by Gayl Mileszko
One of the easiest ways to learn about the laws of motion is to observe Newton’s Cradle at work. You may better know the mesmerizing device as Kinetic Balls, consisting of a row of five or so metal balls positioned side by side, just barely touching each another, all suspended from a frame by thin wires. When a ball on one end of the cradle is pulled away from the others and then released, it strikes the next ball in the cradle, which remains motionless but transmits a force through to the ball on the opposite end of the row. That last ball gets pushed up and away, only to swing back to strike the set of balls, starting a chain reaction once again in reverse. And on and on. Eventually, friction brings the balls to a standstill.
Momentum and Energy
The Cradle was named in honor of physicist Sir Isaac Newton, and was designed to demonstrate the principles of conservation of momentum and energy. It seems an apt device for our times. In these current days of our lives, nearly 300 years post-Newton, long-held principles are being tested in executive offices, courtrooms and voting booths. Decisions that seem to defy laws of mathematics are being made by central banks and legislatures. We are experiencing major social collisions on our borders and in new labor strikes, seeing highly unusual forces at work causing supply chain disruptions, and observing swings in weather requiring emergency conservation measures. We feel utterly exhausted by a series of crises ranging from the 9/11 terrorist attacks going back 21 years now to the inner city riots of 2020 to the subway crime of today. We have been battling a pandemic, living with and fending off restrictions and lockdowns, for two and a half years now. Inflation feels like it has the same linear momentum that it did 40 years ago. The constant recession jabber is giving us bad flashbacks to 2008. The war in Ukraine has effectively become a world war that we fight with fiscal military might if not physical troops and the 7-month costs on both a domestic and world-wide basis have been staggering. Extreme political divides have marked our elections for these past half dozen years and the next ones are a mere 54 days away.
We have friction on multiple fronts but we are by no means at a standstill. The latest “Beige Book” report on U.S. economic growth prospects shows strong activity in five of the 12 Federal Reserve districts: Dallas, Boston, San Francisco, Kansas City and Atlanta. Economies are reported as steady in Philadelphia and Cleveland. Even with the weakness seen in New York, Richmond, Chicago, St. Louis and Minneapolis, employment, tourism, lending, tax revenue, farm conditions and/or demand for industrial space show some positive signs. Good citizens from across the country are standing for election in the primary season just concluded on Tuesday by voters in Rhode Island, Delaware and New Hampshire. The Nasdaq may have dropped more than 5 percent on Tuesday, but traders are back at their desks today with fresh new perspectives and strategies.
Investors feel the forces coming from all directions and opt either to swing into action or remain motionless in cash for the time being. Campaign rhetoric is heating up ahead of the mid-term elections, whereupon many local, state and federal policies may change, so it is not easy to remain detached and focused on the fundamentals, relative value and performance of individual securities or asset sectors as a whole. Very few classes have performed well as of late, or even since the start of the year. But most of us prefer to remain fully invested and, with financial guidance from market professionals such as we offer at HJ Sims, households, businesses, associations and nonprofits can all find income-generating opportunities suited to their capital needs and risk tolerances.
Recent Tax-Exempt Yields
In the municipal arena last week, the Monroe County Industrial Development Authority sold $21.8 million of non-rated, self-designated social impact bonds for the Academy of Health Sciences Charter School in Rochester, New York structured with a final maturity in 2057 that priced at par to yield 6.00%. The Connecticut Health and Educational Facilities Authority issued $3.5 million of non-rated bonds for Livewell Alliance due in 2026 and priced at par to yield 5.84%. This week the Chester County Industrial Development Authority brought a $56.8 million financing for BB rated Collegium Charter School in Exton, Pennsylvania and Okaloosa County, Florida had an $11 million non-rated sale for Destin High School, both pricing at par to yield 6.00% in 30 years.
The latest inflation numbers badly rattled markets on Tuesday and set off chain reactions around the world, but investors are now braced for target Fed rates in the range of 4.00% by year-end. Futures traders wager on a third 75 basis point rate hike at the Federal Open Market Committee meeting next week; there are some, however, who place the probability of a 100 basis point increase at 30%. Lots of other market movers are in motion: a nurses’ strike in Minnesota, a possible railroad worker strike on Friday, a new king and prime minister in the United Kingdom and all the security concerns attending the Queen’s funeral, unexpected turns in the Russia-Ukraine war, the Putin-Xi meeting at the Shanghai Cooperation Organization summit, U.S. retail sales data and quadruple witching, to name a few. The relentless pace of mutual fund outflows in both equities and stocks, on top of the weakness in recent Treasury auctions and the stepped up efforts to reduce the Fed’s balance sheet have been raising concerns about market liquidity. Volatility as measured by the VIX and the MOVE indices remains elevated.
At this writing, the 2-year Treasury stands at 3.78%, up 59 basis points so far in September. This short maturity has a yield that has remained higher than its longer dated tenors for 71 days. The 10-year yield at 3.40% has risen 21 basis points. The 30-year at 3.48% is up 19 basis points but stands 30 basis points below the 2-year maturity. The 10-year Baa corporate bond yield at 6.08% has increased 31 basis points over the course of these past 8 trading days. For tax-exempts, the 2-year AAA municipal general obligation bond yield at 2.39% is 11 basis points higher. The 10-year at 2.28% is up 23 basis points. The 30-year at 3.58% has increased 29 basis points. The Dow is currently down about 1% on the month, oil is up 45 cents a gallon, gold has lost nearly $15 an ounce, while silver prices are up about 9 percent and Bitcoin is up slightly to $20,170.
Newton’s Third Law of Motion states that for every action there is an equal and opposite reaction. But after 87 years in the business, we at HJ Sims know that that the reaction might not come for days, months or decades. Since our last major recession, all the usual market signs, standards and gauges have been disrupted by unprecedented central bank intervention and fiscal stimulus. So we continue to operate at our best in the moment – relying upon the expertise of our veteran sales and trading team to guide us through the daily swings.
For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.