Except for occasional peaks and valleys due to ongoing government shutdown negotiations, the stock market has been on a steady recovery from Christmas Eve lows. The Dow Jones Industrial Average (DJIA)is back up above 24,000 after dropping under21,800 on December 24th and the S&P 500 has gained over 13% in the same span. However, the rebounding market has been overshadowed by uncertainty about the government shutdown, the Federal Reserve’s 2019 strategy and the upcoming March 1 deadline for tariffs to be increased on Chinese imports.Already, existing increased tariffs have negatively impacted American companies. For example, Harley-Davidson released information to investors that sales and revenue numbers from Q4 are lower than expected and shift edits 2019 forecasts downward. Increased costs of raw materials are the biggest reason provided for the bleak outlook, according to the Wall Street Journal. This is likely to be a factor for several earnings reports due out in the upcoming weeks.
Other major market factors in the last week centered around the federal government shutdown and the Federal Reserve. The federal government has reopened, albeit temporarily,with an agreement between the President and Congress to fund the government for three weeks in order to resume negotiations on a 12-month spending bill. The Fed, and specifically Chairman Powell have made statements to clarify their position ahead of this week’s Federal Open Market Committee (FOMC) meeting. It is likely any “new” news coming from the FOMC’s policy statement and Chair Powell’s news conference will only solidify the market’s evolving outlook for a flexible approach to rate increases and the Fed’s balance sheet reduction as discussed in our last Market Commentary. A chart of the 5-year trend for the effective Federal funds rate is below(the FOMC establishes a range),showing the significant increases that have been the source of considerable concern and political debate over the past two years.
Interest Rates & The Municipal Market
In 2018, U.S. Treasury yields hit their highest level since 2011. The yield on the 10-year Treasury Note climbed from 2.47% to start January 2018 to 3.21% at the end of October. The long running bull market for stocks continued for most of 2018, however Q4 saw volatility rear its ugly head. The 10-year T-Note yield dropped down to 2.70% at the end of December. Municipal bond yields were able to track closely with treasuries and recover from higher levels at the start of 2018. The 10-year, AAA yield reported by Bloomberg Valuation services (BVAL) dropped from 2.81% in early November to 2.32% at the end of the year. This trend has continued into January; the 10-year, AAA yield dropped to 2.24% on January 3rd before climbing back to 2.26% at the end of the week of January 25th, where it has remained steady so far this week.
For issuers of muni bonds, it is noteworthy that the “30-day visible supply” (a measure of the expected volume of new bond issues) has dropped off, down to $8.2 billion from a 12-month average of $9.0 billion and a YTD average of $9.4 billion This means that the supply of new bonds is likely to be down for at least the next month. Meanwhile, investor appetite for municipal bonds remains strong. So new issues planned for the coming weeks may benefit from a more competitive atmosphere.
S&P’s Local Government Outlook
Standard & Poor’s forecasts that infrastructure financing will continue to be an enormous challenge for local governments in 2019. They reference reporting from the American Society of Civil Engineers’ (ASCE) quadrennial report card showing a funding shortfall from 2016 – 2025 of $2.1 trillion (or 45%). Increasing infrastructure spending, whether financed through bonds or cash, may inevitably require tax increases. Still, S&P emphasizes that long term infrastructure repairs should be the norm instead of deferring maintenance and their rating criteria will continue to reflect that.
The silver lining on the capital budgeting quagmire, according to S&P, is that the public seems aware and supportive of solutions put forward by local governments. The November 2018 election results included almost 700 approved bond issues, totaling $76 billion nationwide. With an approval rating of nearly 80%, voters sent a message to many local governments that they are willing to support the continued need for capital investment. S&P also reported a high rate of approval for non-bond budget increases during the 2018 election cycle showing a consistent theme of support for local government revenues and their associated expenditures. In keeping with the old saying that all politics are local, though, not every local government that proposed a bond or revenue increase was successful. Ehlers assists many school districts and municipalities with financial planning for referendums and major capital projects every year and can help our clients to craft proposals that inform the public and limit the impact on local taxpayers.
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The information contained herein reflects, as of the date hereof, the view of Ehlers & Associates, Inc. (or its applicable affiliate providing this publication) (“Ehlers”) and sources believed by Ehlers to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein. In addition, there can be no guarantee that any projection, forecast or opinion in these materials will be realized. Past performance is neither indicative of, nor a guarantee of, future results. The views expressed herein may change at any time subsequent to the date of publication hereof. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as “advice” within the meaning of Section 15B of the Securities and Exchange Act of 1934, or otherwise relied upon by you in determining a course of action in connection with any current or prospective undertakings relative to any municipal financial product or issuance of municipal securities. Ehlers does not provide tax, legal or accounting advice. You should, in considering these materials, discuss your financial circumstances and needs with professionals in those areas before making any decisions. Any information contained herein may not be construed as any sales or marketing materials in respect of, or an offer or solicitation of municipal advisory service provided by Ehlers, or any affiliate or agent thereof. References to specific issuances of municipal securities or municipal financial products are presented solely in the context of industry analysis and are not to be considered recommendations by Ehlers
 Ridley, Jane H., Buswick, Geoffrey and Schroeer, Lisa. “U.S. Local Government 2019 Sector Outlook: Showers For Some, Downpours For Others”. Standard & Poor’s Financial Services, January 9th, 2019.