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An Alternative To Money Market Funds

July 2017

June is behind us amid clear signs the economy remains sluggish. The Federal Reserve chose to raise its benchmark interest rate by 25 basis points June 15 even though inflation does not appear to be a concern. The Consumer Price Index fell 0.1% in May, the second decline in three months. Brent and WTI crude oil both ended June well below the $50 per barrel level. The First Quarter Gross Domestic Product was only 1.4%, demonstrating the need for Congress to pass the tax cuts sought by the Trump administration.

All three major indices of the stock market again reached all time highs in June even though not a single item of the Trump legislative agenda has been passed by Congress. The Nasdaq Index declined notably during the second half of June after leading the overall market rally this year. In corporate news, GE is replacing CEO Jeff Immelt with John Flannery effective August 1. Whole Foods will be acquired by Amazon while Staples will be taken private by Sycamore Partners as the M&A market showed signs of life after a quiet first quarter.

One of the troubling developments of 2017 has been the growing problems in municipal finance. Puerto Rico is now in bankruptcy and there is a real chance other territories of the United States may do the same. A little noticed provision of the PROMESA bill passed by Congress last year enabled other American territories to file for bankruptcy too. The US Virgin Islands, Guam, the Northern Mariana Islands, and American Samoa all appear to be at risk. The US Virgin Islands situation is acute as it owes $6.5 billion to pensioners and creditors but its population is only about 100,000 people.

Meanwhile, both Illinois and Connecticut are facing their own difficulties but under existing law, are unable to file for bankruptcy. The Illinois bond rating will soon reach junk status. The state has over $15 billion in unpaid bills according to State Comptroller Susan Mendoza while its monthly spending is now averaging more than $600 million more than its tax receipts.

Connecticut’s fiscal problems continue to grow. In late June, Aetna announced it was relocating its headquarters to New York City from Hartford, where it had been for 164 years. Aetna was swayed by millions in tax breaks from New York State and New York City. Hartford itself is on the verge of filing for bankruptcy according to recent statements by its Mayor, Luke Bronin. The city is seeking assistance from the state and concessions from its unions to avoid filing for bankruptcy.

Sadly, there will likely be more bankruptcy filings by many of our cities and local communities. For this reason, our firm focuses on S&P 500 companies with a history of both paying and increasing their dividends. These companies do so thanks to their financial strength and offer the potential for capital appreciation as well.

If you are unhappy with the returns now offered by money market funds feel free to contact us.

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