By Gayl Mileszko
Silver Bells
The excitement is building as the special holidays draw near, the most wonderful time of the year. But as we exchange warm greetings and bespoke gifts with family, friends, and colleagues, and as we reflect upon the reason for the season, we cannot help but keep one eye on the stunning developments on the world stage, drones swarming over our neighborhoods, and the latest herky-jerky moves in the U.S. financial markets. Understandably, many of us have a fear of missing out on the surge in crypto prices, the artificial intelligence revolution, and the series of record-breaking rises in stock market indices. However, we keep getting presented with conflicting economic data which both point to growth and signal recession as well as pernicious inflation. Valuations are unnervingly rich. Comments made by monetary policymakers are frequently unnerve us. There is much uncertainty over the impact of all the new fiscal policies percolating in Washington. And we have growing concerns over the threats posed to all major economies by the global debt glut. So, there are plenty of reasons to pause right now so that we can closely examine the whole array of canapés on our silver holiday platters.
Quicksilver
It has been reported that about 15% of Americans own some form of cryptocurrency. The other 85%, are either more skeptical on the innate value or unable to afford speculative losses. Investors have plenty of alternative investment options that are far less volatile. Money market funds hold a staggering $6.77 trillion of assets, with $2.7 trillion in the hands of retail. The higher yielding funds are paying 4.70% taxable or 2.48% tax-exempt. One month Treasury bills yield 4.31%, one-year notes yield 4.32% and 10-year Treasuries yield 4.53%. One-year AAA municipal bonds yield 2.71%, more than 4-year maturities at present. Several haven commodities have proven to be quite profitable sectors – gold and silver each have year-to-date returns of 28%. Please do not hesitate to contact your HJS representative to discuss appropriate individual and corporate investment options to help meet your goals.
Silver Tongues
This week, the Federal Reserve cut rates 25 basis points, as expected. Some strategists tell us to celebrate this moment as it may be quite a while until the next action on easing is taken. Indeed, Chair Powell shook markets on Wednesday when he said that the Fed was penciling in two rate cuts for 2025. Futures trading has assumed this as a base case for months, but the markets did not like to hear and see it so plainly stated. Warning bells rung. Stocks and bonds, gold and Bitcoin, all sold off. Probabilities for the target rate now lean in the direction of only one quarter point reduction in May. We note that these last three cuts totaling 1% have really had no impact on our day-to-day lives, certainly not our holiday spending. Retail spending in November beat expectations, rising 0.7% over October. Black Friday set new records, up 3.4% over 2023. Cyber Monday saw $13.3 billion of online sales. But the indicators that really matter — mortgage rates and foreclosures, credit card rates and delinquencies, and stubborn inflation — make our lives more challenging and, now, snail-paced relief is the most we can expect from our central bank. Instead, the Fed is apparently creating some new politically-edged models to brace for higher inflation fueled by tariffs, tax cuts and deportations. Will any of this bring down the price of eggs, up 37.5% from last year, or car insurance, 12.7% higher? The silver tongues of the central bank tell us that we should not expect to see inflation fall to 2% until 2027, although economic activity “continues to expand at a solid pace”, and the rising unemployment rate nevertheless remains low. We are once again informed that policy will be adjusted if and when risks emerge, all hinging on what lies ahead on the fiscal, labor, economic and global fronts.
Silver Lining in Washington?
In the nation’s capital, these are the final days of the 118th Congress, a lame duck session. As is typical for this time of year, lawmakers are late in trying to hammer out the details of a short-term extension to get us past the holidays and new swearings-in. The latest effort, a 1,547-page Christmas tree under which there was something for everyone, is now headed to the dustbin. The incoming Administration is anxious to move quickly on rational spending levels and debt limits, nominations, tax and immigration legislation, deregulation, and government restructuring. Until Wednesday, markets had responded with a Santa Claus rally mostly attributed to the “Trump mandate” to shrink government and unleash the animal spirits driving American innovation and productivity. Consumer sentiment, although well below the highs of January 2000, has been climbing since the GOP convention in July. Post Election Day, the NFIB’s Small Business Optimism gauge saw its biggest monthly jump since 1980. As with the 2017 tax reform debate, however, municipal bond market participants have concerns about how tax-exemption will fare on the chopping blocks of the budget, tax and appropriations committees. We hope that these concerns are inflated. Amid all our nation’s competing priorities, we continue to encourage our nonprofits to help educate our elected representatives on how critical the exemption is to essential infrastructure finance in every congressional district and state.
Silver Spoons
Despite Wednesday afternoon’s violent reaction to Fed’s inflation worries and the newly revised rate cut timetable, major stock indices have registered another fantastic year. In the face of a daily onslaught of unsettling domestic and international news, including the mostly unprecedented twists and turns in U.S. elections, assassination attempts, courtroom drama, border breaches, new AI applications, shifting conditions in the Middle East and Eastern Europe, in France, Germany and Canada, the Dow and the Russell 2000 had risen more than 15% in 2024. As of the close on Tuesday, the S&P 500 was up nearly 27% and the Nasdaq a whopping 34%. Bitcoin, the biggest winner this year, is returning about 157%, surpassing $100,000 in value now for the seventh day.
Bond market indices have also all shown positive returns in 2024, with convertibles recently up 14.7% and leveraged loans up 8.9%. Before Wednesday’s market swing, high yield corporates were 8.8% higher, and preferreds were up 7.9%. High grade corporates were returning 3.76% and Treasuries were up 1.18%. The 2-year Treasury yield at 4.24% was flat on the year, the 10-year at 4.39% was 52 basis points higher and the 30-year at 4.58% was up 56 basis points. In the municipal bond index world, high yield tax-exempts have taken the crown with returns of +8.23%, trailed by non-rated munis at +6.69%. High grade muni performance registered at +2.18%, and taxable munis at +$1.5%. The U.S. Treasury has borrowed $2 trillion so far in 2024, bringing the total federal debt total over $36 trillion debt. Investment grade corporations have sold $1.5 trillion this year, while high yield corporate bond issuance currently exceeds $279 billion. Municipal issuance will likely come in at a record $500 billion this year, as borrowers faced the end to federal stimulus, addressed major pandemic-related backlogs in capital expenditures, and took advantage of rates to refinance debt dating back to 2014. Municipal bond mutual funds and exchange traded funds have added a net of $42 billion this year, with retail investors – the market propellant one again — favoring long-term and high yield sectors. Tax-exempt money market fund balances now total $133.2 billion. Two-year AAA muni benchmark yields at 2.65% are now up 13 basis points in 2024, 10-year yields at 2.93% have increased by 65 basis points, and 30-year yields at 3.79% are 37 basis points higher.
Silver Screen Stars
Last week, HJ Sims came to market with a $149 million refunding and new money financing for the BBB rated Lifespace Communities Obligated Group of 12 communities. Bonds were issued through the Iowa Finance Authority and we structured the transaction with six term bonds, including a tax-exempt final maturity in 2059 priced with a coupon of 5.125% to yield 5.20%, and $20 million of taxable bonds with a maximum yield of 7.25% due in 2035, priced at par. Amid some unusual market volatility, we attracted investments from individual clients as well as from 19 institutional accounts. We welcome inquiries on this transaction as well as on our recent $102.9 million financing for The Brethren Home and Cross Keys Village through Pennsylvania’s Adams County General Authority, our $29.4 million non-rated drawdown financing for John Hancock Charter School in Pleasant Grove, Utah, and our $455 million California Public Finance Authority sale for The James’s 350-unit rental independent living, assisted living and memory care community in Irvine.
We will be back on this page in early January to highlight our many exciting plans for financing a wide range of borrowers including senior living and care, charter schools, private schools, hospitals, and several other non-profits and for-profits. Let us together take a fresh look at the some of the market-moving trends that carry us into 2025. But, for now, we at HJ Sims hope that these next two weeks will be joyful and peaceful ones for you and your families. Although our offices will be staffed to help meet your year-end needs, our team is grateful for this very special opportunity to count our many blessings, ring silver bells with loved ones, and count down to a new year full of good health and prosperity for all.