Market Commentary: Moral Compass

by Gayl Mileszko

Moral Compass

Americans are united in our love of the great underdog boxing champion Rocky Balboa and we still cheer wildly for him, round after round, in reruns of his incomparable 1985 fight against the Russian villain in Rocky IV.  We also root heartily for Rick in Casablanca, the Von Trapps in the Sound of Music, Steve McQueen in The Great Escape, Luke Skywalker in Star Wars, and George Bailey in It’s a Wonderful Life. The greatest films of our times, the most popular and beloved, going back 80 or more years, are the ones we watch over and over again because they touch our hearts, make us laugh and cry and applaud for the clear victory of good over evil, the righting of wrongs, the thwarting of the reprehensible, the delivery of justice. As in the Diehard series. The Fugitive.  The Count of Monte CristoSchindler’s List. These movies and their heroes and villains depict the harsh realities and stark contrasts in our world. They certainly reveal our ugliest and most sinister sides, but also evidence how the worst can always be overcome by efforts from on high, sheer willpower, a united majority, a social consensus on fairness, or a welcome combination thereof. It all turns out so well in the Wizard of Oz and the Shawshank Redemption.  We wish it could be the same in the theaters of war, courtroom showdowns, legislative battles, and campus turmoil at present.

The Good, The Bad, and The Ugly

On screen, the most evil characters are all vanquished to universal acclaim: Potter, Drago, Voldemort, Darth Vader, Cruella De Vil, the Wicked Witch of the East. In the real world, countless numbers have lost their lives in the effort to rid the world of Hitler, Stalin, Mao, Pol Pot and their ilk. But in the 24/7 news cycle, the print, broadcast, digital and social media now cover conflicts, invasions, riots, battles, and the outside agitators who exacerbate them in ways that confound and divide us.  Have we lost our ability to ascertain the right and moral action? On the world stage, can we no longer distinguish the good guys from the bad guys?  Even in our own backyard, it appears that there is no longer universal consensus on what is good and decent. Egregious acts – rioting, looting, arson, attacks on innocents, assassinations of law enforcement officers, cyberattacks that create havoc and steal our personal information — no longer elicit widespread outrage and cries for redress. What is worse is that we seem to reject those who endeavor to show us the high ground, set standards of decency, and adhere to the principle of the Golden Rule. Presidents, Senators, Speakers of the House, Cabinet Secretaries, governors, mayors, academic, civic and religious leaders, are no longer given the respect that their offices deserve. Of course, in some cases, this is with good reason. Recall the former presidents of UPenn and Harvard who stepped all over their own tongues in trying to describe how their university policies apply to students who call for the genocide of Jews, or the president of Columbia University who once described terrorism as “a form of protesting against a system which is not delivering for them.”

Image of The Charging Bull

Less than nine miles from Columbia University is Wall Street’s bronze sculpture, the Charging Bull, far from the image being adopted by academic leaders faced with outside activists stoking pro-Hamas, anti-Semitic protests on their campus, disrupting studies, diverting police resources, and fanning the flames of division for the world to see. But financial market participants who provide such great fuel for our economy, those involved in trading, selling, advising, hedging, investing, rarely come across as the good guys on the silver screen.  Think of the Wolf of Wall Street, Margin Call, The Big Short, and Too Big To Fail.  Few will ever forget Gordon Gekko and his notorious “Greed is Good” speech in the 1987 film Wall Street. As it happens, “greed” or “extreme greed” has characterized the sentiment of investors all year long – until last week. The CNN Fear and Greed Index tracks seven indicators of the market’s mood and has reflected expectations that recession will be avoided this year, rates will be cut, inflation will ease, and artificial intelligence will drive new rallies and increase productivity. But unexpectedly strong economic data reports of late, stubborn inflation, 30-year mortgage rates exceeding 7.1%, the airstrikes at Israel, the retaliating strikes inside Iran, and higher oil and gold prices have led to some shifting views on the direction of interest rates and the Federal Reserve’s monetary policy. At this writing, futures trading indicates the 46% probability of one 25 basis point reduction in September.

HJ Sims in the Market

Real yields are very attractive at present, and we support the increasing number of borrowers electing to come to market now rather than waiting for Fed action to adjust rates later this year. Last week as part of the $8.7 billion calendar, HJ Sims brought a $77.5 million BB rated financing for Ascent Classical Academy Charter Schools through the Colorado Educational and Cultural Facilities Authority. We structured the deal with five term bonds and priced the final maturity in 2059 with a coupon of 5.75% to yield 5.90%. This week, we may see the largest calendar of the year at $13 billion or more. We are back are in the market with an $87.6 million BB rated transaction for Westside Neighborhood School, a K-8 private school in Los Angeles that opened in 1980. The financing is coming through the California Municipal Finance Authority and is offered only to qualified institutional buyers and accredited investors.

On Hold for the Next Federal Open Market Committee Meeting

The Federal Open Market Committee meets again next Tuesday and Wednesday, and markets will parse the press release and Chairman’s remarks for new clues on official thinking. Fed voters are in a blackout period this week, so there are no early indications for traders to absorb. While awaiting the next carefully worded decision recap, attention will turn to the 10 Treasury auctions on the schedule, corporate earnings from the technology sector, the initial first quarter GDP reading, the personal consumption expenditures price index, new and pending home sales, consumer sentiment, and durable goods reports. Bond traders ruffled by the multi-billion outflows from money market and municipal bond funds last week will look to see if this was an aberration related to tax filings or whether retail and institutional investors are shifting resources into commodities, cryptocurrencies and other alternatives. Economists and analysts will be checking for another anomaly in the weekly jobless claims data: in five of the last six weeks, the report has come in precisely at 212,000, figures that have raised questions about the statistical improbability.

More Market Movers This Week

There are quite a few distractions for markets this week, the last full trading week of April, but it is a great time to reach out to your HJ Sims representative to discuss all the conditions impacting your portfolio, investment strategy, and future planning. The Secretary of State is in Shanghai and Beijing this week. The House is in recess while the Senate takes up the $95 billion foreign aid package and TikTok sell-or-ban bill. The Federal Trade Commission is voting on a ban of non-compete agreements, and reviewing a proposed rule prohibiting unfair, deceptive or “junk” fees. Overdue credit card loans are at the highest level since 2011, and the largest banks are reporting delinquency rates of 3.61%.  The latest Federal Reserve Bank Financial Stability Report raised concerns over the rise in consumer debt delinquencies, high stock and real estate values, declining values for commercial real estate, and rising leverage among some of the larger hedge funds.  Gold prices reached a record high of $2,397 last week and, despite other strong economic data, the leading indicators continue to point to recession.  The New York Stock Exchange has begun polling members on their interest in an exchange that trades stocks 24/7.  The Securities and Exchange Commission is looking for more feedback on a proposal for one minute trade reporting in the municipal market.  The Supreme Court will hear oral arguments on presidential immunity while opening arguments are held in the historic first criminal trial of a former president. The International Monetary Fund brings new attention to the U.S. national debt by warning that it poses significant risks to the global economy and threatens to continue fueling high inflation. 

Current Yields

At the close on Friday, the 2-year Treasury yielded 4.98%, up 74 basis points since the start of the year. The 10-year yield at 4.62% is 75 basis points higher. The 3-year at 4.71% has increased 69 basis points. Treasury index returns are down 3.05% in 2024. High grade corporate issuance totals $615 billion year-to-date but index returns are down 2.41%.  High yield volume in the primary market has risen to $105.7 billion year-to-date but indices have negative returns of 0.23%.  The 7-day municipal SIFMA Index yield stands at 4.35%. The 2-year AAA municipal general obligation bond benchmark yield closed last week at 3.15%, an increase of 63 basis points so far in 2024. The 10-year muni yield at 2.74% has increased 46 basis points. The 30-year yield at 3.90% is up 48 basis points. Investment grade municipal bond indices are down 1.22% year-to-date, and taxable munis have lost 3.37%, while high yield is the star of the muni sector at +1.81%, beating 2024 indices for mortgages, preferred stock, steel, natural gas, and platinum.