Investor Confusion Abounds
As the saying goes, war is hell and the volatility it causes in markets is also hellish. The good news is that the equity markets have not declined as severely as was the case in historical events. The economy continues to hold despite a very low level of hiring. What is more worrisome is that inflation continues to be stubborn at around the 3% level. The Fed goal of 2% appears to be quite challenged on the foreseeable horizon.
What is an investor to do? The standard response is to do nothing in the near term until this war is over. The dilemma is that the end of the war is nowhere in sight. An investor may consider allocating more to Treasury bonds since rates are up with the ten-year maturity now around the 4.28% level. However, there is room to attain the 4.5% level in the near term.
The Fed revealed that they are also quite mixed on the future path given they held rates steady. Consensus has formed that there will be only one rate cut this year. If the data does not change course, there may even be a rationale for a rate hike next year. Of course, the policy will be beholden to the Fed Chair transition and how that timing will evolve.
Inflation is now forecast at 2.7% for the remainder of 2026 and at 2.2% for 2027. The latter appears to be an ambitious goal. A lot will hinge on what transpires with oil prices. With a national average hovering around $3.84 the number of trips to the strip mall and other destinations may be consolidated into fewer trips. For those commuting by car, the higher costs will increase and will impinge on other spending.
But the effects of the war will largely depend on the duration and just how much damage is inflicted on the oil industry. It may take months or years and a good deal of capital to restore some of the facilities that have been damaged to working order.
Municipal Topics
There is a developing trend in some states to raise taxes and or fees to plug budget gaps. Previously, we discussed the California billionaire wealth tax that is pending. In Washington State, the legislature has approved a first ever income tax for those filers with $1 million or more of income at a rate of 9.9%. The increase is scheduled to go into effect in 2029 after a Supreme Court Review and a vote. Many have maintained over the years that the state’s constitution does not permit income tax. The proposed tax passed by a relatively narrow margin. The argument before the state’s Supreme Court will be most instructive.
New Jersey is considering whether to trim back certain corporate income tax breaks. Education and transit are spending items in need of more funds. Reducing property taxes in the state is also a perennial goal. In Pennsylvania, legalizing and taxing marijuana and other amusements is the order of the day. The state is focused on supplementing Medicaid considering the federal cuts. In New Jersey and Pennsylvania, these items are only budgetary proposals currently. The legislative processes have time to be conducted before the July 1 deadlines. Neither state has been considering broad-based tax increases.
In New York City, the Mayor has proposed a housing development over the Sunnyside train yards in Queens. There is keen developer interest. In order to facilitate the project, a concrete deck would need to be constructed over the train tracks in a similar fashion to what had taken place in the case of the Hudson Yards development. The HY deck was financed through PILOTS (Payments in Lieu of Taxes). A similar approach would be anticipated in the prospective Sunnyside development.
Higher rates are bound to make municipals more attractive to investors. But the municipal market has not had any significant issues with demand of late.
John Hallacy
John Hallacy Consulting LLC
03/19/26
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