In much the same manner as we discuss risk off/risk on, I think it is time to brand fiscal policy on or off. Despite many hours consumed discussing all variations on a theme, most observers are now coming to the realization that the likelihood of additional stimulus before the election has an extremely low probability. This decided lack of action means that states and localities cannot count on additional federal aid in the near term. After the election, we will hit the restart button depending on who will be at the helm.
The federal deficit is 3x what it was in the prior year and the federal debt level has now attained the level last witnessed in WW II. And yet, Treasury levels continue to be very moderate still. On the other hand, municipal rates have back up a bit in the ten-year range at around 90 bps while the long end has retained its composure. Some of the pressure on the shorter end may be coming with the large spike in supply this week. However, the uncertainty about election outcomes is also coming to bear. There has been growing concern and discussion that the approach to taxation after the election may be in for real change. This outcome also depends on what the composition of the Congress will look like going forward.
The acceleration in retail sales is providing some relief on the revenue side for taxing jurisdictions. The effect is relatively quick when it comes to sales taxes with a lag of generally only a month.
There has been more consternation of what real estate valuations will be going forward in the Central Business Districts. If we may assume that the rent rolls will be on the wane, the property tax appeals will accelerate. Prior to the pandemic, there was serious talk about reforming the property tax system in New York City. That push for reform will be postponed for some time until all the ramifications from Covid-19 may be fully evaluated and analyzed.
The resurgence in the virus in select hot spots is a setback. Whether these areas may be contained without further spread remains to be seen. Restaurants were starting to do more outdoor business and the indoor capacity was lifted to about 25% of the typical volume. With cooling temperatures, many dining establishments will continue to struggle. Another round of federal stimulus would help to have these businesses hanging on until the Springtime.
In the meantime, the municipal investor has had to continue to invest knowing that these rates will prevail for some time to come. Most municipal investors also have equities in portfolio to benefit from growth. Participating in Zoom calls and investing in the name has had its benefits. It is quite challenging to seek out gains in municipals without having an exceptionally good read on the credit cycle that we are in now. We are still at the early phases.
I know that we will have a lot more to say after the election. It we do not have a stimulus until after inauguration day, we will more likely be dealing with more developing credit situations.
Stay safe and vote in the manner that works for you.
John Hallacy
John Hallacy Consulting LLC
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