By Gayl Mileszko
The Other Shoe
Many New York tenements built in the late 19th century were narrow, low-rise buildings, extremely crowded and poorly constructed. A family of 10 might have lived in a 325 square foot space. The apartments typically featured rooms stacked right on top of each other, and there was basically no privacy. When one upstairs neighbor would come home from work, tenants downstairs could clearly hear the thud of a boot as it was taken off and being dropped on the floor. Eyes would inevitably turn up to the ceiling in anticipation of another thump from the second boot. Eyes would roll as this would be repeated multiple times day and night. The phrase “waiting for the other shoe to drop” has since been used whenever we await something inevitable, usually something undesirable, whether it is once a day, once a year, or once in a blue moon.
Tough as Shoe Leather
Size 12 shoes dropped in Bethel, Pennsylvania on Saturday as former President Trump was tackled and shielded by six Secret Service agents on the stage of a campaign event seconds after he was shot. The resilient candidate for re-election, and the nation as a whole, managed to escape a nightmare by about an eighth of an inch. He also lost the shoes he repeatedly asked for. Protective security has been stepped up as a result of another potential assassination threat – this time by Iran – and the national special security event underway in Milwaukee. The Republican Party’s national convention began on Monday and the crowd of thousands at Fiserve Forum gave him a thunderous ovation when he entered the arena that night with a bandage on his right ear and emotion plain on his face.
Really Big Shoe in Milwaukee
Balloons will drop and confetti will fly on Thursday night when Donald Trump accepts the party’s nomination. His choice of a running mate, Senator JD Vance of Ohio, speaks on Wednesday night after his formal acceptance of the nomination. Political junkies will have to wait for their next fix until Sunday – if there is an early, virtual roll call to nominate Joe Biden – or another 33 days for the start of the Democratic National Convention in Chicago. In the meantime, Secret Service officials will be subjected to a barrage of interrogations, and financial market analysts will have plenty of time to run their scenarios on the impact of one victory versus the other. At the moment, the market odds favor the survivor of the assassination attempt, so the old “Trump Trade” from 2016 is back.
If the Shoe Fits
Outside of political prediction markets such as PredictIt and Polymarket, most market wagers on the outcome of the presidential race are being made in currencies and bonds. But across all assets, the choices are to invest or divest, and the major factors involve inflation and tax, regulatory, tariff, immigration, and energy policies. Eight years ago, after Trump’s surprise victory, stocks took off, Treasury yields spiked, and the dollar soared. This time, his win would not shock anyone. This campaign has already had quite a few shoes drop, so it is too early to know anything for sure. But most investor concern involves the potential inflationary effect of further tax cuts and higher tariffs, leading to highly undesirable Fed rate increases, a weaker dollar, and an ugly trade war. Those who favor the reversal of numerous Biden Administration regulations see plenty of potential in the bank, health, oil, private prison, gun, and crypto sectors. And woe to those invested in renewable energy, electric vehicles, high tech, Mexico, and China. The composition of the Congress will matter greatly to the success or failure of the Trump or Biden agenda.
Dancing Shoes
The municipal market generally follows Treasuries. However, given the size of the national deficit and debt, and the coming expiration of the 2017 tax cuts, revenue and spending decisions may put tax exemption back on the table no matter who wins. Higher tax brackets or the grandfathering of outstanding tax-exempt bonds if exemption is eliminated would make munis even more appealing than they are at present. The two markets may not correlate. Borrowers are acutely aware of what happened with advance refundings, so industry lobbyists are already hard at work with staff on the Hill and friendly Members of Congress to fend off the unthinkable. Investors can position for any number of scenarios but no one will truly know what the landscape will be until election results are in.
Getting Off on the Right Foot
While monitoring developments in various key campaigns, most traders are still focused on the Federal Reserve and its next policy meetings this month and in September. Futures currently reflect the expectation for 25 basis point cuts in September, November and December. Some strategists look at the weakening economic data and hold onto the possibility of a first cut on July 31, but they are in the minority. Attention at the moment is placed on the outcomes of the 8 Treasury auctions this week, the rate action taken by the European Central Bank, and remarks made by 10 Fed speakers ahead of next week’s quiet period. Other potential market movers would include any corporate earnings surprises, further weakening in data releases including retail sales, housing starts and leading indicators, and unexpected outcomes from the China-Russia joint naval exercise or the Chinese Communist Party’s Third Plenum.
Running Shoes
July has been a good month for borrowers and buyers. At this writing, the Dow is up 4.9% after closing at a record high on Tuesday. The S&P 500 is up 2.6%, and just set an all-time high for the 38th time this year. The Nasdaq set a new record last week and has gained 1.9% so far this month. Morgan Stanley, Goldman Sachs, and Citi are among the banks warning of the likelihood of a 10% correction in the stock market, but so far, the rally shows no sign of fading. Oil prices are up 0.9%, gold is 6% higher, and Bitcoin has gained 6.8%. In the bond market, the 2-year Treasury at 4.46% has fallen 29 basis points. The 10-year at 4.18% is down 21 basis points. The 30-year at 4.39% has fallen 16 basis points. The 10-year BAA corporate bond index at 5.83% has dropped 14 basis points, high yield corporate yields have dropped to a 2024 low, and borrowers have lined up for $30 billion of investment grade corporate issuance this week alone. In the tax-exempt market, volume is up more than 30% from last year. Investors added a net of $775 million to muni mutual and exchange traded funds last week. They expect another $11.8 billion of principal and interest on top of the $38 billion they received on July 1. High yield munis, the star of the bond market, boasts of 5.28% returns this year. The 2-year AAA general obligation benchmark at 2.88% has fallen 23 basis points this month alone. The 10-year muni at 2.78% is down 6 basis points. And the 30-year muni yield at 3.66% has dropped 6 basis points in July.
Big Shoes to Fill
The municipal bond calendar has been heavier than usual. Last week saw $9.7 billion of issuance. This included a $76.1 million BBB+ rated North Carolina Medical Care Commission sale for the Carolina Meadows community in Chapel Hill. The financing was structured with a 2054 final maturity that priced with a coupon of 5.25% to yield 4.60%. The City of Morris, Minnesota brought a $10.7 million non-rated deal for Farmington Health Services that included a 30-year term bond priced at 6.10% to yield 6.15%. In the charter school sector, the Maricopa County Industrial Development Authority had a $64.6 million BBB-minus rated refunding for Legacy Traditional School which featured a 20-year term bond priced at 4.25% to yield 4.55%. And the Utah Charter School Authority issued $9.06 million of BB rated sustainable bonds for Athenian e-Academy in American Fork, due in 2058 and priced at 6.50% to yield 6.75%. This week’s calendar is estimated at $13 billion and both borrowers and bond buyers hope that the rally continues.
We are a month into the summer and more than two weeks into the third quarter. It is the perfect time to reach out to your HJ Sims representative to review your portfolio, your strategy, your needs, and your goals for the rest of the year. When developing our recommendations, we always put ourselves in your shoes first.