Market Commentary: The Ninth Hole

Hope is slowly starting to fill the holes in every refrigerator, cash register, classroom, orchard, and airplane. As case counts decline and the prospects for treatment or vaccines increase, several states and counties are starting to re-open restaurants, hair salons, movie theaters, gyms, malls, construction sites, health care offices, churches, and parks, many of the places we once took for granted and have since missed dearly. Georgia. Tennessee. Alaska. Iowa. Colorado. Montana. Oklahoma. Utah. Rules are being lifted in phases in other areas for the first time six weeks while many urban areas remain in the early stages of planning. Since December, the COVID-19 pandemic has scorched the earth from Wuhan to Castro Barros, Argentina–inflicting pain and suffering on more than 3 million people, primarily seniors, as well as damage on both local and global economies. One German newspaper put together an itemized invoice for amounts due from China as a result of lost tourism and manufacturing. The State of Missouri is suing the People’s Republic for negligent and deceitful behavior that has led to deaths and losses that were otherwise preventable. In the end, individual states and nations will have to tend to their own wounds. Some parts of the world may take years to recover. Here, the amazing mosaic of sovereign states that comprise our federal republic will re-assemble sooner and stronger than ever.

There is a huge cost that we and other nations will bear, the size and extent yet to be calculated. We have yet to determine where we are in the process of impact and recovery. Are we halfway through, at the ninth hole of an eighteen hole course? Are we on the fairway or still in the rough? Assessing the course and its conditions is a full time job for many economists, industry lobbyists and state budget officers. The National Governors Association has proposed a federal rescue package of $500 billion, an amount that represents more than half of combined general fund spending for all states for the entire year. Members of Congress, mostly back in their home districts, are estimating the local needs. In effort to throw some cold water on the skyrocketing demands, and out of sheer amazement over the audacity of several looking to plug unfunded pension holes, the Senate Majority Leader Mitch McConnell suggested that what may be needed is to extend eligibility for filing bankruptcy to state governments. That gave the talking heads some new material for a few days. In the meantime, the Federal Reserve is issuing so much currency that it has actually become a mathematical impossibility for the Bureau of Engraving and Printing to keep up.

It has been hard to keep up with the directions of the financial markets as well. There are, as always, multiple forces and factors involved. One can explain negative oil prices, for instance, but it is nevertheless astonishing. There are many theories as to why stocks and municipal bond prices have been so closely correlated and why Treasury and municipal prices have diverged since March, but these are also all head-shakers. It has been hard for analysts to find the logic in many of the rallies and selloffs that we have seen in recent months. We attribute some to automated trading based on news flow, fund flows, speculation, and knee-jerk reactions. It seems that we need some new perspective every day on where we are and how we got here. So let us step back and take a look at where the markets have moved since the start of the year.

On the equity side, the Russell 2000 is down 386 points or 23%, the Dow has dropped 4,406 points or 15%, the S&P 500 has fallen 242 points or 2.70%, and the Nasdaq is off by 242 points, just under 3%. Compared with two years ago at this time, the Russell 2000 is down more than 17%, but the Dow is off by less than 1%, the S&P 500 is up about 8% and the Nasdaq has gained nearly 23%. With respect to key commodities, oil prices are down $48 a barrel or 79% since January, 92% since last April, and 81% from where they stood in 2018 at this time. Gold is up across the board with a gain of $190 an ounce of 12% this year and has gained 29% since last year and 29% from April of 2018.

On the bond side, yields are at historic lows. The 2-year Treasury yield has plunged 134 basis points to 0.22% over the past four months. The 10-year has fallen 125 basis points to 0.66% and the 30-year is down 113 basis points to 1.25%. In the past two years, the basis point drop in yields is even greater: 226 for the 2-year, 229 for the 10-year and 187 for the 30-year. Baa-rated corporate 10-year yields currently stand at 4.24% which is 54 basis points higher than where we opened 2020 but 66 basis points below where it stood two years ago. On the tax-exempt side, 2-year munis yield benchmarks at 0.90% have fallen 14 basis points this year and 10-year yields at 1.28% are down 16 basis points. The 30-year AAA general obligation bond yield is actually up 4 basis points to 2.13%. One year ago, muni yields stood at 1.57%, 1.87% and 2.55%, respectively. Two years ago, yields were between 97 and 123 basis points higher across the curve.

The municipal primary market has been quiet for two months. Some deals have fallen in to a black hole for now. Of the new and refunding issues successfully placed, the vast majority are high investment grade or insured. In the high yield sector this month, there were only a handful of deals. The South Carolina Jobs-Economic Development Authority sold $32. 6 million of non-rated revenue bonds for Avondale Senior Living. The single maturity in 2050 was priced at par to yield 4.00% and converts to 6.5% in one year. The Public Finance Authority of Wisconsin issued $24.8 million of non-rated charter school revenue bonds for the Utah Military Academy, structured with a 2030 term bond priced at 5.25% to yield 6.50%. The City of Minneapolis brought a $12.4 million BB-minus rated charter school lease revenue bond issue for KIPP North Star that included a 35-year maturity priced at 5.75% to yield 6.00%. The Michigan Finance Authority sold $7.8 million of BB rated refunding bonds for the Dr. Joseph F. Pollack Academic Center of Excellence that had a 2040 term maturity priced at par to yield 5.75%.

The lockdowns imposed as a result of the pandemic have produced financial stress on every sector of the market. Some are overpriced and some dramatically underpriced and all of this is due to lack of information. First quarter corporate earnings reports are illuminating conditions through March 31, but it will not be until late July that we will have data for damage done in April and May and June. To date, only about 350 municipal issuers and conduit borrowers within the universe of approximately 118,000 have publicly disclosed any details about how operations and expenses have been impacted. So investors are forced to speculate on the extent of illness, revenue loss, liquidity, resource needs, and aid being received from federal, state and other sources. As the month comes to a close, we encourage you to tap the many resources available to you through your HJ Sims advisor in the coming days as you explore opportunities and make informed investment decisions together.