Market Commentary: Pick and Roll

by Gayl Mileszko

High school basketball, like much of life, is not for the faint-hearted. The competition between the teenaged players, and among those who cheer them on, can become extremely intense. Fear, pride, anger, jealousy, hormones or fatigue can bring out the primal beast in the smallest of point guards, the shiest of cheerleaders, the meekest of parents. There is always plenty of friendly banter amid the rivalry. But it can heat up. Trash Talk. Teases. Insults. Jostling. Pushing. Vulgarities. Flying elbows. Rib-pokes. Referees will eject a parent for extreme heckling, a coach who goes berserk, a player who is unsportsmanlike, or even an entire student section for abusive language. But most of the noise and motion is merely intended to distract the opponent, to psych them out, to cause them to miss a shot, to foul out. Fans in the stands clapping, pounding on the bleacher seats and chanting can literally shake the walls of a gymnasium and change the course of a game. And there is nothing more exhilarating for a team headed toward victory as the clock ticks down and the home crowd en masse shouts and stomps in rhythm to taunt the losers, “It’s All Over! …It’s All Over!”

It’s Not Quite Over

It was with a pen, not a buzzer, a 21-gun salute, a balloon drop, fireworks, or confetti parade, that the President signed congressional resolution H.J. Res. 7, ending the COVID national emergency on Monday. He signed the bill behind closed doors without ceremony, bringing no new attention to the execrable pandemic that disrupted and devastated virtually every life on the planet over the course of the last three years. But not all the emergency measures are over. Here, the Public Health Emergency will wind down on May 11 and the mortgage forbearance program is set to end on May 31. Telehealth flexibilities have been extended for two years. It is currently unclear how Title 42 immigration policy and the Administration’s student debt forgiveness plan are impacted. And, in the meantime, COVID rages on in its latest dominant variant, XBB.1.5.

Statistics We Never Hope to See Again

From the moment the pandemic was declared, we all longed for a swift end. It is impossible to forget the extreme measures that were adopted by many nations to try and stop the spread and how that trickled down to our homes, schools, businesses, care facilities, recreational, entertainment and travel options. The world was united in prayer for those afflicted, and health care workers wearing plastic garbage bags and homemade masks became our greatest heroes. Many of us watched with alarm the growing number of global cases and deaths recorded daily by region, country, county on the Johns Hopkins University of Medicine COVID-19 map. The dedicated statisticians there quietly but finally stopped collecting data on March 10, 2023 but the World Health Organization is still reporting and the numbers are still numbing: 762.2 million recorded cases, 6.89 million cumulative deaths. In the U.S., the Centers for Disease Control and Prevention continues for now to report daily hospital admissions and weekly cases and deaths.

Loss of Faith in Those Calling the Shots

It may take decades to finally reveal the origin of the virus, and we may never know. We will never know how many of the 1,127,104 deaths our government currently attributes to COVID were in fact due to COVID. We will probably never know how many lives were truly saved by, or deaths and disabilities actually attributed to, the 13+ billion of inoculations administered. We will eventually come to a consensus on those public officials who deserve to be ejected but, given the great political divide, it is nearly impossible to believe that there will be any kind of objective assessment of federal, state and local policy actions taken since 2020 – if for no other reason than to better prepare us for the next event whether it be in one month, one generation, or a hundred years from now. At a very bare minimum, we need to refocus our attention and funding on protecting our growing senior population and educating our young.

Rebounding

As a result of our own household, business and community experiences, many of us have lost a significant amount of faith in our elected and appointed officials as well as the unelected folks who had been afforded such extraordinary powers to impact our lives and livelihoods since the national emergency was declared on March 13, 2020.  All we know firsthand is that pandemic shutdowns had a major adverse impact on the social and academic progress of our precious youth and the overall quality and extent of life for so many of our frail elders. Fortunately, due to yeoman’s efforts on the part of those committed to private, charter and traditional public schoolchildren, to senior living residents, and to all those in need of medical care, day-to-day life has dramatically improved since the darkest days. But we have rushed to put the last three years behind us and sadly stopped cheering for the heroes and the funding they need to continue their essential work.

Scorekeeping

No crystal ball exists but there are companies, investors, speculators and others who have been placing their bets on COVID’s costs and recoveries for more than three years. Variables changed with the Russian invasion of Ukraine, supply shortages, sky-high inflation, unprecedented fiscal stimulus, central bank interventions and the current bank crisis. For the S&P 500, the pandemic low point was reached on March 23, 2020 but its index at 4,109 is up 27% since December 31, 2019. The Dow, currently at 33,586 is up 17%, and the Nasdaq at 12,084 has gained 34%. Oil prices at $79.74 are 30% higher, gold at $1,989 is 30% higher, silver at $24.79 is up 60% and, in spite of all the extreme volatility, Bitcoin prices, now at $29,062, have risen 306%.

Goal Tending

In the bond markets, yields are up and prices have come down across the board amid volatility as measured by the MOVE Index that has risen from 58 in December of 2019 to 143 today. The Fed had its target rate at 1.50% when the pandemic was declared. The new goal quickly became fostering financial and monetary stability, and the rate dropped to 0% by March 15, 2020 and stayed here there for two straight years. Since March 16, 2022 we have seen nine successive rate hikes taking the target to 4.75% at present. Two year Treasury yields have risen to 4.00% and two-year AAA rated municipal general obligation bond yields are now at 2.26%. At this writing, the highest yielding Treasury is the 3-month at 5.06%, reflecting an upside down condition that has persisted since last July when bills with the shortest maturities began to offer more yield than even 30-year bonds. In the municipal market, the yield curve has been inverted since December; the top rated one-year general obligation benchmark yields more than the next 12 maturities.

Scrimmage

The stock and bond markets seem to be divided on their outlooks for rates and the economy going forward. Many economists forecast a recession this year, while some believe we will see a soft landing. It is an extremely unsettling time for most households. Taxes due. Talk of nuclear weapons. Inflation said to be running at 5%, but shelter, utilities and transportation running much, much higher year-over-year. Fifty eight percent are living paycheck-to-paycheck. For those with some cash, it is unclear what to do with it. The banking crisis that began with the failures of FTX and SVB is still evolving and the soundness of many institutions in question. With bank rates on demand deposits still in the range of 0.5%, and money market funds paying 4%, 3 months Treasuries at 4.97%, and 6 month Treasuries at 4.99%, it is no wonder that those with checking and savings accounts are rapidly moving funds away from community, regional and major banks. While waiting for more stable conditions which many envision as a Fed pause followed by a steady series of rate cuts, investors are parking record amounts in money market funds totaling $5.24 trillion. The trend does not bode well for small and mid-sized institutions or those small businesses in communities across the country who rely upon these banks for loans.

Fed Jump Ball

This marks the first major week of quarterly corporate earnings, with 415 firms reporting. It is expected that earnings per share will fall seven percent from last year, and every analyst is tuned in to projections for future quarters. Traders are monitoring developments off the shore of Taiwan, reverberations from the Discord intelligence leaks, fallout from last week’s OPEC+ production cut announcement, the latest in a series of corporate layoffs, and a fourth consecutive week of declines in the US dollar. Economic data includes the significant consumer and producer price indices, minutes from the last Federal Open Market Committee meeting, retail sales, and consumer sentiment. There are eight Treasury auctions and five Federal officials on the speaker circuit. Even though the next policy meeting is not until May 2 and 3, futures traders are active in pointing to probabilities that do not mesh with the Chairman’s forward guidance or the dot plot indications. At this writing, traders assign a 71% chance of a 25 basis point hike to be followed by cuts in July, September, and December, ending the year with a target rate of 4.25% with a series of further cuts such that 2024 finishes at 3.00%.

The Municipal Zone

Bondholders have been net buyers of munis for the past three weeks, and municipal bonds have performed extremely well. In the past week alone, long dated maturities gained 1.57%, non-rated munis were up 1.54%, and taxable munis had a 1.41% return. Conventional municipal bond mutual funds lost $197 million of assets in the most recent week, but muni ETFs added $305 million and high yield funds took in a net of $148 million. This week’s primary calendar totals about $5.8 billion and features a $11.4 million California School Finance Authority sustainability bond sale for BBB-minus rated Camino Nuevo Charter Academy. Last week’s slate totaled $6.1 billion and included a $30 million Build NYC Resource Corporation issue for BBB-minus rated Classical Charter Schools last week structured with a 2058 maturity priced at 4.75% to yield 4.85%. Supply and demand are a bit mismatched this month with $12.5 billion of redemptions expected and $10.6 billion of sales planned. The market is active with more than $1 billion par of daily bids-wanted and $20 billion of offering par. Whether your investment strategy is defensive, crossover, or full court press right now, your HJ Sims representative is ready to assist, and proud to be on your team.

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

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