Market Commentary: Smiles All Around

by Gayl Mileszko

Egaoiku is a growing Tokyo-based company that is blossoming in the wake of the grim, mask-worn days of the pandemic. It is attracting clients who say they need to learn how to smile again after being hidden behind N95 masks for three years. There are some twenty instructors at Egaoiku, which means “smile education”, that show students how to use their hands to stretch their mouths upward and outward, helping facial muscles back into long neglected positions. So many of us, especially those who lived alone, rarely smiled during the lockdowns. The loss of expressiveness was widespread.  Gravity and grief also produced many lasting frowns. Exercise coaches with mirrors are now helping young and old alike re-learn how to break into a grin without looking goofy or fake. Egaoiku charges $55 or 7,667 yen for one hour of smile tutoring.

Grin And Bear It

Some economists looking at the indicators believe that we are already in a recession. The Conference Board’s Leading Economic Index has declined for thirteen straight months. Consumer confidence in May fell to a six-month low.  There are thousands of high-profile layoffs. Corporate profits fell 5.1% in the first quarter and second quarter profit expectations are mainly pessimistic. Gross domestic income fell 2.3% in 1Q23 after a 3.3% decline in the last quarter of 2022. Credit card debt is rising, and there are long lines at food banks. Short Treasury yields have been higher than long term benchmarks for one full year. Inflation is not falling fast enough to help most Americans with grocery, housing, gas and utility bills. But others looking at the lagging indicators see a resilient economy and some believe that a recession can be avoided altogether. Unemployment is near record lows, there are 10.1 million job openings, and GDP has been positive for the last three quarters. Fluid, seemingly contradictory data, is what the Federal Open Market Committee relies upon to make its rate decisions. The latest consumer and producer price index data will be reported during their meeting next week and current futures trading indicates that there is a 77% probability that the Fed will pause and leave rates in the range of 5.00% to 5.25% at least until July 26.

When Bearish Eyes Are Smiling

The drama over the debt ceiling came to blessed end on June 3 when President Biden signed the Fiscal Responsibility Act into Public Law No. 118-5, suspending all limits through January of 2025. Cash balances at the Treasury had fallen below $23 billion on June 1 and will now be replenished with $1 trillion of bill, note and bond sales over the course of the coming months. Unhappy parties are already working to undo or amend several provisions of the compromise agreement but there was a global sigh of relief that America did not default on any payments.  Most attention quickly returned to other bricks in the Wall of Worry: uncertainty over rates, the war in Ukraine, OPEC+ decisions impacting our weekly gas prices, Chinese aggression, and the impact that the coming flood of Treasuries will have on banks and world markets. Fitch Ratings is one of the few whose public focus remains on “governance shortcomings” in the United States and the outlook for fiscal and debt trajectories.  They have had our sovereign rating on negative watch since May 24 and will decide what to do about it sometime in the third quarter.

Smile For The Camera

This week, Federal Reserve officials are in a quiet period ahead of next week’s meeting, so there will be none of the crosstalk that investors find so vexing. Saudi Arabia took the spotlight during the 23-member OPEC+ meeting on Sunday when they announced a production cut of one million barrels per day starting in July. Economic data is very light this week and the Treasury is only holding six auctions.  We are coming close to the end of corporate earnings season, but expect to hear results and forecasts from Campbell’s, Smucker’s, GameStop, DocuSign and Signet Jewelers, the world’s largest retailer of diamond jewelry. Money Market Fund managers are among the busiest in the workforce as weekly inflows have taken combined assets to a record high $5.42 trillion. And the busy 2024 presidential campaign season heats up this week with announcements from former Vice President Mike Pence, former Governor Chris Christie, and incumbent governor Doug Burgum.

Smile On Your Brother

Investors gave a lot of love to technology stocks in May and, on the artificial intelligence mania wave that boosted Nvidia’s market capitalization up over $1 trillion, the Nasdaq closed up 5.8% higher than April, or 709 points. The S&P 500 ended basically flat at 4,179, but the Russell fell more than one percent to 1,749 and the Dow dropped 1,189 points to end the month at 32,908. It was a lousy month for many commodities and bonds. Oil prices fell 11.3% to $68.09, silver fell 6% to $23.48, and Bitcoin dropped 8% to $26,941. The highest yielding Treasury was the 6-month bill at 5.41%, 41 basis points higher. The 2-year yield rose 40 basis points to 4.47%, the 10-year yield increased by 22 basis points to 3.64% and the 30-year yield climbed 19 basis points to finish the month at 3.86%. Municipal bonds sold off as well. The one year yield at 3.24% ended higher than the 16-year maturity at 3.21%.  The 2-year AAA general obligation benchmark at 3.08% rose 39 basis points, the 10-year yield at 2.65% was up 30 basis points, and the 30-year yield at 3.55% closed 16 basis points higher.

May Returns Bring No Smiles

Except for the Nasdaq, up 5.93% in May, and the S&P 500 which returned 0.43%, it was a down month for most assets. Treasury indices lost 1.23%, investment grade corporate bonds dropped 1.33%, and high yield corporate bonds fell 0.95%. High yield corporate issuance totaled $22.2 billion during the month, bringing the total for the year to $79.9 billion.  Investment grade corporate sales totaled $149.4 billion bringing year-to-date issuance to $610 billion.   High yield municipal bonds lost 0.59% but are still up 1.70% in 2023. Investment grade munis fell 0.77%, non-rated bonds lost 0.24%, and taxable munis dropped 1.82%. Municipal bond volume at $26 billion fell 29% from the 2022 level, with taxable sales at $1.16 billion down 82% from a year ago.

Service With A Smile

As May drew to a close and the last month of the quarter began, we saw little activity in the charter school and senior living sectors in large part due to the protracted negotiations in Washington. We applaud our clients and colleagues in the American Health Care Association and National Center for Assisted Living participating in the 2023 Congressional Briefing in Washington this week. And we celebrate the achievements of the many charter schools we have helped to grow and expand in acknowledgment of the report just released from the Stanford University Center for Research on Education Outcomes that found that charter school students make more average progress in math and English than their counterparts in traditional public schools. Among the most recent charter schools to come to market was Compass Academy in Odessa, Texas. They sold  $11.6 million of PSF-guaranteed, AAA rated bonds through the New Hope Higher Education Finance Corporation. The bonds with an underlying rating of Baa3 had a final maturity in 2053 priced with a coupon of 4.25% to yield 4.38%

The Whole World Smiles With You

June brings the start of summer, and many happy occasions for reunions with family and friends. The HJ Sims family extends best wishes to all those graduating in the Class of 2023, all the newlyweds starting new lives together, and all the great and grand fathers of every generation. No matter whether you are just learning how to save, investing for a major life event, in need of an outside portfolio review, seeking more tax-exempt income, or weighing borrowing options, we invite you to contact your HJ Sims representative.

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