At Stonebridge, we believe in educating the community and sharing our knowledge and expertise. We write weekly educational market review articles and quarterly national & global economic reviews along with a few other research papers throughout the year.
Below you will find news and articles from this calendar year. For access to our archives, please contact us by phone, email or online contact form.
Presentations & Community Engagement
Our economist and portfolio managers and are always willing to provide educational presentations to groups and organizations across the country. Whether it is in person or through a webinar we are happy to develop a customized educational presentation for your specific audience. Some of our presentation topics are:
“The Economy, Where Are We At & Where Are We Going?”
“Cash Management & Your Business”
“I Want To Be A Millionaire: Building Success for Your Financial Future”
Please contact us if you would like someone from Stonebridge to present one of the topics above or a customized topic of your choosing.
March Market Commentary
April 3, 2018
This months commentary features David A. Eckenrode, Director of Equity Management and Jon F. Lynn, Senior Analyst & Portfolio Manager giving their reviews of the March equity and fixed income markets along with a brief review of the first quarter. Click the button below to read the article.
This months commentary features David A. Eckenrode, Director of Equity Management and Jon F. Lynn, Senior Analyst & Portfolio Manager giving their reviews of the February equity and fixed income markets. Click the button below to read the article.
Stonebridge Economist, Daniel E. Laufenberg, Ph.D., discusses the U.S. economy and provides his outlook for 2018. Following Dr. Laufenberg’s update on the economy, Stonebridge Portfolio Managers, Robert A. Kincade, Steven B. Roorda and Heidi L. Hukriede, CFA fielded questions from a moderator and audience members.
The views expressed here reflect those of the speakers as of the date noted and not necessarily those of Stonebridge Capital Advisors. They may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.
2018 Q1 Stonebridge Economic Outlook
January 16, 2018
This quarters Outlook includes three headings:
The Forecast—More Growth but Less Confident
Tax Reform and the Economy
Is an Inverted Yield Curve Really Necessary?
To read the full Economic Outlook by Stonebridge Economist Daniel E. Laufenberg Ph.D. click below.
This past week was kind of dull. Dull unless you are watching Bitcoin. The amount of speculation surrounding cryptocurrencies such as Bitcoin puts speculation into a new light entirely.
Will the Tax Reform Bill Affect Municipal Bonds?
We have had many questions regarding how the Tax Reform Plan coming out of Congress may affect the Municipal bond market. We clearly do not have a crystal ball and are still hoping to get a better handle on what might pass, and not jump ahead of ourselves too much. With that being said, here are a few of our thoughts.
This past Tuesday was the 100th anniversary of the beginning of the Russian Revolution. Seems the Russians themselves didn’t think enough of the event to have a celebration. Wonder why. Seems the philosophy is alive and well on our college campuses. Oh well. Another anniversary that comes on the 11th is Armistace Day or Veterans Day here in the States. Originally set to honor the end of World War 1, in America it has changed to honor all of our veterans. So thank you veterans for your sacrifice.
Understanding what a bond is and why they are issued can hopefully make some of the other concepts a little easier to understand.
4.1% unemployment, 261,000 new jobs in October, new tax plan revealed, Apple knocks the earnings cover off the ball, Houston wins first World Series, Trump names new Fed Chair, markets make new highs. See how easy this is?
Stonebridge Quarterly Outlook
The Stonebridge team gives our quarterly outlook on the market and how we manage in this environment.
Tech stocks rumbled back to life on Friday in a big way on the heels of boffo earnings beats. Google, Microsoft, Intel and Amazon were all up 6-10% on the day sporting flash new highs. Even wallflower Twitter managed a 14 month high.
Yields Are Slowly Improving
As the snow is starting to fall here in Minnesota, it seems that the best days of fall may now be passing. But as we look back at the last couple months in the bonds market—better days, at least for yield hungry buyers, are starting to arrive. Interest rates have been slowly marching higher since the unofficial end of summer.
While nobody was paying attention the Senate passed a budget bill that appears to clear the way for a tax cut bill. The market fresh off a more than 100 point bounce back on Thursday, (wait for it) applauded by going up.
Staying Long Term Goal Oriented
As we approach the end of the year it is time to begin the process of reviewing investment goals. The stock market has provided another good year of returns and the equity market still seems strong. Some may be questioning whether or not their goals are appropriate. For a few investors this questions might lead to a decision they will regret later, chasing performance.
After weeks of hurricane talk and large damage estimates, we now have three hurricanes in a row with estimates ranging in the $60– 100 Billion…each. This week we have wildfires in California with damages estimates in the $65 billion area…and counting. This is starting to get expensive.
Callable Bonds: What are They and Why Does Stonebridge Use Them?
When a corporation or municipality decides to issue debt, they have several options on how they want to structure it. One caveat that they can do is make the bonds callable. The call allows the issuer to redeem the bonds prior to its ultimate maturity. Why would the issuer do this?
This week saw some action on several fronts, many of them market moving. Since the health care reform bill was withdrawn, many commentators opined that the talk of tax reform would likely founder.
Buying Local: Is it Always Best in Muniland?
Bloomberg News pointed out an oddity in its Municipal Market Brief this week. It made mention that for most of September, state of New York bonds have paid higher yields than state of California bonds, despite New York holding a higher credit rating. In theory, the lower the credit quality, the higher the yield should be. Bloomberg credited the relative scarcity of tax-exempt bonds in California made available to a growing population of investors. Really, there are likely a number of factors that could explain the difference.
Nine days in a row we were up in the markets and it came to an end on Thursday and Friday after the Fed indicated that they might, might raise rates again in December.
A Market Conundrum? One Man’s Opinion
According to the CAPE ratio (cyclically adjusted P/E ratio), the US stock market of today has historically only been this expensive just before the crash of 1929, the tech bubble of the late 90’s, and the great financial crisis of 2008.
Raise your hand if you thought the following last Friday before Irma made landfall:
A) The hurricane would not cause as much damage as predicted
B) The market would go up
The Value of Not Trying to Time the Market
I am sure that readers of the Stonebridge Market Wrap and other publications are getting tired of hearing how interest rates remain at historical lows. It has been talked about for what seems like forever now. While rates will rise at some point in the future, I think it is a good idea to look back and see why trying to “time” the market is very hard to do and has some downside.
Strange week. Just after taking in the destruction of Hurricane Harvey, we got to hear of the impending destruction of Hurricane Irma.
It’s Tough to Call the Top
The US Equity market continues to surprise investors with its ability to continue to move higher. The market as measured by the S&P 500 is up close to 10% and has not had any meaningful corrections greater than 5% in over 10 months. This is not surprising given the continued steady economic growth and good earnings.
The markets somehow went up despite the terrible devastation of Southeast Texas and Louisiana.
Are Natural Disasters also a Calamity for Municipal Bonds?
All of our hearts go out to those affected by the unimaginable aftermath of Hurricane Harvey. With costs so high to clean up and rebuild the region’s many affected communities, one can’t help but wonder how routine services and government obligations including municipal bond payments will be affected in the months and years ahead.
It looks as if we are about to experience something that has not happened in almost 12 years, a category 3 hurricane hitting the U.S. mainland. The last one was Wilma on 10/24/05. Why is this important to those of us not living in Texas?
What Goes Into Managing Your Portfolio
Recently I was in a meeting with a client, and they asked me a very valid question. How do you manage all of your client portfolios? Good question!
The market took a deep breath on Monday when North Korea took a step back from their threat to shoot a few missiles Guam’s way. The market then drifted higher on Tuesday and Wednesday before succumbing to earnings pressure from Cisco and WalMart on Thursday.
Corporate Bonds and Dividends/Stock Repurchases
Not a lot of people realized that corporate bonds have an effect on the price of a stock. There is an obvious connection in regards to how much debt a company has on its books. The higher the debt ratios a company has, the riskier the company is.
Favorite headline of the week: “What to do with stocks if U.S. and North Korea go to war”. Geez, Louise. Does anybody really think we are going to war with North Korea?
Medicare Made Easy
You may know that when you turn 65 you become eligible for Medicare. But did you know when it comes to Medicare you have choices? From reviewing original Medicare (Part A and Part B) to understanding Medicare supplement insurance plans to Medicare Advantage (Part C) and stand-alone prescription drug plans (Part D). Medicare helps millions of Americans get the health care they need.
Since 2013 there have been eight times we have added another thousand point new high. To long time investors it seemed to be a miracle that we crossed the 5,000 barrier in 1995, never mind the 10,000 mark in 1999.
Don’t Even Think About It
For a while now I have been hearing commercials exhorting the listener to invest in gold which in and of itself is fine. Should anybody consider investing their IRA in tangibles that you can hold? In a word, no.
It is getting hard to write about the week’s market action when nothing ever seems to change. Volatility; gone. Market averages; new highs. Bond yields; a bit lower. Earnings; good for the most part. Washington; what can I say?
Bond Yields and What They Mean
In the bond world there are several different types of yields which can sometimes be confusing to investors. There is a yield to call (YTC), yield to maturity (YTM) and current yield (CY). These are all based off the price of the bond and the bond’s coupon, but have different meanings.
It is still way too early in the second quarter earnings season to make any calls but for the most part, we are liking the results so far. The next couple of weeks are a flood of reports, so stay tuned. It seems like the reports exceed expectations about 60-65% of the time, so that is your benchmark.
Key 2017 Economic Themes
While there are no major changes from this quarter to last quarters Key 2017 Economic Themes, we do feel it is important to share with you what we are seeing and the impact on our investment strategy.
So as advertised, earnings season kicked off this week. The banks started it off pretty well with beats by the likes of JPM and Citigroup. While the loan picture and higher rates made for good earnings, the flat volatility environment caused a drop in trading earnings.
The Municipal Market: What We Have Been Buying This Week
Over the last week or two, we have seen a softening of the market rally we had experienced heading into June. Rates are again moving higher, creating some renewed opportunities for income investors.
Second Quarter earnings reports kick off next week. Pepsico and Yum start off on Tuesday and JPMorgan and Wells end the week on Friday. This market has elevated itself this year on a combination of hope and some better than expected earnings and to a certain respect, better economic news. Next week, we will begin putting all of that to another test.
Equity Markets- Mid Year Review
The equity markets have provided a variety of returns during the first half of 2017. In this article, we will review how the year kicked off, where we are at and how we plan to approach the rest of 2017
Thanks, Janet. On Tuesday, Janet Yellen, Chair of the Fed, told our friends in the UK that another financial crisis like the one in 2008 was not likely “in our lifetime”. I wonder what the time reference was.
When a Maturity Specific ETF May Be Appropriate for Fixed Income Accounts
Just like in the equity world, fixed income investors have a choice to make in regards to buying individual securities vs. an ETF (Exchange Traded Fund). The size of the portfolio is the biggest factor in determining if an ETF is the best fit.
The Republicans rolled out the basics on their version of healthcare reform and the markets liked what they saw so far. The pharma companies have been quiet as this process has unfolded so far. The big pharma and hospital stocks have reacted positively, though it is too early to draw any conclusions because the Senate has yet to vote. If the Senate passes this bill, it has to go to a conference committee to iron out the differences. That said, the pundit class gave them zero chance of getting this thing out this summer, or even this year, so it is good to be a pundit I guess.
What is the VIX?
The Chicago Board Options Exchange maintains a volatility index commonly referred to as the VIX. We often mention the VIX in our Market Wrap and other communications as simply a measure of volatility in the market. The VIX has entered news headlines recently due to the suspiciously low levels maintained over the last year. However, we’ve spoken at great lengths in the past as it relates to the behavior of the VIX and how that helps illustrate market behavior. The purpose of this piece is to break down what the VIX actually is. It is often referred to as a measure of volatility in the market. Technically, this is not correct. If we wanted accurate measurements of volatility, we would simply use the standard deviation of returns in recent periods. But what good would historic information be if our goal is to develop metrics that give us an indication of future behavior? (Technicians might take issue with this statement, but that is a discussion for a different time.) Long story short, the VIX is actually an estimate of future volatility.
Just when you thought the news couldn’t get any worse, current events come along and smack you upside the head. It is an amazing thing that, amid so much acrimony, investors can see through the fog and just buy anyway.
Valuing the Municipal Bond
We like to occasionally remind our readers of just how important the tax-exempt status of municipal bonds really is. It seems the exemption comes under attack more these days than in the past. Tax-free bonds are a vital tool for states and, perhaps more importantly, local governments to fund essential projects like schools, hospitals, roads and bridges.
Big doings this past week. Former FBI Director Comey had his day in before the Senate Intelligence Committee. New developments were thin on the ground. Most likely nothing will change because of it. Putin has got to be enjoying this spectacle.
The snap UK election went down and the Tories lost ground instead of picking up seats. Seems that the Labor Party picked up a ton of support from the young folks with promises of free tuition and an end to austerity measures. Sounds like the Bernie Sanders kids moved to London. The process of the Brexit occurring quickly and decisively probably took a hit. Perhaps another snap election will come along in the summer or fall.
Stonebridge Changes on the Horizon!
Over the past few years Stonebridge has continued to grow in both assets under management and employees. We are excited to announce the addition of several new team members!
We had a bit of a downer from the employment report on Friday with additional downward revisions for the previous two months. On top of that, the day before, we withdrew from the Paris Climate Accords that was signed last September. The market reaction? Buy treasuries, buy stocks, buy gold.
Bond Market Comment
The bond market had a slight rally since the beginning of the 2nd quarter. The 10 year treasury started the quarter at 2.39%, had a high of 2.415% on 5/10/17 and has since rallied to a current yield of 2.20%. The majority of the rally can be explained as a flight to quality due to political events such as the firing of FBI Director James Comey, turmoil with regards to foreign policy and a lower possibility of U.S. tax cuts in 2017.
We go from a seven or eight day losing streak right into a seven day winning streak. If you can ignore this day to day movement and focus on the bigger picture, you would see that the S&P 500 is up 7.91% (Not Including Dividends) year to date. When we hear that old saying “sell in May and go away”, we often think it is some kind of rule for trading the market. If you had sold at the beginning of May, you would have lost out on a 1.19% gain so far—And this happened with the most bizarre political background ever. The “solons” on the TV tell us that the health care bill is dead, that there will be no tax bill this year and that the budget will end up killing people… The market went up anyway.
Growth versus Value
The U.S. stock market is off to a very good start in 2017 with the S&P 500 up 8.8% (Including Dividends) through last Friday, May 26th. When you take time to dissect what is going on, performance is even better for Growth Stocks with the Russell 1000 Growth Index up 14.2% and the Nasdaq 100 Index up 19.4%. This strong performance is being driven by the “FANG” stocks: Facebook +32.2%, Amazon +32.8%, Netflix +31.2% and Google (Alphabet) + 25.8%. These four companies are the definite leaders but there are other strong performers as well. The one thing all the best performers have in common is that they are perceived as fast growers. Slower growing securities, or Value Stocks, have been left in the dust in the first 5 months of 2017 with the Russel 1000 Value Index up a mere 3.4%.
The market was doing fine, until Wednesday when the news that broke the night before that President Trump had met with FBI Director Comey…
Bond Market Comments: What does a yield curve say about the market?
Talk about the yield curve is constantly in the news, especially these days. There is talk about a normal, flattening, steepening or inverting of the curve. While there is not a guaranteed outcome based off of the yield curve, it is an indication on what the bond market is thinking.
A quiet week masked what was a beat down of the retail sector when Macy’s reported a bad quarter, as the charts below show. It did not seem to matter if you reported a light quarter (KSS, M), a good quarter (JPC JWN) or have not even reported yet (TJX, GPS, LB), it was off to the woodshed. We have all seen the impact of AMZN and internet retailing in general and no doubt are participating in this secular change. Yes, we have too many stores and some are closing. Retail layoffs continue apace. Malls are seeing disappointing traffic amid a general malaise in spending overall. That said, some of these companies are trading like they are all going out of business, which they are not.
Corporate Bond Market Sectors
Many clients have inquired over the years why an allocation to fixed income would make sense if the investor is in the early stages of their career. A proper portfolio allocation structured among equities, fixed income, and cash will create a balanced investment that will perform well over many market cycles. True, this balance will change to become more conservative as we age and our risk tolerance declines. It is common in our younger years to think only of growth and wanting to invest exclusively in the equity market. That is why it is always important to create a financial plan that includes your investment goals, risk tolerance and time horizon. The biggest benefit to adding fixed income to your portfolio at any age is that bonds offer a buffer to the volatility of the equity market, which provides stability to the total returns in the portfolio over a longer time frame. A fixed income allocation can also add a steady income stream as well as stated maturity dates to assist in future cash planning.
The S&P500 finished slightly positive on the week, fueled mostly by relatively positive earnings announcements across the board. So far, the S&P500 has reported an average of 14% growth in earnings for the first quarter. It appears top and bottom line earnings results have been on the positive side of expectations. Aside from corporate earnings, the market has been reacting to potential plans for tax reform. It is difficult to say with any degree of certainty that the administration will be able to achieve their tax reform goals, however, the market has been responding to the slightest hint of a successful deal.
The growth of value in the markets has been significant this year. Although the media seems mystified by the markets continued growth and want to attach all things economically to Washington, politics and politicians. The reality is, it’s the economy and corporate earnings causing this growth. Most of our global trading partners, including China, India, Japan, Canada, and Europe are showing improving economic growth. This economic growth is now being reflected in corporate revenues and net income during this quarterly earnings season. U.S. economic growth may show less than stellar numbers for the first quarter, although slow first quarter growth has been the pattern for the past few years with improvement as the year rolls along. That said, we see economic and corporate earnings continuing to grow at a steady pace.
Managing growth is critical to any firm’s success. Stonebridge has been fortunate to experience significant growth over the years and we are thankful to you, our clients, advisors and friends, who have made it all possible. We are mindful that growth must be managed to assure that we remain true to our commitment to provide customized portfolios and a high level of service through direct contact with portfolio managers and a proactive team that supports your needs and objectives. Stonebridge will be growing this year by adding team members and a new portfolio management and reporting software system.
Another week goes by and the market is still trading in a very narrow range. We are just below the 50 day moving average as we digest the earnings reports coming in. The reports, so far, are fairly good. We have had a few misses such as IBM, but many of the companies we own are beating estimates.
Meanwhile…there may be another election meltdown dead ahead on Sunday. France is having a first stage (assuming none reach 50% of the vote) election to choose an new President.
When Falling Yields Still Look Attractive
Bloomberg News noted this week that the 10-year municipal bond yield has held steady or fallen every day since March 14th. As of the end of the week, it stands at 2.25, down about a quarter percent in a little more than a month. Compare that with the 10-year Treasury at 2.23%. You are earning just as much on the strongest AAA rated municipal credits as you are on Government bonds and that is before factoring in the value of the tax-exemption.
Earnings season kicked off this week. The first notables to report were Citigroup, JP Morgan and Wells Fargo. Citigroup and JP Morgan had very good reports, but Wells Fargo showed some weakness due to their recent account openings scandal. The coming week is thick with reports, the results of which will determine the market direction for the remainder of the second quarter.
Key 2017 Economic Themes
We take a look at important 2017 economic themes and provide an outlook.
Another week of momentous news flow has passed and the market took it in stride, finishing mostly flat. 100 years to the day after the U.S. entered World War 1 or the “war to end all wars”, we lobbed 59 cruise missiles at Syria and nothing happened. Oh there was the expected protests from Syria, Russia and Iran, but otherwise the “world community” approved. Worldwide markets were calm, interest rates moved little and oil slightly higher. Gold edged up a whole $2.00 on the news. We had further developments in the “wiretap story” regarding former NSA Director Susan Rice admitting that she unmasked the identities of Trump associates surveilled during the transition – and the markets yawned.
First Quarter Bond Market Review
The first quarter of 2017 saw a fair amount of volatility in the bond market, but yields are relatively close to where they were when it started. The 10 year treasury yielded 2.44% to start the quarter and finished the quarter at 2.39%. This followed a large spike in yields after the election to end 2016 and included a bump in rates from the Federal Reserve of 25 bps. Yields have continued to stay lower after the Reserve announced their rate hike and the intention for more rate hikes in the future. One area where we have seen some changes is in the Municipal Bond market. As 10 year treasury yields have come up after the election, muni bond yields have been a little slower to move.
I put the chart below because it genuinely surprised me. As that doesn’t often happen, I thought it might surprise you dear reader as well. Take a look at the red line which represents oil imports. Down she goes, due to (in no small part) the fracking industry. We import less because we produce more. Now look at the light blue line. Note that the non-oil balance of trade has actually gone positive. Exporting more goods and services and importing less oil. A lot less.
What is Driving the Market: Trump, the Fed or Corporate Profits?
We have talked about the correlation between the markets as measured by the S&P 500 and U.S. corporate profits in the past. Over time, as this chart shows, the market generally follows the fortunes of corporate America.
Corporate profits tumbled in 2015 marking the first decline since the 2008/2009 recession. Companies were challenged by a weak global economy and a strong dollar. Key industries such as energy and agriculture took severe hits during the broad decline of commodity prices. Notice how the market struggled during the latter half of 2015 through the first half of 2016.
Mea Culpa. My bad. I should have known better than to tempt the gods of the market when I wrote last week about how long it had been since a 1% down move.
Bond Market Rebound
Fixed income markets have largely benefited as the havens for safety over the last week as the equity market has been a bit bumpy. 10-year Treasuries marked a low of 2.37% during the week, falling from a high of 2.62% at the start of last week and prior to the Fed Funds rate increase.
Well, we made it through the Fed hike, St. Patrick’s day and the NCAA basketball tournament got underway as planned. Regarding the Fed hike, the market seemed to approve on not only the hike itself, but the somewhat dovish commentary as well. Now we can hunker down and wait for the beginning of earnings season in a few weeks.
New Stonebridge Website!
We are excited to announce that our new Stonebridge website is up and running. This new site has a user-friendly interface with easy access navigation throughout the site.
A down week? How utterly pedestrian. You would think that after getting used to a market with no downside, we had rewritten the rules governing the stock market.
Municipalities and Tax Exemption
Over the past several years there have been many articles in the press dedicated to the topic of municipalities being able to issue bonds that are exempt from taxes. This topic has been brought up recently in regards to how the Trump administration views these exemptions and if they will continue going forward.
It seems that in July we started to get more positive, particularly in U.S. Large Cap. This trend became a flood after the election. The market reaction of course verifies this move. Now what?
Snapchat Goes Public!
It seems every couple years a big social media company goes public and opens at nosebleed valuation levels. Valuing these new companies is extremely difficult for two main reasons; there is often little history of actual revenue/profit generation, and it is relatively new technology. Who knows how long their competitive advantage can remain intact? Mobile app users are a finicky bunch.
The 12 day run of new Dow highs has to end sometime, which was almost on Friday. However, the day and the week finished on the upside, continuing the upward march. The talk out of an unnamed alleged source said there maybe no tax deal this year which caused some investors to go on the defensive. Next week look for this bit of “intelligence” to be debunked. A conversation like this is meant to rile up the trading community not investors.
Bond Market Update
Since flirting with market highs late last summer, the bond market has experienced a significant selloff in recent months. How has that shift to higher interest rates affected the overall shape of the yield curve? How have we adapted our current fixed income strategy to take advantage of new opportunities? What measures are we using to protect portfolios from further changes in rates, especially in the municipal market, where many of our investors turn to generate tax-free income?
To answer these questions, let’s first look back at what has taken place in the market. Overall, along with generally higher rates across the board, we have seen a steepening of the yield curve since August. A steepening of the curve typically indicates the market is expecting inflation will begin to pick up. The difference between short and long rates has widened from 176 basis points to around 211 basis points. The most dramatic movement in yields has been on the short end of the curve. In fact, all of the steepening of the curve has occurred inside of 10 years.
For five days running, the three major indices (Dow, NSADAQ and S&P 500) have settled at new highs. This is something that has not happened since 1992, which is 25 years ago if you are counting. As shown in the bottom chart on the right, the market tripled in the next 6 years. I am not saying that this will happen again but it does show what the market can do when many are under invested in stocks and looking for a nice safe downturn to get on the bandwagon. History doesn’t often repeat but it does rhyme.
What Are Some of the Common Steps Retirees Overlook?
I have attempted to create a shopping list of steps I have seen retiree’s skip over the past 40 plus years. This list is by no means a complete list, but should give you some things to contemplate:
Complete an indirect rollover within 60 days
Spousal continuation mistakes
Naming a beneficiary
Review and update beneficiary designation forms
Beneficiaries fail to “stretch” their IRA distributions
Transferring inherited IRA’s to non-spousal beneficiaries
A Beneficiary of an inherited IRA must name a successor beneficiary
Keeping assets in an employer-sponsored plan after retirement
Understanding the Net Unrealized Appreciation (NAU) rules before rolling 401k to IRA
Momentum. P = M*V. P is momentum, M is mass and V is velocity. It’s all very simple. Usually big round numbers take time to break. Witness the 2200 level on the S&P. It took almost six months to break through that level and only about 10 days to trade through 2300. Now we know that we have momentum but what is the other side of the equation? M*V, which can be reduced to the new high/new low numbers. In Thursday’s trading, the M = 164 new highs and 7 new lows. The V = is the speed at which the 2300 level fell in 10-11 days. Now, 157 net new highs is nothing to sneeze at but these numbers can get quite a bit bigger before we are done. It also shows that we are nowhere near a mania.
General Obligation vs. Revenue Bonds
While there are several different types of municipal bonds that can be purchased, two of the most common types of bonds are general obligation (GO) bonds and revenue bonds. Both types of bonds can be high quality bonds. GO bonds are backed by the full faith and credit of the issuer. This is to say that a municipality will use its taxing power to pay back the debt that they borrowed. While the strength of that taxing power varies from city to city, the likelihood of the bonds being repaid is very high. While some GO defaults have made the news recently (Detroit, Jefferson County, San Bernardino), it is very rare for a GO bond to default and even more rare for the GO bonds not to pay off their debt (some GO bonds have gone into default but still paid off their debt without missing a payment). Because of this strong backing, GO bonds tend to have a tighter spread compared to other types of issuance.
Most of last week was a bit boring if you ask me. Oh sure, Apple and Facebook had great earnings among a few others, but on the whole, the week appeared directionless. We are waiting for something to happen considering the DJIA crossed 20,000. The one thing that moved bigly besides Apple was gold. The dollar continued to weaken as well.
The mainstream media has been all abuzz about the general populous (all of us) receiving fake news from illegitimate news sources, particularly over the internet. Mainstream media sources would claim the only news that is “factual” comes from major channels or print: ABC, CBS, NBC, FOX, CNN, or NY Times, Wall Street Journal, Time, Tribune etc. My recent experience in attempting to utilize major media is a classic example of why we (the general populous) are forced to utilize other resources to gain unfiltered straight forward NEWS!
Have you ever lived in a house that was undergoing a major renovation? If you have, then you will recall the mess of tearing down walls, ripping down drywall and fixtures and generally living in a big mess heading to an outcome that somewhat was close to what you had in mind. That was the feel of the first week of the Trump administration. The guy is a builder after all. There was so much happening in the first week that it was hard to take it all in. Many people don’t know what to make of all of this activity and are acting flummoxed.
Proposed Tax Cuts? Munis Still Attractive!
A common question that we have been asked since the election is, “should we still be buying municipal bonds given a potential change in the tax code?” First, I would like to point out that municipal bonds provide benefits to investors and communities over and above the tax exemption. Bonds allow states and municipalities to finance needed infrastructure, schools and other revenue projects at a lower, more cost effective interest rate. At the same time, investing in these bonds gives investors an opportunity to support their local communities in a meaningful way. Municipal bonds offer a great deal of diversification for fixed income portfolios as well. That being said, the most common reason to buy muni bonds is still for the federal tax-exemption.
The market continued its pullback last week as earnings started rolling in. Now that we have the inauguration accomplished, we can get on with the cabinet confirmation process and, more importantly, the business of governing. I believe that we will see a lot of speculation about what the “first hundred days” will entail and a lot of stories about “what this all means for investors”. As is the case with the year end stock lists and things to avoid list, you are probably better off ignoring all of this speculation until we get some concrete facts to act upon.
Fixed Income Objectives
In the bond market experiencing high volatility over the past two months, it is a good time to talk again about fixed income securities in a rising interest rate environment. The day before the 2016 Presidential election, the 10 year U.S. Treasury was at 1.827%. It closed at 2.468% on Inauguration Day. That is a big upward movement in a relatively short period and does have an effect on fixed income portfolio market values.
Last week was relatively quiet. Not much in the way of economic indicators and just the beginning salvo of fourth quarter earnings were reported. Next week will get off to a slow start with the market’s closure on Monday for Martin Luther King Day. Everything appears to be in a holding pattern with very low volatility for now. The confirmation hearings are proceeding apace with little real news emerging. Next Friday is inauguration day so there will be protests, but other than that expect business as usual.
Key 2017 Economic Themes
The current economic expansion in the U.S., now in its eighth year, is on track to be one of the longest on record, albeit one of the slowest
Inflation is expected to push above the Federal Reserve’s target of 2%
Federal Reserve to hike short-term interest rates substantially higher than the consensus anticipates
Earnings season begins this week with Alcoa and ends with a few big banks; Wells Fargo, JP Morgan and Bank of America on Friday. Fourth quarter earnings will occupy the markets for the rest of January and may be punctuated by other events that pop up in the next few weeks. We have the inauguration coming up on the 20’th, which may cause a bit of turmoil if the news reports of the mass demonstrations are accurate. Personally, I feel this event is a bit overblown and do not expect much will happen. The beginning of the hearings on the new cabinet officers is coming up as well so that will occasionally grab the headlines, but in the end I think the vast majority will be confirmed.
Electronic Municipal Market Access
Often the municipal market is described (even by me) as somewhat opaque when compared to the corporate bond or publically traded equity markets. While this can be frustratingly true especially for smaller and less frequent issuers, one website has increasingly made it less so from a financial disclosure, trading, and ratings standpoint over the last few years. The website is called EMMA (www.emma.msrb.org) and it was developed by the Municipal Securities Rulemaking Board (MSRB), the municipal market’s regulatory organization.