Market Commentary: Pointing Fingers

by Gayl Mileszko

At a Washington news conference back in September 1982, President Reagan cited examples from the many calls and letters he was receiving from hard-working Americans who, through no fault of their own, were facing serious financial problems. The country had been in a recession since July 1981, and Reagan blamed it on long years of government mismanagement. He said that what hurt and angered him the most about the toll being taken on our citizens is that it didn’t have to be that way. “We could and should have solved or prevented these problems years ago by the simple exercise of responsibility in government,” he insisted. Later on, during his parry with the press corps, ABC White House Correspondent Sam Donaldson asked “Mr. President, in talking about the continuing recession tonight, you have blamed mistakes of the past and you’ve blamed the Congress. Does any of the blame belong to you?” The President replied, “Yes. Because for many years I was a Democrat.”

No Joke

Fingers are being pointed in every direction down in the nation’s capital and there is evidently not much humor to lighten the mood. Hard-working Americans once again, through no fault of their own, face serious financial problems as a result of the pandemic, inflation and various fiscal and monetary policies. Total consumer debt has risen past $17 trillion for the first time according to the New York Fed, and the share of current debt becoming delinquent has increased for the fifth straight quarter for most types of credit. U.S. consumer sentiment has slumped on worries that the political stalemate over raising the debt limit could trigger a recession. Inflation is high but slowing, yet the prices of staples like eggs, flour, sugar, cereal and pet food remain highly elevated. Fed officials are talking about keeping rates high or raising them higher through the end of the year. The Leading Economic Index has fallen for 13 straight months. The 30-year fixed rate mortgage stands at 7.01% and year-over-year home sales have fallen by 23.2%.

The 2023 Version of Uncertainty

The financial markets despise uncertainty but Wall Street as well as Main Street are immersed in it. Most expect that the nation’s leadership will eventually act responsibly to avoid the chaos associated with a default but, at this writing, the U.S. debt ceiling has not yet been lifted or suspended, and no agreement has been reached on proposed budget cuts or clawbacks. Both sides are dug in and admittedly remain far apart. With respect to rate hikes, the Dallas Fed President has signaled support for more, perhaps as soon as next month. Earlier this week, markets were rattled by the fake, AI-generated image of an explosion near the Pentagon and concerned by the mysterious loss of a 30-ton rail shipment of ammonium nitrate. Russia and China have just inked new memoranda of understanding on trade services and exports. Investors and depositors across the country are closely watching how the market absorbs the billions of dollars of bonds and other assets that are being liquidated from the portfolios of failed or weakened banks. Primary dealers are holding their breath during this week’s 10 Treasury auctions, the last to be held before the projected debt-ceiling X-date. On Monday, the 3-month T-bill sold at 5.25%, the highest yield since 2001.

Pressure Points

Quarterly corporate earnings are still rolling in and analysts are listening to CEO outlooks as a type of leading indicator. Apple once again beat expectations but reported that overall sales dropped for a second quarter in a row, partially due to parts shortages and macroeconomic challenges in digital advertising and mobile gaming. However, with a market capitalization of roughly $2.7 trillion, Apple is now worth about $100 billion more than the combined value of all 2,000 stocks comprising the Russell 2000. These past few weeks have also seen results from a number of major retailers. As if inflation-driven consumer cutbacks on discretionary spending were not enough, they are pointing to theft and organized crime as bringing major pressure on financial results. Target beat analyst estimates for the first quarter but estimated that profitability may be reduced by as much as $1.3 billion this year due to this “shrinkage”, quite a bit of which involves violent incidents involving its store associates. Walmart, which sees more than 100 million shoppers every week, also outperformed Street forecasts but echoes other retailers including BJ’s and TJX warning that rising store theft could force it to raise prices higher or close stores. The National Retail Federation estimates that retail shrink is a $100 billion problem for the industry.

Pointing Out The “Premise and Promise” of Senior Living Communities

Financial results for the last quarter are also being reported by nonprofit senior living communities. Here, some providers point to misconceptions about independent and assisted living as among the challenges to increasing occupancy and revenue. However, a new retirement survey by Age Wave and Edward Jones in partnership with The Harris Poll found that the oft-cited premise and promise of senior living communities is more valuable than ever. They found that three-quarters of today’s retirees have experienced a “curveball” or “cannonball” event that led to a course correction, such as a move into assisted living or a rehabilitation center. The vast majority indicated a willingness to make changes and be flexible and resilient in order to have a good life in terms of health, family, purpose, and finances. The Age Wave CEO recommended “test-driving” retirement activities and even retirement living ahead of time, suggesting a two-week trial stay in a community, having previously found that assisted and independent living residents who delayed their moves wished that they had moved in 10 years earlier.

Pre-K Education Enrollment Pointing Up

In the world of education, the National Institute for Early Education Research cited the pandemic as responsible for erasing a decade of progress in preschool enrollment. It fell in the Fall of 2020 for the first time in two decades and, at present, only 32% of 4-year-olds and 6% of 3-year-olds attend traditional or public charter schools. HJ Sims has underwritten several charter schools with pre-3K and pre-4K programs including Merritt Academy in New Haven, Michigan and the Bob Hope Schools in Texas, where we monitor enrollment trends that impact the success of elementary and secondary programs.

From the Corporate Bond Market Point of View

The corporate bond market points to the standoff in Washington as the reason for its recent spate of issuance. Investment grade companies have been jockeying for attention, looking to bolster liquidity and lock in rates ahead of potential market disruption. And, despite clarion cries warning of a looming wave of defaults by overleveraged firms, buyers have presented strong demand for the investment grade and high yield securities. By month-end, there will be an estimated $135 billion of primary market sales on the books. This includes sales by JP Morgan and Citigroup this week as well as the fourth largest debt issue on record last week: Pfizer’s $31 billion, eight series A rated deal to finance its purchase of Seagen, which met with a reported $85 billion of orders.

Municipal Bond Selling Points

Municipal bonds have sold off these past two weeks so yields have risen substantially and, in contrast to prior years, returns are down. May is traditionally the strongest month of the year for munis but nothing is normal right now. The Fed’s intensely aggressive series of rate hikes has caused the yield curve to partially invert since December 9. The 1-year AAA benchmark yield at 3.31% is currently higher than the 16-year yield at 3.28%. The 2-year yield at 3.15% has risen 46 basis points in May. The 10-year at 2.67% is 32 basis points higher. The 30-year at 3.62% is up 23 basis points. Technical factors as well as an unusually close tie to Treasury volatility led to the price adjustments. Last week’s calendar at $7.5 billion was higher than average and municipal bond funds saw a 14th week of net outflows. Bond offering par skyrocketed to $25.05 billion for only the third time in history and bids-wanted were elevated at over $1 billion a day. Banks have been reducing their holdings of tax-exempts to the point that there are now only 23 banks holding $1 billion or more. Month-to-date, investment grade muni indices are down about 1.05%, high yield index returns are down 0.78% and taxable munis have lost 2.50%

Tax-Exempt Price Points

Last week’s municipal slate included a $9.3 million non-rated California School Finance Authority sale for Orange County Educational Arts structured with a 2053 term bond that priced at par to yield 5.875%. The Utah Charter School Finance Authority brought a $9.6 million financing for Promontory School of expeditionary Learning that included a 2058 term bond rated Aa2 under the state charter school credit enhancement program and priced with a coupon of 4.50% to yield 4.66%. We have not seen a senior living transaction for several weeks but the pipeline is building and investors should have plenty of cash. Between maturing and called bonds, $37.4 billion will be returned to holders in June and, in addition, they will see $14.4 billion of interest payments. June is the heaviest month of the year for redemptions available for reinvestment, and more than $150 billion is expected to hit accounts this summer.

Starting Point

Bond markets close early on Friday ahead of this Memorial Day, largely in acknowledgement that traders and investors will be among the 42.3 million Americans expected to hit the road to join family and friends to celebrate high school and college graduations and the unofficial start of summer. We invite you to contact your HJ Sims representative ahead of the holiday to review your goals for the summer, your market outlook, and how your portfolio is positioned. We stand ready to assist with credit selection from among the billions of bonds being offered right now and to help analyze how to best meet your capital needs. Let us know how we may be of service. And join with us in the coming days as we honor the patriots, our fallen service members, who gave their lives to defend our Constitution and protect our many freedoms.

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

Exclusive Opportunities For Our Clients