March 21st, 2016
This week we look at updated performance numbers for municipals vs. taxables and highlight the challenges of using volume statistics for the West Coast ports to infer economic activity levels.
Municipal Market Underperformance Extends Beyond Treasuries
After being one of the best performing asset classes last year, municipals have underperformed taxable markets this year. While Treasury rates are substantially lower on the year, municipal yields are close to unchanged. Municipals have also underperformed vs. taxable credit markets.
Within the municipal market, positive technicals have lead to outperformance of high yield vs. investment grade. It is interesting to contrast this to the taxable credit markets, where, despite high yield’s recent recovery, investment grade has outperformed high yield.
While municipal high yield has outperformed municipal investment grade this year, the correlation between the two sectors remains strong. Using the weekly price change of two large ETF’s as a proxy, the correlation between high yield and investment grade in municipals has been 0.62 so far this year. The average correlation since 2009 has been 0.70.
West Coast Port Volume Comparisons Skewed by Last Year’s Strike
In last week’s Commentary, we discussed the threat to the nation’s economy if the winner of the Presidential election carries through on the anti-trade policies that have dominated both parties’ primaries and these policies lead to trade wars.
In the past we have highlighted the value of monitoring volume statistics at the West Coast Ports of Los Angeles and Long Beach. The two ports recently released their volume numbers for the month of February. Both ports showed strong year over year growth in volumes. Media reports over the weekend touted these increases as a signal that the economy is healthy. Unfortunately, the year over year changes cited in the article were skewed by impact on last year’s volume of slowdowns due to labor strikes.
Another potential distortion is that due to leap year, February had one extra day this year (potential impact +3.6%).
Rather than focus on year over year change in one month’s statistics, we prefer to look at the 12-month rolling average.
Examining the numbers this way puts the February increases in a better context. Much of the improvement is likely due to recovery from strike-depressed volumes, rather than a sign of boisterous consumer demand.
Another interesting aspect of the statistics is the mix between outbound (exports) and inbound (imports).
Imports have been far larger than exports for many years. Perhaps due to the strength of the dollar, this gap has widened in recent years.
Exports share of port volumes continues to trend lower.
The recent decline in the dollar that has returned it to levels of October ‘15 may slow this trend. Unfortunately, a slowing of the trend is not likely to be enough to change the anti-trade rhetoric that is dominating the Presidential election.
Have a Great Week,
Michael Craft, CFA