Market Commentary: Tango with the Economy

Published August 21, 2019

At the turn of the twentieth century, first-generation Americans tended to gather in local church or other meeting halls to socialize. Makeshift bands would assemble and floors were often cleared for dancing. Long before radio, phonographs, television and disc jockeys, there were square dances, mazurkas, shags, and fox trots. Eastern European immigrants introduced the Polka, those from Cuba brought the Cha Cha and some from Spain taught the Bolero. One might see a dragon dance, a fan dance, a belly dance, a hora or any number of folk dances from around the world. Years later, the Greatest Generation loved the Lindy and the Jitterbug. In the sixties, we learned the Twist from Chubby Checker. The disco era produced the Hustle. Everyone tried the Moonwalk in the eighties and no wedding party in the nineties was complete without the Electric Slide. Today you can Salsa while watching Dancing with the Stars or walk into any Fred Astaire dance studio and learn the Tango: slow, slow, quick, quick, slow.

Dance is a performing art, an expressive form of communication through movement, often referred to as a dialogue between partners. Every culture has its forms, features and functions, ranging from social and energetic to sacred and ceremonial. We might take our first steps by standing on Daddy’s toes, watching Olympic ice dancing competitions, awkwardly mirroring brave peers in junior high gymnasiums, or practicing with brooms before a fancy dress prom. There are fewer halls and clubs devoted to dance now than there were in the heyday of Saturday Night Fever, and the prevailing hip hop beat seems to favor free style solos over couples dancing; but dance remains the most popular participatory art form in the world.

The National Museum of Dance is located in Saratoga Springs, New York. About three hours’ drive south of there at Albert Einstein College of Medicine, scientists have been taking a new look at how group dancing may be able to help reduce the onset of dementia. Studies funded there by the National Institute on Aging indicate that dance as a form of aerobic exercise may improve cognitive health, strengthen neural connections and improve memory. Group dancing which involves social engagement, physical activity and executive function may be particularly beneficial to those with, or at risk of, developing Alzheimer’s. Given an aging population where the risk of developing dementia doubles every five years after age 65, dance may prove to be a viable therapy and Boomers may soon be returning to discotheques and trying to remember some of their old moves.

The risk of a developing recession is increasing in the eyes of some economists and pundits and the talk on Wall Street has returned to yield curves and rate cuts. The lack of a trade deal with China, slowing job gains, loosening Federal Reserve monetary policy, and weakness overseas has produced an atmosphere of uncertainty. The brief anomaly in the Treasury market, wherein the 2-year maturity yielded more than the 10-year maturity last Wednesday (inverted yield curve) sent shivers down the spines of equity indices and the stock market sold off by more than 3%. Most of our economic data has been solid, however, and the American consumer is still confident, a key telltale indicator of strength for the time being. Few can forget—and some have still not recovered from—the damage wrought by the last recession, so monetary policymakers are lining up all the tools they can to try to reduce the impact of the next one, whenever it comes. We may hear more about their approaches later this week at the annual Jackson Hole symposium on “Challenges for Monetary Policy.”

A recession is defined as two straight quarters of declines in gross domestic product. It is declared by the National Bureau of Economic Research, a private, nonprofit organization, and the determination is always made retroactively for despite all its brainpower, the group has no predictive abilities. They tell us that, since World War II, recessions tend to last an average of 10.4 months—a relatively short amount of time, but only when looking in the rear view mirror. Employment, trade, income, and industrial activity are reduced, and some businesses fail. Advance warnings can be found in certain leading economic indicators, but the timing is not precise and there may be completely unrelated shock factors involved. In the face of a recession, executive and legislative branch leaders tap dance as they attempt remedies and the central bank tries to choreograph a soft landing. Recessions are the undoubtedly the worst part of a normal economic cycle, and there is nothing normal about the one we are in right now. The U.S. has been in an expansion for 122 months, the longest on record going back to 1854. So, a downturn like the one we see beginning overseas is to be expected here at some point; but it is not happening today, no matter how much airtime the news anchors devote to speculating about it and its possible causes, and markets gyrate in response.

In the meantime, bonds are enjoying a spectacular rally. Foreign investors plagued by negative rates are pouring into the markets they see as the safest as well as highest yielding in the world, and U.S. buyers wary of the volatile stock markets are also driving up government bond prices, including those at the state and local level. U. S. Treasury yields have dropped by more than 40 basis points this month, and the Administration is resurrecting proposals for 50- and 100-year bond sales. As of the close on Friday, the 2-year stood at 1.47%, the 10-year at 1.55% and the 30-year at 2.03%. The long bond in fact hit a record low of 1.97% on August 15. Municipal yields, as benchmarked by the AAA general obligation MMD scale, have fallen in tandem. The 2-year tax-exempt yield stood at 0.94%, down 13 basis points. The 10-year at 1.22% has decreased by 30 basis points and the 30-year at 1.87% is 37 basis points below where it began the month. These levels are among the lowest on record since the curve was first tracked in break-dancing era of the eighties.

If the municipal market were a ballroom, borrowers would be waltzing now as they have been all year. More than $6 billion has flowed into municipal bond funds this month and there have been 32 straight weeks of net investment, another new record. The demand for tax-exempts has been heavy again this summer as tremendous cash from coupon payments as well as maturing and called bonds looks for reinvestment opportunities while families from high tax states and overseas buyers vie for more of the same. In the high yield sector last week, the California Community Housing Agency sold $110.8 million non-rated essential housing revenue bonds for Verdant at Green Valley that had a 30-year maturity priced at 5.00% to yield 3.60%. The Ohio Air Quality Development Authority brought a $100 million Ba1 rated refunding for Ohio Valley Electric with a 10-year maturity priced at par to yield 3.25%. The Franklin County Industrial Development Authority in Pennsylvania issued $25 million of non-rated revenue bonds for Menno-Haven structured with 2054 term bonds priced at 5.00% to yield 3.67%. And the New Hope Cultural Education Facilities Corporation in Texas had a $17.6 million non-rated transaction for Beta Academy. The 30-day visible supply of municipal bonds totals $10.1 billion.

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