Market Commentary: Inflated

by Gayl Mileszko


Gerald Ford called it Public Enemy Number One. Jimmy Carter called it our most serious domestic problem. Joe Biden once said it was his top domestic priority. Ronald Reagan said it is the price we pay for those government benefits everybody thought were free. Some folks joke that inflation — then and now — is so stubborn that a picture is now worth 1,000 words plus $100. McDonald’s might roll out a quarter-ouncer.  The tooth fairy is forced to leave IOU’s.  Whole Foods renamed itself Half Foods. And many of us can no longer afford to pay attention. But, as the novelist Kathleen Norris so pointedly remarked, “Despite the costs of living, it remains popular.”

The Common Man Variety

Inflation is no joke. The economic data show that the pace of increase is slowing.  But so-called “common man” inflation is still elevated and not properly reflected in the numbers. Non- discretionary spending on food, shelter, energy and utilities, all things we need in our day-to-day life, is stubbornly high. Although the prices of eggs, apples and milk have come down somewhat, many products remain about 19% above where they were before the pandemic. Companies have now mastered the art of shrinkflation, and we have altered our consumption by buying more store-brands and gently used items and fewer, if any, treats.  Some of us, fearing that prices will rise again, have accelerated our purchases, a practice that often perpetuates inflation. Some have no worries about the extent of our debt, given the recent government trends in forgiveness.  The New York Fed says companies in its region plan to raise prices an average of about 3% this year on top of 5% in 2023 and more than 9% in 2022. Lower-income consumers, in particular, are running up credit card debt and falling behind on their payments. USDA data confirms that U.S. consumers spent more than 11 percent of disposable income on eating in 2022, the highest percentage in more than 30 years.

Dynamic Efforts

Concerns over the high cost of living are not limited to individuals. As we learned last week at the 21st HJ Sims late Winter Conference, charter schools are squeezing budgets to adjust for higher labor and supply expense, and life plan communities are stretching revenue to pay higher wages, utility and food bills. The New York MTA is counting on generating $15 billion from congestion pricing, tolls for driving into Manhattan below 60th Street, even as they face multiple legal challenges. Boston, ranked having the fourth-worst traffic in the world, is also considering the toll. Same with Chicago. Several cities including London, Stockholm, Singapore, Milan, San Diego, D.C., Dallas, and Minneapolis/St. Paul already impose surge pricing to regulate demand and generate revenue. The fast-food chain Wendy’s announced a few weeks ago that it planned to implement dynamic pricing to its menus but received immediate backlash and quickly pivoted, assuring customers that there is no plan for any surge pricing.


Many stocks and bonds are trading at highly elevated levels. Some claim that stock market prices may be overvalued by as much as 59%. Last week, the S&P 500 closed at an all-time high of 5,088. It is trading at a trailing price-to-earnings ratio of about 22. On the Nasdaq, the price of Nvidia stock has risen from $475 to $787 in less than 9 weeks. Investment grade corporate bond sales in the primary market have set new records in January and February; orders are running nearly four times the par offered. In the tax-exempt sector, we are seeing blocks of bonds trade at significant premiums: University of California Regents bonds at $124.14, University of Pittsburgh at $121.573, Children’s Hospital in Boston at $119.896, New York State Thruways at $118.945, and New Jersey Transportation Trust Fund at $113.421.

Winter of Discontent

If rates start to come down, will inflation spike again? There are still 3 weeks to go until the next Federal Open Market Committee meeting and futures trading reflects the probability of 3 rate cuts this year, with the first coming in June. At the start of the year, hopes were so inflated that some analysts forecast as many as six quarter-point reductions. Fed officials have worked very hard to deflate these expectations. Recession fears remain a major concern despite some strong economic data. Several analysts believe that the markets have not yet absorbed the full impact of the 11 rate hikes, but the latest drop in consumer confidence reveals anxiety about the future, worries about an economic downturn, and building political turmoil. Mortgage rates at 6.90%, asking rents of $1,967, average credit card charges of 22.75%, average weekly grocery bills of $331, and evaporating savings all contribute to growing discontent. This is likely to be exacerbated by gridlock in Washington on immigration, foreign aid, and the most basic of responsibilities: funding the government. Without Congressional action, twenty percent of the federal departments and agencies will shut down at midnight on Friday. Four days later, voters in 17 states head to the polls to cast ballots in primaries or caucuses. Five days later, the rhetoric continues with the President’s State of the Union address and Republican rebuttal. The following day, funding for the remaining 80% of government expires unless House and Senate leaders can reach an agreement.

Rallies and Reversals

Last year federal spending totaled $6.13 trillion. That is roughly equivalent to the market cap of Microsoft, Alphabet and Meta combined. Nvidia at $1.97 trillion now tops Alphabet, and the stunning earnings results from this company so dominating the artificial intelligence market spurred another rally in equities last week.  Berkshire Hathaway hopped on the bandwagon, reporting a record $97 billion of profit in 2023 even with a $167 billion pile of cash – – about the size of the combined annual budgets of the Departments of Agriculture, HUD, and Homeland Security. Over at NASA last week, however, no confetti fell. Hopes for a unifying burst of patriotism were dashed when the first U.S. spacecraft to land on the moon since 1972, and the first ever U.S. commercial lunar landing, toppled on one side upon touchdown and had its mission cut short. Nerves in the space and defense sectors were even more rattled by reports that a Russian nuclear powered anti-satellite space weapon could be deployed within the next year, threatening some 7,800 operational satellites in Earth’s orbit, despite a 1967 treaty banning the stationing of weapons of mass destruction in outer space.

Sentiment and Yields

The investor’s wall of worry gets taller while sentiment, as reflected in the CNN Fear and Greed Index, leans into Extreme Greed. But so far this year, the only indices in the black are the Dow, S&P 500, Nasdaq, leveraged loans, high yield municipal bonds, high yield corporate bonds, preferred stock, nickel, and WTI oil. At this writing, the 2-month Treasury has the highest yield of all maturities at 5.42%. The 2-year yield has climbed 49 basis points to 4.69% this month.  The 10-year yields 4.56% and the 30-year is at 4.43%. Tax-exempt yields are about 8 basis points higher on the month. The 1-year AAA general obligation municipal benchmark yields 2.98%, well above the 10-year at 2.46% but below the 30-year at 3.59%. This week, we are watching the flow reports to see if investors continue to add to high yield mutual funds and ETFs. Possible market movers include the 9 scheduled Treasury auctions, remarks made by 13 Federal Reserve officials, the active corporate bond slate, and the $7 billion municipal calendar.

Deals in the Market

Last week, while we hosted a series of keynotes, panels, and networking opportunities in San Diego, Florida’s Capital Trust Authority came to market with $26.5 million of BB rated revenue and refunding bonds for KIPP Miami North charter school structured with a final maturity in 2060 priced at par to yield 6.125%. And Pennsylvania’s Chester County Industrial Development Authority sold $50.9 million of MIG-3 rated notes due in three years for Avon Grove Charter School that priced with a 5% coupon to yield 4.05%. This week, we expect to see an $18 million non-rated financing for Portland Village School come through the Oregon Facilities Authority.  The reception for higher yielding municipal bonds should be a warm one as $19 billion of principal and interest payments will be made available to bondholders for reinvestment on Friday.

Making A Difference

This is a great week to reach out to your HJ Sims representative to discuss market conditions and outlooks. Tax Day draws near so the appeal of tax-exemption balloons. But this is also a great time for nonprofits to seek donations and for investors to consider strategic giving opportunities. The incredible billion-dollar gift just made by Dr. Ruth Gottesman to the Albert Einstein College of Medicine in the Bronx to fund free tuition in perpetuity should make all of us stop and think about what more we can do to support causes that we are passionate about in ways that will really make a difference.