New Market Wealth Management Logo
Market Digest          
1.13.16          
OBSERVATIONS
Rate Hikes and Municipal Bonds
The Federal Reserve's (Fed) first rate hike in nine years is officially history. And in the first full week of trading for 2016, expectations of additional hikes declined. This was in response to another bout of Chinese economic concerns and a benign message from the Fed. Still, a strong employment report late last week means that Fed rate hikes will remain a factor in 2016, even if market participants began to express doubt.

While we do not expect an aggressive rate hike campaign, we do believe municipal bonds face the prospect of additional rate hikes on relatively good footing.

Attractive valuations. Municipal bonds enter the current rate hike period more attractively valued compared with any of the prior three rate hike cycles. Average municipal-to-Treasury yield ratios are higher now and the higher the ratio, the more attractive municipal bonds are relative to Treasuries.

Municipal Valuations Compared to Prior Rate Hike Periods

Limited supply. Net growth of outstanding municipal bonds remains anemic. While the
overall market for municipal bonds began to grow in 2015, the growth rate remains very modest (2% as of September 30, 2015). Tight supply is likely to be a factor supporting performance in 2016 and beyond. State revenues have rebounded notably from the recession but have only slightly outpaced expenses, constraining capacity to take on new debt.

Municipal Bond Market Growth


Higher taxes. Unlike the early 2000s when lower tax rates posed a threat, higher tax rates
may continue to support municipal bonds. Federal tax rates are unlikely to increase, but
localized tax increases - such as those recently enacted in Chicago to help meet pension
obligations and California's tax increase in 2013 - may boost the allure of municipal bonds.

As we have opined previously, accessing municipal bonds can be a real challenge. In addition to ensuring you are finding superior, independent research, be sure to avoid costly mark-ups (commissions) that are so often associated with purchasing bonds from a bank and/or wire-house. Supply demand dynamics and valuations mean quality municipal bonds of appropriate maturity still represent a place for safety in this volatile investment period. But proceed with caution and good advice.
MARKET UPDATE
The opening week of 2016 saw domestic equities have their worst ever four-day start to a year with all the major equity indices falling back to their early-October lows. A stock sell-off in China, the continued slide in oil prices, new tensions in the Middle East and weak manufacturing data all contributed to the negative sentiment and across the board selling.

Equity Index Returns as of January 8_ 2016
ECONOMIC NEWS
> Jobless Claims Thursday morning we will get the release of jobless claims data. Initial claims returned to their very favorable trend in the first week of January, down 10,000 to 277,000 though the 4-week average is still slightly elevated compared to prior readings. Forecasters see claims edging further lower this week, down 2,000 to 275,000. 
 
Jobless Claims


> Retail Sales Friday's economic reports include an update on retail sales. Consumer spending accounts for more than two-thirds of the economy, so if you know how the consumer sector is faring, you'll have a pretty good handle on where the economy is headed. And, retail sales are a major indicator of consumer spending trends because they account for nearly one-half of total consumer spending and approximately one-third of aggregate economic activity.

Held back by slowing vehicle sales, retail sales were lukewarm going into year-end. Core rates (which exclude auto and gas sales) have been more solid with forecasters calling for a moderate 0.3% gain for December. It will be this report's core readings that will determine the health or weakness of holiday sales and their contribution to fourth-quarter growth.

Retail Sales

> Industrial Production The index of industrial production shows how much factories, mines and utilities are producing. It's also an important measure of current output for the economy and helps to define turning points in the business cycle. 

The data, which comes out Friday, is not expected to show improvement from December. And forecasters see no strength and no change for December. Industrial production is expected to extend its decline, down 0.2% in what would be a fourth straight dip. Weakness in utilities reflects unseasonably warm temperatures while weakness in mining and manufacturing reflects weak energy and export markets.

Index of Industrial Production
 
 
Economic data source: Econoday
NEW MARKETS. NEW ADVICE.
New Market Wealth Management is dedicated to providing thoughtful research-based investment advice and forward thinking services. Combined, the Partners have over 70 years in the investment management business, providing advice to some of the wealthiest families and largest corporations, endowments and foundations in America.

New Market Wealth Management
(657) 900-1899