Turmoil Tests
Markets and investors are being tested in many ways that have not occurred in the recent period prior to the start of the war. Many comparisons are being made to prior times of crises. One of the most frequently cited lessons from the past is the negative effect of stagflation. Unemployment is only up marginally at this point. Yet there has been a decided slowdown in hiring. What is more vexing is the inflation outlook.
The OECD recently pegged inflation for the USA to 4.2% in 2026. This estimate is well above current readings. It is not clear what the assumption is for the duration of the war. Much of the elevated inflation prediction is attributable to elevated oil prices. The present readings of the various oil prices will persist until there are some rational approaches and agreements to moving ships through the Straits of Hormuz.
The pause in any escalation of military activity on the part of the USA until April 6 will serve to elongate the period of uncertainty. The impact on economies around the globe cannot be dismissed.
As we had stated previously, the ten-year Treasury could climb to the height of 4.5%. The current level of 4.41% is rapidly approaching that level.
Hopefully, the successful resolution of the TSA funding will propel the economy further. The OECD has estimated the GDP for the USA at 2%. That level of growth should be attainable if oil does not spike even further.
What happens with tariffs going forward has been masked by the attention on the war. There is no visible move to commence with rebates of any kind at this point. Also, the work around keeping tariffs in play has not been fully revealed.
The real fear in all these developments is that there will be a drag on the economy and most importantly corporate earnings. Equities have been battered but have not declined nearly as much as in previous crises. What is amazing is that earnings estimates have not been adjusted very much or at all to reflect the current reality. This factor makes monitoring the data even more pressing.
No entity is more data driven than the Fed. The war has changed the outlook for Fed action appreciably. We really do not know if we will have an easing or a tightening. We are aware of the outcome the administration seeks.
Municipal Matters:
We recently learned of an effort to roll back the income tax rate in Massachusetts from 5% to 4%. Clearly, taxpayers would benefit from the change but at what cost? The Commonwealth’s budget and finances have been solid of late. If the proposal succeeds, the budget will be hard pressed to accommodate the change. Many other states in the Northeast are considering approving tax increases to maintain spending and to allow for innovative programs. Many of said programs are targeted at affordability and healthcare spending. The latter has been driven by the federal cutbacks in Medicaid. Other critical spending priorities include supporting programs for housing. Polling in Massachusetts indicates the proposal has popular appeal.
We continue to monitor the various tax increase proposals. New York State’s budget is due by April 1, and the governor has remained firm on not increasing the income tax including the NYC component. This stance has generated more pressure on NYC to identify more potential cuts in the proposed budget. The proposed property tax increase is very much still on the table. The recent City GO offering was orderly and did not reflect much change in levels and spreads.
One aspect is certain for all governments with income taxes, if the equity downdraft continues for an extended time, there will be fewer capital gains revenues on the horizon.
John Hallacy
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