HJ Sims Market Commentary: Numbers Count

by Gayl Mileszko

More than 18 million veterans who have served our country in the active military, naval or air service will be honored this week at parades, dinners, award ceremonies and other events commemorating their sacrifice and service. A grateful nation pauses once a year to thank all those who have defended our many freedoms — including the one we just exercised with spirit this week. An estimated 42 million early ballots were cast in the midterm elections and, by the time all the tallies are final, this could be the second midterm in a row where voters exceeded 100 million. The population of the U.S. is currently estimated at 333,280,260, and we are one of only 74 countries who hold free and fair elections. The majority of the world does not. The Earth’s population is expected to hit 8 billion on November 15, and only about 45.7% live under some form of democracy.

Numbers Fly

Numbers have been flying by all week. Many pollsters and pundits are cringing over how far off their election predictions were. Newly elected officials celebrate their victories by margins thin and wide while quite a few races are still too close to call at this writing. At $16.7 billion, this is the costliest midterm election on record.  The economy has been cited as the top issue of concern to voters and inflation has been top of mind. The latest Consumer Price Index comes out on Thursday and economists expect to see a year-over-year increase of 7.9%. Among other numbers batted around, the Astros beat the Phillies 4-1 in Game 6 to win the World Series. After hours of unnerving delays over security protocols, Powerball announced that one lucky person in California won the $2.04 billion jackpot, largest on record. Having just raised the target Fed funds rate for a sixth time to 3.75% last Wednesday, nine Federal Reserve officials take to podiums this week to stir more speculation about the December 14th meeting, just 35 days away. The U.S. Treasury plans to borrow $550 billion in the fourth quarter, and eight auctions are scheduled for this week. U.S. Corporate earnings for the third quarter are still rolling out; so far they have been fairly lackluster with 24% missing earnings per share estimates. Only 34 business days remain in 2022.

Number of ETFs

The Fed is committed to a rate hike cycle that futures traders project will end by March in the range of 5.00% to 5.25%. Many investors, rattled by these rapidly rising interest rates, inflation at a 40-year high, year long investment losses, and all the midterm election hype, have turned to cash and liquid instruments including taxable money market funds and exchange traded funds. Equity ETFs reported $17.5 billion in weekly net inflows last week according to Refinitiv Lipper. Corporate-high yield ETFs added a net of $3.7 billion, the second largest inflow on record, and municipal bond ETFs added a net of $737 million. There are currently 73 muni ETFs with $94 billion of assets, 15 of which were launched in the last two years. Altogether they have added a net of $19.9 billion in 2022. This is in contrast to conventional municipal bond mutual funds, which number 541 and have suffered $123 billion of outflows this year, causing assets under management to fall to $738 billion.

Number of New Issues Drop

Amid all the rate uncertainty and volatility as measured by the VIX up 41% this year, only 66 companies have gone public so far this year, down more than 80% from a year ago. Last week, many corporate and municipal issuers stood on the sidelines ahead of the Federal Open Market Committee meeting. Although the markets had been expecting a 75 basis point increase, participants paused until they had the opportunity to parse the Fed Chair’s comments for clues about next moves.  Municipal trading volume was down 18% from the past few weeks and only $11 billion of new investment grade corporate issues came to market.

Numbers and Yields in the Tax-Exempt Market

Last week in the $3.5 billion primary municipal market, the Arlington Higher Education Finance Corporation sold $29.1 million of non-rated revenue bonds due in 40 years for Essence Preparatory Public School in San Antonio that priced at par to yield 7.875%. The Colorado Educational and Cultural Facilities Authority brought an $18 million non-rated refunding and improvement bond financing for Fort Collins Montessori School due in 2029 which priced at par to yield 6.125%. And the Tempe Industrial Development Authority issued $3.9 million of non-rated educational facility revenue bonds for ACCEL, structured with one term bond due in 2048 priced at par to yield 6.50%, to finance the construction of a private school serving students with cognitive, behavioral and physical challenges.

Financing a Fifth Bob Hope Charter School in Texas

HJ Sims is in the market with the largest and highest rated charter school this week: a $26 million financing for The Hughen Center, the nonprofit operator of four Bob Hope charter schools with campuses in Port Arthur, Beaumont, and Baytown, Texas, serving Pre3K-12 students. The Bonds, rated AAA by Standard and Poor’s, are guaranteed by the Texas Permanent School Fund and are being issued by the City of Newark Higher Education Finance Corporation to help finance a fifth school. We invite you to contact your HJ Sims representative for more information on this and other offerings in this higher yield environment where we focus on an outcome of higher income for you.

Benchmark Numbers

Bond markets, along with banks and government offices, are closed on Friday in observance of Veterans Day. Equity markets are open as are all HJ Sims offices. You can count on us to help you sort through the numbers and help navigate current markets. At this writing, the 2-year Treasury yield at 4.66% has exceeded that of the 10-year (4.13%)  for 126 days and counting. Last week, the 3-month government yield exceeded the 10-year yield for 3 days, and at this writing it is 4.23%, ten basis points higher. The 12-month Treasury at 4.79% remains well above the 30-year at 4.26%. Five days into the penultimate trading month, the Dow is steady at 32,827. The S&P 500 at 3,806 is down 1.7%. The Nasdaq at 10,564 has lost 3.9%. The Russell 2000 at 1,809 has fallen 2%. Oil at $91.79 is up 6.1%, gold at $1,677 is 2.5% higher, silver at $20.85 has risen 8.8%, and Bitcoin at $20,702 is up 1.6%. Ten-year BAA corporate bonds yield 7.23%. And AAA rated general obligation municipal bond benchmarks stand at 3.17% for the 2-year, 3.34% for the 10-year, and 4.06% for the 30-year.

For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.

Exclusive Opportunities For Our Clients