Market Commentary: Weighty Matters

by Gayl Mileszko

Weighty Matters

Americans are obsessed with weight loss. We spend some $78 billion a year on diet plans, clinics, food substitutes and supplements, plus another $29 billion or so on gym memberships.  Many of us end up where we started – sometimes in worse shape and lighter only in the wallet. Whether we can afford it or not, we shell out an estimated $63 billion on liposuction and other cosmetic surgeries to get closer to those ideal body images we see online, on stage, on TV and in magazines.  Our melting pot of cultures places such a high value on thinness but we are vexed by a rather unhealthy relationship with food.  We of every age celebrate happy occasions with bad foods that make us feel good — and then very guilty. Our doctors provide us with alphabetical lists of healthy foods, but we start grimacing at Alfalfa and immediately begin to crave Ziti and Zeppole. If it is good for us, we think, it must have no taste and bring no joy. If it comes in a cardboard box with calories and preservatives enumerated, we might prefer to go hungry or wait and binge on a box of chocolates or pizza pie. It should come as no surprise that we, the richest country in the world, also suffer from the highest percentage of eating disorders. 

Heavy Losses

More than two thirds of American adults are overweight (with a body mass index of 25 to 29.9) or obese (with a BMI of 30 or higher). The airwaves are full of proposed solutions that include GOLO, Atkins, Jenny Craig, Weight Watchers, Noom, and Nutrisystem.  Some wonder drugs peddled in the 1990s have left takers with terrible long-term side effects, but new, untested products are regularly being rolled out. New medications with semaglutide bases intended for other purposes are being touted as solutions for long-term weight management: Ozempic, Mounjaro, and Wegovy.  For those who seek help away from physicians, neighborhood pharmacies have aisles dedicated to “fat burners”, appetite control and metabolism-boosting supplements.

Shedding Pills if Not Pounds

Half-empty bottles of Hydroxy cut litter numerous medicine cabinets, desk drawers, pocketbooks, and closet shelves along with other pills prescribed for conditions once deemed serious. Pill hoarding is common. We forget that we have them or want to save them in case symptoms return and we can avoid another trip to the doctor. But, in the worst-case scenarios, children, other family members or visitors can find, take, consume, inject, or sell them to others. If they get into the wrong hands, poisoning and overdosing can result. The wrong response is to keep them, toss them into the household trash or flush them down the toilet, only to contaminate groundwater and vex waste treatment plants. Fall is a good time for all of us to collect and dispose of unwanted sharps and medications at Drug Enforcement Administration “take-back”-approved sites which vary by hometown but may include local police departments, solid waste authority recycling centers, pharmacies, and/or hospitals.

Fat and Slim Chances

Worst case scenarios are played out every day by risk managers in law enforcement, homeland security, school administration and senior living operations roles. Wall Street traders comb through the daily news for signs of possible “black swans”, major disruptive events ranging from a widespread labor strike to a pandemic, producing vast uncertainty and new opportunities. They set the odds for millions of possible outcomes. Artificial Intelligence is driving countless numbers of new algorithmic predictors, but investors will always look to real life industry heavyweights for their views, predictions and actions.  Warren Buffett, for example, has created headlines with major purchases of U.S. Treasury bills and three homebuilder stocks. Last week, Elon Musk said Tesla could have made a significant advance in artificial general intelligence and that his full self-driving car “has a mind.” Two weeks ago, Jamie Dimon told us that the surprising Fitch downgrade of the sovereign credit of the United States “doesn’t really matter.” 

The Day-to-Day Financial Market Diet

There are countless factors for stock, bond and commodity traders to take into account overnight as well as during the course of the trading day. Outside of wild card events, the numbers with most weight for traders on a daily basis come regularly from the federal agencies that report the leading, coincident and lagging indicators. These, along with the results of daily Treasury auctions and remarks made live by Federal Reserve officials, White House and Congressional leadership, feed and fuel the markets. This week, we follow the results of six Treasury auctions and second quarter earnings reports from major retailers including Walmart, Target, TJX and Home Depot, parse the minutes from the last Federal Open Market Committee meeting, and analyze the latest retail sales, housing starts, and leading index data.  

Waiting for Congress

The U.S. Congress is in recess until after Labor Day, but they have an action-packed calendar upon their return. Weighty matters include the FY24 government funding and deficit control measures, authorizations for defense, the Federal Aviation Administration, agricultural and nutrition programs, Ukraine aid, FEMA support, the sanctuary city immigration crisis, banking sector concerns, oversight hearings, cryptocurrency, Taiwan, among others.  The ups and downs of negotiations will captivate Wall Street as well as Main Street perhaps through the end of the calendar year. Markets here and abroad will move in response to the very same governance issues highlighted by Fitch Ratings in its August 1 downgrade.  In the interim, financial markets have slowed as is normal at summer’s end and lack direction ahead of the Federal Reserve’s Jackson Hole Summit and the policy committee meeting ahead in late September.

Heavy Balances

At this point, fifteen months from the congressional and presidential elections, the economy remains remarkably resilient. The much forecasted recession, at least in any of its old familiar forms, has not materialized and consumers remain stubbornly optimistic.  Inflation, particularly in the areas that matter most —  food, energy, and shelter  — remains painfully high. It is unclear as to whether more rate increases can significantly lower it.  Futures trading suggests that we are currently at peak rates, and that cuts will begin next May. In the meantime, mortgage rates have climbed to 7.16% and average credit card rates exceed 20%. Homebuyers and consumers are not deterred. U.S. credit card debt now exceeds $1 trillion, mortgage balances exceed $12 trillion, and overall household debt has ballooned to $17.06 trillion.

Weighing the Data

Financial markets remain baffled by much of the data in weekly economic reports and the inverted yield curves that have long been reliable indicators of a coming recession. So far this month, 12 trading days in, stock market volatility as measured by the VIX has increased 25%. At this writing, the Dow at 34,946 is down 1.4%, the S&P 500 at 4,437 has fallen 3.2% and the Nasdaq at 13,631 has dropped 4.8%.  Bond market volatility, using the MOVE Index as a gauge, has increased by 11%.  The top Treasury yield is the 6-month at 5.50%.  The 2-year Treasury yield at 4.93% is up 6 basis points in August, the 10-year at 4.22% is 27 basis points higher, and the 30-year at 4.34% has increased 33 basis points. Ten-year BAA rated corporate yields at 6.46% have risen 18 basis points. On the tax-exempt side, the one-year yield at 3.22% is higher than the 10-year yield at 2.75% and only 49 basis points below the 30-year yield at 3.71%.

Municipal Sweeteners

Higher tax-exempt yields remain highly attractive to retail buyers who are flush with $58 billion of principal and interest paid or expected by the end of this month. Long-term muni bond funds have taken in a net of $3.29 billion this year; high yield funds have added $1.26 billion.  New York City came to market last week with $1 billion of AA rated general obligation bonds that were priced to yield 4.35% in 30 years, a taxable equivalent yield of 10% for city residents in the top tax bracket. Esperanza Academy Charter School in Philadelphia had a $13 million non-rated financing issued through the city’s Industrial Development Authority and priced with a 6.00% coupon to yield 6.25% in 2033.   Quality Education Academy in Winston-Salem, North Carolina sold $12.1 million of Ba2 rated bonds through the Public Finance Authority conduit issuer; the 40-year term bonds priced at par to yield 6.50%. Virtus Academy in Florence, South Carolina came to market with $13.9 million of non-rated bonds through the state Jobs-Economic Development Authority structured with a 2058 maturity that priced at par to yield 7.125%.

Serving Sizes

More than $14 billion of investment grade corporate bond issues are scheduled for sale this week as the market digests recent downgrades of ten small and mid-sized banks. This week’s municipal calendar is expected to exceed $7 billion with charter school financings planned for American Leadership Academy and a Wonderful Foundations portfolio. Five bond issues with Environmental, Social, and Governance (ESG) labels are being offered as buyers ponder S&P Global’s decision to no longer publish alphanumerical scores along with its credit ratings. The HJ Sims trading desks are active in all these and other fixed income markets. We invite your contact with an HJ Sims representative for our current menu of offerings. We may not be able to do anything about your waistline, but we can help to boost your bottom line.