By Gayl Mileszko
Mr. Magoo
This Labor Day, as we pause to count our blessings, we certainly number among them our family, our friends, all those who care for us, those entrusted to our care, our gifts and skills, rewarding work, enjoyable leisure, all the sacrifices made for our education, our safety, our home, and – of course – our health. For those of us fortunate enough to have our eyesight, we all too often take it for granted. Considering how much we rely upon our vision, whether it is 20/10 or as nearsighted as Mr. Magoo, how much do we really know about how our eyes work? Other than our brains, these sensory organs are the second most complex that we have. You can easily research the details — but the eye muscles are the fastest and most active in our body; each eye contains over two million working parts that combine to capture, bend and focus the visible light around us. Together our eyes give us a field of view about 200 degrees wide and 135 degrees high. The process of vision begins with the sights within that field and ends with our brain fashioning them into images that we can understand and use. That process is challenged if we have astigmatism, color blindness, glaucoma, or any number of conditions and disorders. Some can be corrected with eyeglasses, contact lenses, surgery and medications. But, as we know all too well, some of us blinded by love simply cannot be helped. And it is hard, if not impossible, to correct those of us who are significantly impaired by stars in the eyes, hatred, ego, greed, fear, envy, or that which sometimes binds them all together in election years: politics.
Sights to Behold
This first week in September pretty much divides the spring training pre-season for elections from the rough and tumble playoffs that take us into the voting booth in November. The first absentee ballots are actually being mailed out in North Carolina next Friday. So we are about to enter a very noisy period with deafening cheers and raucous booing. Everything from beer cans to firecrackers will get thrown from the bleachers onto the field. Uniforms will change, umpires will scratch their heads, there will be an interminable number of replays. Broadcasters will reveal their biases, hundreds of millions of dollars’ worth of campaign commercials will somehow insert themselves into our TVs, radios, frequently visited websites, and smartphones, producing a continuous stream of inane texts, alerts and calls to action. Soon, we will all start paying much closer attention to the policies, if any are articulated, that separate the candidates. We will try to pick our winners and figure out how to improve our positions and strategies. After Columbus Day, pressures to take sides and make big financial contributions will peak. Following that, we should brace for the proverbial gutter war with, as the ring announcer exclaimed in Rocky IV, “no holds barred in Moscow.” This year the battleground runs from Moscow, Maine to Moscow, West Virginia, to Moscow, Texas and beyond.
Turning a Blind Eye
Investors have by no means ignored developments in the presidential and congressional campaigns thus far but we have managed to dodge quite a bit by covering our ears and rolling our eyes. Some have been enticed to participate in the paid betting markets, at least while they remain legal in the U.S. But most are seasoned enough, hardened by years of unexpected twists, turns and outcomes, to know that it is far too early to make any calls or long wagers. A lot can happen in these nine weeks before Election Day and even between Election Day and when the Congress counts the electoral votes on January 6, 2025. But the fundraising pleas, negative ads, dire warnings, and media hype will continue to become awfully distracting. Most veterans of the investing wars will stick to strategies more impacted by the timing of the next central bank actions, developments in the Middle East and Ukraine, Treasury auction results, key corporate earnings – this week, Nvidia grabs almost all of the attention – and any economic data that looks somewhat reliable. This may include the July Personal Consumption Expenditures (PCE) inflation indicator favored by the Fed which comes out on Friday. Before that, we have revised GDP data for the second quarter as well as the latest stats on durable goods, home prices, consumer confidence and sentiment. Last week, the Bureau of Labor Statistics flubbed the release of preliminary revisions of payroll data for the 12 months ended March 31, 2024 which slashed previously announced results by 818,000; further downward revisions may be made next February. So many downward revisions have been made to upbeat data in recent years that traders have come to view initial reports skeptically and look to their own self-devised indicators and gut checks as principal guides these days.
Seeing is Believing
Incredibly, about half of our brains are dedicated to vision and sight, and some eighty percent of our memories are said to be determined by what we see. At present, we see that the CNN Fear and Greed Index, a reflection of the mood of investors, has swung from Extreme Fear to Fear and back to Neutral in a matter of just a few weeks. But households and many institutions, shaken by recent volatility and concerned by headlines forecasting either recession or greater volatility ahead of the elections, or both, are still choosing to stay in safer zones. And why not? Most every asset class has done well this year so far. But anything can come out of left field. We just saw a global mini-crash as a result of the overcrowded yen carry trade, and of course we are still living in the coronavirus pandemic era. In years past, we had the housing market crash of 2008, the Meredith Whitney muni meltdown call in 2010, the S&P downgrade of the U.S. credit rating in 2011, the sudden bank failures in 2023. The big gorillas on Wall Street and algorithmic traders continue to cause dramatic market moves. Smaller institutions and households can choose to fly blind and ride with them or sit on the sidelines and sleep well. When higher yielding retail money market funds yield 5.34% and the 1-month Treasury yields 5.33%, many feel much more comfortable staying safe and liquid.
Blind Dates
Of course, as we learned from Federal Reserve Chair Jay Powell last week, rates will be coming down to prevent further weakening in labor. We are not sure when or by how much, but markets feel certain that we will see a reduction of 25 to 50 basis points on September 18, and another 50 to 75 basis points by year end. These moves may or may not come to pass. Apparently, the Fed is no longer worried about inflation — after price stability has been the more important of its two mandates for the last 3-plus years. But those of us scanning the shelves at the grocery store or working with realtors remain concerned and alert. We note that the Bespoke MORTGAS Misery Index, which represents the sum of the 30-year fixed mortgage rate and the dollar cost of a gallon of gas, is below the 20-year record high of 11.66 from last year but at 10.2 it remains just under the 10.54 read from the 2008 Financial Crisis. In any event, it is highly unlikely that the next moves in Fed rates will be earthshattering. You have to go back to the 1978-1981 period to see multiple, successive moves of 100 basis points. And, absent a severe recession, we should not expect to think we are moving toward another zero-rate environment. Many traders, analysts, government and company officials have come to view zero as the norm. Nothing could be further from reality. Perhaps the best we can hope for is what the Fed’s last “dot plot” indicates: a 2026 rate of 3.125% and a longer run rate of 2.50%. In any event, if the Fed continues to signal its planned moves, there will be plenty of time for investors to slowly shift out of lower yielding instruments into riskier assets. Given that there are $6.2 trillion of assets in money market funds and $7.7 trillion in exchange traded funds, no one wants to see what would happen in a mad rush to unwind the safety trade.
Sights For Sore Eyes
As expected, the Fed Chair’s remarks from the annual Jackson Hole symposium cheered stock, bond and most commodity markets. Jay Powell holding up the proverbial axe in the Grand Tetons was a beautiful sight. Base metals, the S&P 500, convertible bonds and preferred stocks turned in some of the best returns last week. In the bond markets, taxable municipal bonds and high yield corporates dominated. The 2-year Treasury and the 2-year AAA municipal general obligation benchmark yields both fell by 13 basis points to 3.91% and 2.45%, respectively. The 10-year Treasury yield dropped to 3.79% and the 30-year yield to 4.09%. The top rated 10-year tax-exempt yield closed at 2.69% and the 30-year at 3.57%, and we saw the muni yield curve move further toward normal steepening. However, the 1-year muni yield at 2.51% still remains higher than the 6-year at 2.47%, and the 7-day SIFMA yield at 3.31% exceeds the 20-year benchmark at 3.29%. Muni buyers had $9.5 billion of supply to peruse and added another $354 million to high yield mutual funds. The trend of positive mutual fund flows continued for an eighth straight week with a net gain of $500 million. And buyers were thrilled by many of the week’s offerings. In the high yield muni new issue sector, Merrimack College had a BB rated student housing deal with a 2060 maturity that priced at 5.00% to yield 5.14%. Among other student housing deals, we saw a $51.3 million Aa3 rated financing for the University of Georgia that priced at 4.125% to yield 4.30% in 2056. And the dorm project at Purdue University Fort Wayne was financed with $94.9 million of BBB-minus rated bonds that had a final maturity in 40 years priced with a 5.25% coupon to yield 4.84%.
In the charter and private school sectors, Babcock Neighborhood School in Babcock Ranch, Florida sold $40.1 million of nonrated charter school bonds structured with a 2063 final maturity that priced at par to yield 6.00%. Mason Classical Academy in Naples, Florida brought an $86.3 million BB rated charter school deal that included a 2064 term bond priced at 5.00% to yield 5.03%. California’s Grenada Hills Charter Obligated Group came to market with a $26.3 million BBB rated transaction featuring a 40-year term bond that priced with a 5.00% coupon to yield 4.46%. Valor Education of Texas sold $19.5 million of non-rated charter school bonds that included a 2054 maturity priced with a coupon of 6.00% to yield 6.04%. And Phoenix Montessori Academy in Huntersville, North Carolina had a $22.2 million non-rated private school bond issue due in 2059 priced at par to yield 7.00%.
Eyes on the Prize
Markets will be closed on Monday as America takes the long weekend celebrate the many contributions to the strength and prosperity of our nation made by our civilian workforce of 169.71 million and our active-duty military, national guard and reserve forces numbering 2.86 million. We remain mindful of the 8.4 million Americans who are working two or more jobs, the 7.69 million who are actively seeking work, and the employers who are actively looking to fill 8.1 million positions. That said, we too will pause to enjoy this sweet end to summer. We at HJ Sims wish you and your families a safe and happy Labor Day, a wonderful start to the new school year, and great success and reward in your chosen fields of endeavor as we approach the final quarter of 2024. Please reach out to your HJ Sims representative for guidance in meeting your long-term investment and financing goals. We always keep our eyes on your prize.