Market Commentary: The Ayes and the Nays

Published January 15, 2019

Votes have been cast in the U.S. House of Representatives by electronic means since January of 1973. As it turns out, a brand new system was installed last summer and House members used their new voting cards in hundreds of roll calls last year. But the machines have only been used 5 times in 2019 and not yet on the question of funding for a southern border wall. No vote on appropriations for the Department of Homeland Security has been held in the U.S. Senate either. In the upper chamber, votes are cast by voice, standing, or voice roll call with results recorded by a clerk on a tally sheet. So, without much action to mark in Washington, attention has turned thirty six hundred miles away to one of the oldest parliaments in the world where things are electric but not electronic. British Members of Parliament still vote using paper ballots but on major issues they vote in person by physically dividing into one of two groups: the Aye or No lobby in the House of Commons and the Contents or Not Contents lobby in the House of Lords. Individual votes are recorded by clerks and counted by tellers. At this writing, the House of Commons has just voted down proposed terms for Britain’s withdrawal from the European Union by 202-432 producing a number of possible scenarios and making currency trading all the more challenging right now.

Back in the U.S., a partial U.S. federal government shutdown is now in Day 26. Washington has previously faced 20 days-long and fortnight-long funding disputes since 1976 when Congress adopted a more modern budget process, but this one lacks the sense of urgency and expectation of compromise that has accompanied previous spending showdowns. The usual pressure points — money for the military and most human service programs — are missing this time as 75% of the government is fully functioning. Entitlements such as Social Security and Medicare are unaffected and the mail is still being delivered. This narrow closure of government nevertheless sets a new record. An anonymous senior Administration official has penned an opinion piece suggesting that this is an opportunity to strip wasteful government agencies for good, but beneficiaries of federal programs are starting to make themselves heard. Some 800,000 federal workers did not receive a paycheck last Friday and three lawsuits have been filed by unions and other associations. News media have publicized these and other concerned parties. They include traders looking for Commerce Department data on retail sales, for example, and companies looking to bring initial public offerings, travelers fearing delays if airport security screeners walk off the job, low income Americans scheduled to receive HUD rental assistance, 38 million food stamp recipients and the 260,000 retailers who accept SNAP benefits, car manufacturers awaiting EPA emissions certifications, and landlords in the 7,000 buildings being leased by federal agencies.

As if all of this is not enough drama for the start of the year, Iran attempted to launch a satellite, China’s Chang’e 4 spacecraft landed on the far side of the moon, confirmation hearings for attorney general are underway, fourth quarter earnings reports are coming out, teachers in Los Angeles are on strike, and the old Tappan Zee Bridge which spanned the Hudson River for 3 miles and 60 years has just been demolished. Financial markets have mostly slipped from the headlines. The stock market has regained some of the ground it lost last month. The Dow is up 668 points on the year to 23,995 at this writing. The S&P 500 has risen 89 points to 2,596 and the Nasdaq is up 336 points to 6,971. Volatility as measured by the VIX has declined from 25.42 to 18.19. Oil prices have climbed $6.18 a barrel to $51.59. Gold prices are up $$8.67 an ounce to $1,290. Bonds have pulled back a bit after a strong start in 2019. Trading in governments ground to a near halt on Friday afternoon due to an unusual outage in the largest interdealer trading platform, Brokertec, but resumed again after an hour and a half. So far this year, the 2-year Treasury yield has risen 6 basis points to 2.54%, the 10-year added 2 basis points to 2.70%, and the 30-year is 2 basis points higher at 3.03%.

The municipal bond market has finally seen some activity for the first time in weeks. High yield municipal bond funds have taken in $300 million since the start of the year. Trading averaged $11.8 billion a day last week and there were $4.9 billion of negotiated and competitive sales. This week, we expect $6.3 billion on the primary slate and the high yield sector includes a $90.6 million California Statewide Communities Development Authority student housing financing for California College of the Arts. This year we will likely see some increases in rates but we remain in an historically low range that still appears highly favorable to nonprofit borrowers with new and expansion projects in the pipeline. Industry consensus is that 2019 will be another net negative supply year with demand for these securities outpacing the available supply in the primary and secondary market. The need for diversification as well as tax-exempt income, especially in higher tax states such as New York, New Jersey, Connecticut, Massachusetts, and California, should keep muni prices relatively elevated. Bonds issued to build senior care communities, charter schools, affordable housing, renewable energy and countless other local projects are naturally suited to meet the increasing appetite for environmentally and socially impactful investments. And, while munis are of course subject to many of the same risks that affect other bonds and asset classes, the technical factors appear favorable and tax and rate advantages are real. We will be sharing more of our market outlook at the 16th Annual HJ Sims Late Winter Conference later next month in Clearwater Beach, Florida and look forward to having your perspective. We welcome your participation and registration here.

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