attacks in 1941 and throughout the duration of World War II, the Fed sought to manage the level and shape of the yield curve, and the 30-year Treasury rate was fixed at 2.5%.

Professional Guidance

U.S. investors have enjoyed nearly 40 years of bond market bliss and, with few interruptions, only gains in the equity market. But conditions have changed in response to factors including the reversal in monetary policy, the lingering pandemic, automation, digitization, and geopolitics. In the wake of the FTX debacle and bankruptcy, we have every right to be skeptical of every offering. Choose this time to reach out to your financial advisor and review your holdings, your goals, and your opportunities. Take the time to study the fundamentals. Follow the lead of your advisor and learn how to conduct due diligence. The competence and commitment of management, the caliber of those holding key financial, operational, legal and board roles whether in corporate, non-profit, or governmental roles matter greatly in everything from initial public stock offerings to revenue-backed municipal bonds. As do transparency and performance metrics. If you have been on the sidelines, if you need a portfolio risk assessment, if you are anxious about what 2023 has in store or just need some peace of mind, reach out to your HJ Sims representative today.

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