Market Commentary: Oxygen

by Gayl Mileszko


When you boil it all down, there is only one thing that keeps the “United” in the United States of America. It supports the workings of our justice system, our electoral process, our educational institutions, and our financial markets. It is called confidence, and it is essential. Warren Buffet once said that confidence in markets and in institutions is a lot like oxygen. “When you have it, you don’t even think about it. It’s indispensable. You can go for years without thinking about it. But when it’s gone for five minutes, it’s the only thing to think about.”

Loss of Confidence

Some cracks have started to appear here and there in the confidence quotient of depositors, voters, alumni, consumers, investors, old Gen Z-ers, young Boomers, and law-abiding Americans across the nation. Earlier this year, depositors lost confidence in Silicon Valley Bank. There have since been four other bank failures, most recently the Citizens Bank of Iowa, a sign that, except for the top few megabanks, the banking system with all its unrealized losses is still quite vulnerable to fire sales, deposit delays, run risks, and closures. After seeing surveillance videos of ballot box stuffing, plenty of voters who did or did not go to the polls on November 7 question the integrity of the process. Thousands of Gen Z-ers and older Millennials priced out of the housing market have very bleak outlooks on their financial futures. Young Boomers are justifiably worried about the ability of elected officials to ensure the solvency of Social Security and Medicare. The majority of citizens are furious over policies permitting massive numbers of illegals to cross our southern border and receive more attention and services than our own veterans, seniors, poor, and disabled. And that is not all.

Loss of Oxygen

Millions are maddened by what they see as the selective prosecution of cases in courts across the country. All those living paycheck-to-paycheck, an estimated 58%, are angered by the artificial elevation of prices by producers of drugs and fuel, and outraged by shrinkflation and “greed-flation” at the grocery store.  Even if the Fed hits its target and inflation drops to 2%, prices will still increase every year and product sizes will never return to what they once were.  Alumni donors are revolting in response to college administrators tolerating anti-Semitic activity and violence on their campuses. And many investors feel increasingly fearful that any hope of a level playing field has been upended by years of Federal Reserve interventions, massive federal stimulus, now supersized Treasury borrowings, and artificial intelligence trading platforms. This explains in part why retail investors currently have $2.2 trillion of their assets in liquid money market funds. Even Warren Buffett is sitting on a cash pile totaling $157 billion. In short, some oxygen is lacking, and a lot of unhealthy skepticism is building.

Earning Investor Confidence

In this rapidly changing WorldScape, we as households, businesses, and service providers can only focus on the few things that we can control. In the financial sphere, delivering good results goes a long way toward earning the confidence of investors. So does transparency and accountability, effective communication, and timely and accurate reporting. Investors in charter schools like HJ Sims not only need to have confidence that state legislatures will provide fair funding levels to these public schools, but that school boards will actively work to promote their missions, values and visions, and that administrators will pay as much attention to finances as they do to curricula, testing, academic achievement, enrollment, student and teacher safety and well-being, and parental involvement. For investors in senior living and care facilities like HJ Sims, our confidence level is rooted in good governance, and encompasses all that is involved in meeting the needs of residents, their families, their staff, prospective residents, lenders and shareholders. Cultivating confidence across the spectrum of current and prospective investors is critical to any organization seeking to access capital, increase donations, attract talent, form business partnerships, and build and maintain a strong brand image and reputation.

Oxygen Tanks

The bond market, which serves as an essential provider of capital to both non-profit and for-profit enterprises, will be busy through year-end.  Only about 30 trading days remain.  We saw little primary market issuance during the week in which the Federal Open Market Committee met but last week saw about $12.6 billion on the calendar. Among recent sales includes a $33.2 million non-rated Florida Capital Projects Finance Authority financing for IDEA public charter schools structured with a single 2030 maturity priced in $100,000 denominations at par to yield 7.00%. The Florida Capital Trust Agency sold $24.4 million of non-rated bonds for Global Outreach Academy in Jacksonville that had a final maturity in 2033 that priced at par to yield 7.50%. And the Public Finance Authority brought $31.3 million of non-rated bonds for Socrates Academy in Matthews, North Carolina structured with a 10-year term bond that priced at par to yield 6.65%. In the senior living sector, the Lancaster County Hospital Authority in Pennsylvania brought a $26.9 million financing for Masonic Villages that featured 2038 term bonds priced with a coupon of 5.125% at a discount to yield 5.32%.

Holding Our Breath

This week, markets will be following six Treasury auctions, 18 Fed speakers, third quarter corporate earnings reports, and economic data releases on consumer and producer prices, retail sales, business inventories, and housing starts.  There is a big spotlight in Washington where federal funding runs out on Friday at midnight and the impeachment inquiry ramps up. The former president presents his defense in the New York civil fraud trial and the President meets with Xi Jinping in San Francisco. With escalating global debt, two major wars raging and dividing nations, terrorist threats, natural disasters, AI developments, cybercrime, and 7 more weeks remaining in the NFL season, there is no absence of potential market-moving headlines. 

Catching Our Breath

Both stocks and bonds have rallied during these first eight trading days of November. The consensus is that the economy, although weakening, is still strong, that there will be no more rate hikes, and that a recession is not imminent. Some of those who have been on the sidelines are tippy-toeing back into the market in the belief that the worst is over. They may be surprised, as further rate hikes are still on the table, the Fed is still rolling $95 billion off of its balance sheet every month, and the federal need to raise money via Treasury auctions to finance the government’s $1.7 trillion deficit may push prices down and yields up.  At this writing, the 6-month Treasury is still the highest yielding of all maturities at 5.45%, the 3-month is right behind at 5.40%, and the one-month at 5.34%. The benchmark 10-year yield at 4.65% has plummeted 28 basis points since the start of the month, and the 30-year at 4.76% has fallen 33 basis points. The BAA corporate index yield at 6.88% has dropped 31 basis points.  Bond market volatility is down by about 8% while the VIX as a measure of stock market volatility has fallen 22%. All the major stock indices show gains of between 2.6% and 7.4%. Gold and silver prices are down more than 2% while Bitcoin is up 8.2% and oil at $77.17 a barrel is down 4.8%. In the tax-exempt world, the 2-year AAA general obligation bond benchmark yield at 3.29% is down 38 basis points, the 10-year at 3.20% has fallen 41 basis points, and the 30-year at 4.22% has dropped 35 basis points. The municipal yield curve on the short end has been inverted for the past year, a new record. Retail trading in municipal bonds is setting new records as investors rush to grab higher yields and income and offset capital gains with capital losses.

Confidence in You

This week, HJ Sims will be at the 73rd annual California Association of Health Facilities convention and expo. Last week, we were a premier sponsor of the 2023 Leading Age National Conference in Chicago and applauded all who participated in the annual meeting of those in the aging services field. We were also in Anaheim for the California Charter Schools Development Center Conference. Events like these enable our bankers to spend time with our loyal clients and enhance relationships with many other owners, operators, lenders, developers, sponsors and leaders. In the meantime, our sales executives, traders, analysts, and operations teams actively work on behalf of our investing clients. We have faith and confidence in our securities markets and our customers, and we very much appreciate the confidence that you have in us. Reach out to your HJ Sims representative today to learn more about our current offerings and services.