Inauguration Day Is Here

As market participants re-assemble after the extended Martin Luther King holiday weekend, the focus is immediately cast upon the inauguration of Joseph R. Biden Jr. as the 46th President of the United States. We believe that the sooner Biden-nominated cabinet appointees can be confirmed by the Senate, the better positioned we will be to have all levels of government up and running, yet we are prepared for a number of delays given the logistics of coordinating a new Congress while potentially pursuing impeachment proceedings. In our view, it may take some time before the impact of new fiscal relief makes its way throughout the economy, and we expect there to be ample slack in the labor market through the foreseeable future. Overall, global demand can be expected to be lackluster for a while longer, and we must be skeptical when we begin to see post-pandemic spending as its durability may be called into question and economic policy will continue to be driven by health care developments.

By many accounts, the Biden fiscal relief plan is viewed favorably by muni market stakeholders as it earmarks another $350 billion in aid to state and local governments, although it does fall quite short of the $1 trillion in state and local governmental assistance as part of the HEROES Act that was passed by the House last spring. In our view, this level of funding would have a material consequence for the outlook of municipal credit, yet there are no guarantees that an eventual legislative package would contain President Biden’s number. Job creation must be at the heart of our nation’s recovery, and we believe that a robust relief package can be accretive to this cause. But again, job creation will be an ongoing priority and beyond what may come out of Mr. Biden’s proposal, the labor market would also benefit from meaningful infrastructure and climate change initiatives. Direct aid payments to individuals will be an important component in the support of economic sustainability, and we expect there to be additional phases yet to come with the new administration.

The impact of the Biden proposal upon the municipal bond market is thus far being overshadowed by technical factors which have driven performance. Aside from the targeted $350 billion in state and local relief, we can expect a growing debate over the repeal of the $10,000 limitation on state and local tax deductibility (SALT) from federal income taxes, and a proposal to lift the federal minimum wage to $15 per hour. Opponents of the higher wage threshold argue that it would result in the elimination of many leisure and hospitality jobs and that it would create new challenges to rural job formation. In our view, we see the need for a more coordinated minimum wage policy between the states and the Federal government as recognition must be given to varying standards of living across the Nation. We are certainly experiencing a rather conventional “January Effect”, with active reinvestment needs and contained weekly calendars. We have now seen 10 consecutive weeks of positive flows into municipal bond mutual funds and we have no reason to think that this trajectory will shift any time soon given still ample amounts of sidelined cash. We believe that until there is a material shift in market technicals or until there is something, such as a policy change, muni yields will likely hold to a narrow trading range with ratios staying depressed. It would take a period of sustained muni underperformance before ratios move away from their historically rich position. However, we are skeptical that ratios can move much lower, yet we do see continued prospects for muni outperformance with compelling technicals. Let’s recall, that our outlook calls for lower new issue volume in 2021. Having said this, volatility in bond prices is likely to come about given a new administration with a re-focused agenda, an uncertain rollout of the COVID-19 vaccine, and what will likely be further evidence of a choppy recovery.

For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Professional.