by Gayl Mileszko
The first month of the New Year is already behind us and how fantastic it would be if we could keep the rally going at this pace for the rest of the year. Heading into Groundhog Day, we would welcome six more weeks, six more months of this performance with low volatility and strong returns. So far in 2023, stock market volatility is down more than 10% and all the indices are up. The Dow finished January 2.8% higher, the S&P 500 climbed 6.2%, the Russell 2000 gained 9.7% and the Nasdaq is up nearly 11%. Bond market volatility has plunged 18%. The 10-year BAA rated corporate bond index yield is down 52 basis points, the 10-year muni benchmark yield has fallen 44 basis points and the 10-year Treasury yield has dropped 37 basis points.
It certainly does not feel like we are about to enter into the recession that economists have threatened for more than a year.
But there are shadows cast over most markets, and Main Street is wary. We remain in a pandemic-era climate of rising rates, increasing layoffs, debt-fueled spending, war-torn supply chains and heightened geopolitical risk. We are down from the 9.1% general inflation rate that peaked in July, but food inflation is expected to persist in the range of 7.1% all year with some of the most popular products like eggs forecast to rise another 27%. Consumer confidence fell to 107.1 from 109 in December and consumer expectations dropped from 83.4 to 77.8, below the canary-in-the-coal-mine warning level of 80. Interest rates are still on the rise, with the Fed moving the target up again to 4.50% this week and predicting a higher range ahead. The average 30-year fixed mortgage rate at 6.13% is the highest it has been since November 2008. Credit card rates are up over 23%, and most auto loans are hovering around 7%. Household debt has risen to $16.5 trillion, with the average household owing $222,000 in mortgages, $17,000 in credit card debt, $29,000 in auto loans and $58,000 in student loans as the cost of living continues to outpace income. With respect to the U.S. government, our federal budget deficit currently stands at $1.56 trillion and the national debt at $31.5 trillion exceeds allowable limits and now represents 120.37% of our gross domestic product.
January Rallies and Inversions
At the close on Tuesday, the Dow stood at 34,086 and the S&P 500 at 4,076. The Nasdaq finished at 11,584 and the Russell 2000 at 1,931. Oil prices fell 1.5% during the month to $79.05. Gold prices rose 5.8% to $1,929. Bitcoin outperformed with a 40% return, up $6,626 to $23,151. In bond world, the Treasury curve remains highly inverted; the 6-momth government has the peak yield at 4.84%, followed by the 12-month at 4.68%, the 3-month at 4.59%, the 2-year at 4.18%. The lowest yields on the curve are the 10-year at 3.46% and the 30-year at 3.59%. On the corporate, side, the 2-year AA yield at 5.04% exceeds that of the 10-year at 4.68% and the 30-year at 4.70%. The tax-exempt yield curve has also been partially inverted since December. The one-year AAA general obligation benchmark yields 2.28%, more than the 10-year at 2.19% but below the 30-year at 3.18%. Municipal bonds remain very pricey versus their taxable counterparts. The 10-year muni/Treasury ratio is 62.2%, the 30-year ratio stands at 87.7%.
Investors are watching markets very closely and are keeping a considerable portion of assets in highly liquid form. U.S. Money Market fund assets are at an all-time high of $4.82 trillion. One of the nation’s largest private wealth management firms just reported that 11.5% of client assets are in cash, 15.1% of debt holdings are in the form of ETFs, and 16.9% of all equity positions are held in ETFs. Some investors, as always, have Fear of Missing Out (FOMO) of current opportunities, many still believe There Is No good Alternative to U.S. equities (TINA) and rush in to Buy The Dip (BTD), others see asset evaluations as extraordinarily high and have Fear of Holding On (FOHO), and there are always the risk takers who say You Only Live Once (YOLO).
Supply has been sparse in some primary markets. The high yield corporate market saw only 21 borrowers come to market in January with a total of $20 billion last month. It was nevertheless the busiest month in the past year, as companies held back as interest rates . The municipal market produced little more: only $21.9 billion of deals came to market, so volume was down 17% year-over-year. On the other hand, investment grade corporate sales were the second highest on record with nearly $144 billion priced. And, seemingly regardless of the debt limit, U.S. Treasuries are still being auctioned at the same torrid pace as last year, when there was $16.73 trillion of gross issuance, an average of $1.39 trillion a month.
Market Movers This Week
There are five Treasury auctions scheduled for this week, although no sales are on the calendar for Wednesday when the Federal Open Market Committee rate announcement and policy statement were issued. Wednesday proved to be a huge day for traders who had to monitor the OPEC+ policy meeting, the meeting on the debt limit with the President and House Speaker, housing price data, the consumer confidence report, and major corporate earnings results.
Municipal Bond Calendar
Tax-exempt buyers are seeing less than $1 billion of new issues on this week’s calendar while demand builds due to reinvestment cash available. February will see a total of $27.5 billion of principal payments and $14.2 billion of coupons, with about half of this total hitting bondholder accounts on the first of the month. High yield buyers in particular have a lot of pent-up demand and we have seen no significant issuance yet this year. We expect that any signal that the Fed is ready to pause with its tightening campaign will bring a number of deals out of the pipeline into the market. This will likely include essential purpose senior living and charter school facility expansion and refinancing deals that have been on hold during this historic rate-hike cycle.
February 14 Conference on Senior Living and Charter School Finance
Market conditions and sector-specific challenges and opportunities are among the hot topics to be addressed during the HJ Sims Late Winter Conference in Sarasota less than two weeks from now. It is not too late to register and join us for informative panel discussions and networking with senior living and charter school colleagues on the Gulf Coast in the warm Florida sun. For further information on our keynote speakers, panel experts, and agenda, please contact your HJ Sims representative.
For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.