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Market News & Commentary - From The Desk Of David Loesch 05.20.2021

Market News & Commentary - From The Desk Of David Loesch 05.20.2021

May 20, 2021


  • Some Federal Reserve Officials were open to the debate about "scaling back" the asset purchases. This "potential" taper talk is not uncommon, and I suspect we will hear a lot of this type of talk over the next several months.  Powell has indicated that the FED will give the markets "plenty" of notification if any tapering occurs.
  • $350B of the $550B will be distributed to states and municipalities this week and next. Yellen commented that the funds would head off a repeat of the painful budget cutting, which slowed our recovery last year.  These funds will be great for weaker type credits such as NY, IL, NJ, and CA.  As mentioned, Moody's is in the first stages of increasing credit ratings in many of these states. 
  • The State of CA is one of the largest benefactors of Federal Aid. Since February, most states (except NY) saw revenue turn around significantly, and overall budget deficits were far less than what was feared.  This news is excellent for the muni market as many states will be flush with cash for the next year compared with the last two. See graph below for aid to states.
  • The White House was encouraged by talks Tuesday with Republican Senators on a new infrastructure package. The GOP "alternative" plan attempts to keep the spending down and costs under control.  Issuing trillions of dollars in debt is not the answer. However, with Yellen and Powell at the helm, I suspect the "tax and spend/spend, and tax" mentality will continue with the Biden Camp approving any deal that resembles this. Overall, this will be good for MUNI's as we move through the year. Money going to municipalities will be looked upon by rating agencies as favorable, and upgrades will most likely happen.
  • Due to support from the American Rescue Plan Act, Fitch indicated that positive credit implications would likely be limited to states with credit ratings that currently have a negative outlook. It will depend on how they use the capital. Moody’s has said this as well. I suspect we will see upgrades if these states use the funds to build out projects and produce jobs that would increase tax revenues.
  • With taxes on the minds of many, residents of NJ, MA, and CT will face the highest tax burdens over a lifetime.  Those living in NJ will pay an average of $931K, well above the $87K for MA residents and $805K for CT residents. The average person will spend about 33% of their earnings on taxes. However, people in high-tax states like NJ are moving to places such as FL and TX.  This exodus will eventually hurt these states as many move out or retire from their current employer.  This kind of taxation will continue to be a tension point in the debates under the Biden proposal and will be watched closely by the rating companies.  Overall, MUNI's in these states will benefit from the high taxes; however, one must consider the lack of revenue this might cause. 



David Loesch

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