Why Municipal Bonds May Be Appealing amid Market Turmoil

Recent market turmoil has made many investors understandably nervous, but it has also created opportunities. Municipal bond funds, for example, may be appealing right now.

Municipal bonds are issued by governments (both state and local) and their agencies, such as counties, cities, schools, and water districts. They are used to finance public projects, such as schools and airports, and some private projects, such as nursing homes and toll roads. Municipal bonds are widely available via mutual funds.

Investors have traditionally purchased municipal bonds for two reasons. First, like all bonds, they may offer a measure of diversification and stability when equity markets are volatile. That is because increased equity market volatility causes bond yields to move higher and prices lower.

Second, municipal bonds offer potential tax-free income. You do not pay federal taxes on municipal bond interest. The interest may also be exempt from state and local taxes because most states do not require their residents to pay state and local taxes on interest received from bonds issued by governmental entities within their states. This may be the greatest appeal of municipal bonds.

One thing to keep in mind is that no investment is entirely immune from market volatility. While the overall default rate on rated municipal bonds is low, municipal bonds have certainly been affected by market volatility surrounding the COVID-19 pandemic. There are concerns about the longer-term effect a severe slowdown in economic activity could have on municipalities’ finances.

As a result, selecting the right municipal bond is of paramount importance. First, you should seek municipal bonds that are rated. Second, some municipal bonds are insured, offering greater safety. Third, you also want to choose a municipal bond that carries an appealing maturity.

Let me help you manage market volatility with the best options that fit your financial goals. Give me a call today.

When Markets Are Volatile, Measuring Value Is Critical

When markets are volatile, many investors want to understand how they can measure the true value of a stock. Conventional wisdom holds that price-to-earnings (P/E) ratio is the go-to gauge, but there are other options.

P/E ratio compares a company’s share price to its earnings per share, according to Investopedia. It is calculated by dividing market value per share by estimated earnings per share.

What does that mean? The lower the P/E ratio, the “cheaper” a stock, at least in theory. We say “in theory” because in today’s volatile economic and market environment, the “E” in P/E ratio can’t always be trusted. Corporate earnings estimates may be unrealistically high.

That’s why we recommend looking at ways to value stocks that do not involve corporate earnings, such as enterprise value and free cash flow.

Enterprise value calculates the worth of a company based on its entire capital base: short- and long-term debt, preferred stock, and minority interests minus total cash. Including debt is important because it helps investors determine if a company is using debt to inflate its profits.

Free cash flow, meanwhile, takes a company’s earnings and subtracts capital expenditures, thereby revealing the amount of cash a company is able to generate after maintaining or expanding its asset base. This measure thus gives investors an idea of a company’s ability to boost dividends or buy back shares.

If you are investing in stocks when markets are volatile, you may want to determine which of these measures is appropriate for you based on a number of financial measures.

Please reach out to me so I can support you and provide guidance during these unprecedented times.