By Gayl Mileszko
My Kind of Town
Chicago, Chicago, that toddlin’ town, my kind of town, my kind of razzmatazz! These were the lyrics in songs sung by Frank Sinatra back in 1957. The toddle was a partner dance, involving a series of bouncing hop steps followed by some back kicks. Along with the Charleston and the Lindy Hop, it was said to define the jazz culture of the Roaring Twenties. Razzmatazz is an old-fashioned word describing a plan for razzle-dazzle, something exciting and complex, intended to confuse opponents. One hundred years later, in the latest incarnation of the Roaring 20’s, the focus is again on the Windy City. An unexpected set of partners has taken the stage at the Democratic National Convention. The incumbent president has been kicked off the ticket and the 2024 presidential campaigns, jazzed up by the media, are more full of razzle and dazzle than ever.
Onion Field and Wrigley Field
The Second City, home of Al Capone, Louis Armstrong, Michael Jordan, Da Bears, the Sears Tower, the Billy Goat Tavern, O’Hare airport, Wrigley Field, Soldier Field, the Loop, and the river dyed green on St. Patrick’s Day, derives its name from the Myami word “shikaakwa” or the Algonquin word “chicagou” meaning “onion field”, the marshy environment where wild leeks, garlic and onions once grew. The pungent fragrance that had permeated the area lives on in the kitchens of more than 200 distinct Chicago neighborhoods, featuring favorites like deep dish pizza, polish kielbasa, and “cheezborgers”. But all of the history, the flavors, the music and attractions of the nation’s third largest city are being overshadowed by the events at the United Center where 50,000 conventioneers and thousands of protesters have gathered under the watchful eye of thousands of local, multi-state, and federal law enforcement — with even more on standby — for the national special security event, the third such major happening of 2024.
Razzle Dazzle
Wall Street has been full of its own version of razzle dazzle of late. Economic data point to the strength of our economy, but investors have tended to overlook the numbers that are quietly revised a month or two later, signaling weakness, or gauges like CPI that exclude increases most impactful to those on Main Street. The latest preliminary benchmark revisions on jobs released on Wednesday were unsettling. Nonfarm payrolls were reduced downward by 818,000 jobs for the 12 months ended March 2024. Federal Reserve Chair Jay Powell admitted in June that the employment data “may be a bit overstated,” so our central bankers are most likely not shaken by the extent of the overstatement. But some market observers have looked skeptically at the rosy claims being made month after month, running in contrast to so many other indicators of a slowing economy, and argue that the Fed is far, far behind in cutting the rates that impact both employment and inflation.
Heat On in the Tetons
There are a number of market moving events drawing our attention this week aside from the policy proposals being revealed in Chicago, and the data Bureau of Labor Statistics. Many eyes remain on developments in the Ukraine war, negotiators working the Gaza peace talks, and the next attacks being planned by Iran and its proxies. But it is Jackson Hole, Wyoming that will receive a year’s worth of attention this week. Central bankers, academics, government officials, and financial institutions are gathering there for the annual symposium from Thursday to Saturday. This year’s theme is “Reassessing the Effectiveness and Transmission of Monetary Policy,” but the grand event in the Grand Tetons is Jay Powell’s speech on Friday morning, remarks that are bound to shape market direction and monetary policy here and around the world. Economic data releases this week include the minutes from the Fed’s last policy committee meeting, and new home sales. But with the Congress out until September 9, and the president on a 2-week vacation in California, Washington is not otherwise a central focus between now and Labor Day. Traders will be monitoring the results of 8 Treasury auctions and listening to earnings reports and forecasts by corporate beacons including Target, TJX, Lowe’s, and Macy’s, and digesting announcements such as the one by Ford to cancel all plans for electric SUVs. The chaos expected to come out of the settlement with the National Association of Realtors in the class action suit over commissions has not yet arrived.
Managing Risk
Hedge funds and other traders using algorithms are always making big bets on equities and commodities, but we are currently seeing major bond traders take on a record amount of risk. There is a widespread expectation that the Fed will begin to cut rates in September, and now the number of leveraged positions in Treasury futures is reportedly at an all-time high. The municipal bond market is usually impacted sooner or later by movements in Treasuries, and leverage is used in many mutual funds. Actively managed exchange traded funds may also use leverage. This year, 17 new muni ETFs have launched, including 6 in July and 3 just last week. Two more are expected to start trading in October, thus providing investors with a total of 105 avenues of ETF exposure on top of the 517 muni mutual funds available. Higher yielding tax-exempts have seen steady demand all year long, and index returns exceed 6.50%. Primary dealers have increased their overall inventory of municipals to $11.2 billion, 24% higher than the 2024 average.
Safety Plays
Investor sentiment, as measured by the CNN Fear and Greed Index, remains rooted in fear as a result of uncertainty over the economy, rate and day-to-day market volatility, the elections ahead, how tax policy may change, and of course the conflicts overseas. Some analysts believe that we in the U.S. are basically fighting four cold wars – with China, North Korea, Iran and Russia — dubbed “CRINK”. Given the rallies in equities this year, some investors may have fear of missing out, but the data show that many households are more comfortable staying liquid and sticking to fixed income. The safety play can be seen in the growth in money market funds assets and ETFs, and the consistent demand for municipal and corporate bonds. Money market funds took in $28 billion last week, with most flows going into the government sector, bringing assets to an all-time high of $6.21 trillion. Fixed income exchange traded funds added $7.5 billion, again with most flows going into the U.S. Treasury sector. Municipal bond funds saw net inflows of $529 million last week with $231 million added to high yield strategies.
Current Markets
At this writing, the 2-year Treasury yield at 3.98% is down 27 basis points so far this month. The 10-year at 3.80% has fallen 22 basis points. The 30-year at 4.06% has dropped 24 basis points. The 2-year AAA municipal general obligation bond yield at 2.52% is down 33 basis points so far in August. The 10-year at 2.71% has fallen 11 basis points, and the 30-year benchmark at 3.59% is down 9 basis points. The 10-year AA taxable muni yield stands at 4.42%. The S&P 500 at 5,597 has gained 1.4%, oil prices at $74.04 per barrel are down 5%, and gold at $2,509 an ounce is up 3.4% month-to-date and 21.6% so far in 2024.
The No Razzmatazz Zone
As we have seen in the past few weeks, markets can turn on a dime. August is a big vacation month and trading desks can be lightly staffed. With less liquidity available, movements upward and downward can be exaggerated. Computer-driven trading, triggered by percentage movements in prices or quantities, fuel the rallies and sell-offs. No matter where you are in these closing weeks of summer, sailing on Lake Michigan, chilling in a pool in your backyard, toddling with a toddler, shopping for school supplies, driving a freshman to college, covering for colleagues in the office, hiking in the Adirondacks, picnicking on the beach, or campaigning for your candidates, make some time to reach out to your HJ Sims representative to discuss market conditions and other considerations that may impact your strategy and goals as we approach the final quarter of the year. As always, you can expect good ears, sound advice, straight talk, and no razzmatazz.