Market Commentary: Waffles

by Gayl Mileszko

Punxsutawney Phil, the world-famous groundhog, appeared for the 138th time in Gobbler’s Knob on February 2 and delivered some sunshine to many parts of the nation weary of winter. An early spring sounds good to so many of us who are still plowing and shoveling, slipping and sliding, shivering and aching to shed our heavy coats and boots. It was the first in a series of signs that the season is changing. Another was the sight of the big trailer rigs being loaded with baseball gear: bats, balls, hats, helmets, jerseys, gloves, cleats, cups and water, all heading to southern climes for spring training which begins this week. Forget January first. Forget the Chinese New Year, the Year of the Dragon, that began on Saturday. Forget Tax Freedom Day, the point in the year when we have finally earned enough to cover the tab for our annual federal, state and local taxes.  The real new year begins with Major League Baseball’s Opening Day, on March 28, when anything is possible, dreams are within reach, hopes soar, and we are all inspired to swing for the fences.

The Waffle Iron

Inventors and entrepreneurs are perpetually inspired by the people around them, curious about the things they do, why they do them, how a new tool or device would improve their lives and fortunes. They see trends, pinpoint needs, and seize opportunities in ways that most of us do not. Nike co-founder Bill Bowerman was having breakfast with his wife  Barbara one morning in 1971 when it struck him that the Belgian waffle iron they were using would make an excellent mold for a running shoe, He was a track and field coach at the University of Oregon looking for ways to make sneakers lighter and faster for use on multiple surfaces, The shoe treads he then made by hand using that iron mold on his kitchen counter in Oregon led to the Nike Moon Shoe in 1972 and the Waffle Trainer in 1973. His creations were nothing short of revolutionary and he left a legacy of sneakers that have become global top sellers.  Nike reported $51.2 billion in sales in Fiscal Year 2023 and its Swoosh is ranked by Forbes as the 13th most valuable brand in the world. Wow. Imagine what YOU could dream up over breakfast tomorrow morning with your whisk and egg poacher!

Political Waffling

Waffles and waffling mean something different in Washington, DC.  Whether it involves border control, federal spending, inner city crime, aid to allies, painful inflation, or any other issue of concern to voters, candidates for office are bobbing and weaving. The House and Senate plan a several week recess after working hard on legislation that may go nowhere.  The Senate just passed on a $95 billion foreign aid package for Ukraine, Israel and Taiwan. The House passed a $79 billion bill extending child tax credits, certain business incentives, affordable housing, and disaster relief, among other supplemental items, and is now scheduled to take a second vote on the impeachment of the Homeland Secretary. The Secretary of State has been in the Middle East shuttling between a half dozen countries in response to the more than 170 attacks against US bases there. The Treasury Secretary has appeared before the banking committees and parry with Members questioning the soundness of the banking system, and the impact of artificial intelligence and digital assets on our financial system. The President’s communications team hems and haws over the very few public appearances he has scheduled and his performances therein.  The Supreme Court has been thrown a stack of hot waffles on matters involving Texas razor wire and presidential immunity. There are only 266 days until the elections in November. An awful lot can happen between now and then.

Waffle King

Between now and November there will be increasing pressure on the Federal Reserve Chair to continue providing the markets with clear policy guidance while dodging accusations of political interference that may appear to favor the incumbent president.  It is a tightrope that Federal Open Market Committee members have to walk every four years and makes the Chair into a Waffle King or Waffle Queen as he or she tries to keep everyone around the world focused on backward looking data based on estimates that are seasonally adjusted, annually benchmarked, and subsequently revised. For those who look beyond the headlines, the data are often head-scratching. We all know how political Washington is, so we figure that monthly announcements are pretty much always tilted in a way that makes the announcers and incumbents look good. The vapid Fedspeak nonetheless raises our blood pressure more quickly than chicken waffles and gravy. We just want to see lower prices and rates, and the sooner the better.    

Waffle House Menu

This is still early in campaign season. The last FOMC meeting delivered what the market expected but we did not like the service and gasped at the tab.  Members voted for a fourth pause in rate action, leaving the target at a 23-year high. The Fed funds rate is hovering in the range of 5.25% to 5.50%, impacting everything from gross interest on our national debt (now exceeding $1 trillion), to individual mortgage rates, which at 6% to 7% are at a two-decade high, to credit card debt, which at $1.13 trillion just set a new record, to auto loans, which are experiencing delinquency rates of 7.7%, a percentage not seen since the Great Recession. The press conference and Powell’s remarks on Sunday’s 60 Minutes newsmagazine quashed market hopes for the six rate cuts had we so optimistically baked into our forecasts and trading. This has led to what is likely the first of many periodic selloffs in stocks and bonds during the first half of 2024 as we start to take the Fed at its word and its dot plots. Both markets still appear to be overpriced, some still anticipate a recession, none are braced for the impact of an escalation of U.S. military action, one or more electoral surprises, aberrations or lags in economic data that may be covering for a recession, or perhaps a huge adjustment in consumer demand and sentiment coming after hefty holiday bills and tax season shocks. 

Waffles Stand Out in a World Full of Pancakes

During periods of uncertainty like this, financial advisers offer a wide range of guidance on holding the course, doubling down on skyrocketing tech stocks, jumping into the new Bitcoin ETFs, hedging risk with commodities such as oil or gold.  But some financial decisions hastily made at the start of the year are just like waffles – the first few don’t turn out so good. Your HJ Sims representative is here to help you navigate through pivotal and pivoting periods like this with solutions tailored to your needs and risk parameters. Many economists have dubbed 2024 “The Year of the Bond,” while others declare this “The Year of AI”. Fear of Missing Out motivates some of our clients, Fear of Imminent Losses paralyzes a few.  Fear of Becoming Obsolete, or You Only Live Once are the mantras of others. Depending on how inflation and employment indicators point, month by month, the Fed is moving to reduce rates by 75 basis points this year. That helps a bit, but not all that much to those looking to take on 30-year debt, buy groceries, or refinance loans coming due.  There are always Americans who thrive in every economic cycle, but polls show how unhappy we generally are with where America is headed. As the Sesame Street muppet Elmo recently learned after his innocent tweet asking how everyone is doing, there are loads of unhappy people, struggling no matter how high the major stock market indices register. The poor little furry fella got throttled on live TV just for suggesting that we reach out to ask our friends how they are doing and what we can do to help.  

Market Movers This Week

This is an in-between or pivot period where a majority of us are trying not to fall flat, hedging bets by boosting our money market fund holdings to $6 trillion all time highs, adding to liquid fixed income ETFs and mutual funds, and watching to see what is likely to develop in terms of key policies that will impact our lives going forward for the next four years.  Given the wars in Ukraine and Gaza, and all the events we place on our individual Walls of Worry, there is a lot to juggle but also many ways to outperform. This week, we are watching the level of participation in six Treasury auctions, following the remarks being made by 9 Federal Reserve officials out on the speaking circuit. Quarterly corporate earnings reports are coming out from major U.S. companies including Deere, Airbnb and Shopify. Ahead of the inflation data, municipal and corporate bond issuance paused. On Tuesday, the core consumer price index for January was released, and it altered many May rate cut bets by coming in above estimates.  Retail sales data will come out on Thursday and the producer price index and consumer sentiment on Friday.

Flipping the Calendar Pages

Taking a look back, we are still surprised that the municipal bond market did not experience the “January Effect” which typically sees strong investor demand fueled by unusually high principal and interest payments ($34.5 billion this time) against low volume (which was actually up 28% year over year), producing a rally to start the year.  For the third time in a decade, however, investors looked around and did not find any attention-grabbers or much relative value in tax=exempts. Although we saw nice inflows into mutual funds ($3.5 billion), stocks grabbed most of the attention and retail buyers shifted focus. The muni price increases and returns during the last two months of 2023 were among the best on record but simply did not carry over into the new year. When the dust settled on January 31, the Dow, S&P 500 and Nasdaq all finished more than one percent higher and oil prices increased six percent. The Treasury curve was still inverted with the 2-month yield at the peak. The 2-year closed at 4.20%, the 10-year at 3.91% and the 30-year at 4.16%.  Municipal yields rose in tandem with governments, up by more than 10 basis points: the 2-year AAA general obligation benchmark ended the month at 2.64%, the 10-year at 2.38%, and the 30-year at 3.52%. Tax-exempts outperformed governments and corporates: investment grade muni indices closed 0.2% lower but taxable munis returned +0.15%, non-rated munis +0.56%, 6.00% coupons +0.33% and high yield munis +0.98%.

Breakfast in San Diego

We are so excited to be less than a week away from the HJ Sims Late Winter Conference in San Diego. For the hundreds already registered to attend, there will be waffles for networking over breakfast, thought-provoking keynote addresses, more than a dozen workshops, off campus activities and a spectacular evening at Petco Park, home of the Padres. For those unable to attend this year, we will share conference highlights soon thereafter. Until then, enjoy Valentine’s Day, and have a Kansas City Chiefs kind of week.