Cumberland Comment by Patricia Healy, CFA

Special to the Herald-Tribune

Excerpt below.

The credit cycle does not yet seem to have turned; at worst, it is mixed. Last quarter we were wondering in our Q1 commentary, will this be the year credit trends reverse? Corporate spreads are tight; job growth has been strong enough to keep the Fed from easing; consumers are spending, albeit more slowly and getting accustomed to higher interest rates. There is the underlying issue that the housing market is stuck, and younger folks are spending instead of saving for a down payment and taking on mortgages, while those who have low-rate mortgages are loath to give them up and have slim pickings for another abode. There is some weakness in private, sovereign, and other credit markets as well as the office segment of commercial real estate and the banking sector, which has bifurcated credit quality between the big banks, which have more flexibility and products, and the regional banks that are not faring as well. Early July economic releases, which show signs of a cooling job market and the third straight month of rising unemployment, may indicate the economy is slowing. The ups and downs in economic data affected muni market returns as well.

On the muni front, governments and agencies are determined to maintain strong fund balances or reserves and are cutting costs or raising taxes to have balanced operations in the face of the drawdown of pandemic funds, higher wages and prices, and slower economic growth. Some municipalities are experiencing increasing population, and that might be causing growing pains; then there are some that have declining demographics, cost overruns, or management issues, resulting in lower fund balances and, potentially, downgrades. For example, the outlook on Memphis’ AA-rated GO bonds was recently changed to negative by S&P for budgetary imbalance and reduction of reserves as well as continuing expense pressure and loss of population. If the city does not improve budgeting and build up reserves or improve desirability to attract more residents, there is the chance of a downgrade.

Continue reading at the Herald Tribune website: https://www.heraldtribune.com/story/business/2024/07/22/patricia-healy-credit-cycle-mixed-with-fluctuating-economic-numbers/74422612007/

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