Q3 Market Outlook

CHARLES W. FISH, CEO/CIO / FOUNDER

 

As Shakespeare said, “There is a tide in the affairs of men… ”. We agree, so unless you are prepared to sit in cash and cash equivalents for many months, perhaps years, waiting for materially higher interest rates, we recommend you get your municipal bond money invested between  now and year-end.

 

Although a further cut in interest rates by the Federal Open Market Committee (FOMC) on November 7 by more than a quarter of one percent is probably off the table for now, it certainly appears that forthcoming economic data will justify a succession of cuts over the next several months. Signs of strength in the economy may persuade the Fed to slow its pace of interest rate declines, but it won’t justify further increases.

 

The supply of new issuance of municipal bonds, which has risen every month this year, is almost 34% higher than a year ago.  This growth in volume has been more than matched by the surge in demand. The appetite for municipal debt is now so heady, the max yield bonds on new issues of high grade munis are typically well oversubscribed in the order period. This is despite the fact that 10-year high grade muni yields are 100 basis points below the peak in yields at the end of October last year. Notwithstanding this dramatic move, yields on high grade municipal bonds remain 200 basis points higher than they were at the end of July 2020.

 

Of course, the upcoming election will impact the municipal bond market. This is why many issuers are racing to complete their funding needs before November 5th. While Trump has promised lower tax rates for corporations and mega wealthy individuals, it seems unlikely that his election will significantly impact the demand for municipal bonds. On the other hand, the proposed tax hikes for the wealthiest Americans by the Democratic ticket could see a significant increase in the demand for Munis.

 

During the last two years, several areas of municipal finance have been severely affected by the increase in expenses brought on by COVID. Chief among them are those related to healthcare and senior (retirement) living. Although these areas are not out of the woods yet, they have, for the most part, recovered considerably. State support and consolidations have certainly helped.

Shakespeare concludes Brutus’ discourse to Cassius, “… On such a full sea are we now afloat and we must take the current when it serves or lose our ventures.”

 

Click here if you would like to learn more about Charles Fish Investments and the CFI Enhanced Yield Muni Bond Composite Strategy

 

This outlook reflects the views of Charles Fish Investments and is subject to change as market and other conditions warrant. No forecasts are guaranteed.

 

This commentary is provided for informational purposes only and is not an endorsement of any sector, security or index. This should not be seen as a solicitation or offer to buy or sell any securities.  Past performance is not a guarantee of future results.