Markets
From Coast to Coast: How U.S. Muni Bonds Help Build the Nation
Over 200 Years of U.S. Municipal Bond History
Our modern society shares few characteristics with the 1800s. In the last two centuries, styles have changed, laws have evolved, and cities look entirely different. However, one thing that has prevailed is the way state and local governments finance public projects.
Far from a new invention, municipal bonds have been shaping U.S. communities for more than 200 years. In today’s infographic from New York Life Investments, we take a look back at their long history.
Early Beginnings – 1800s
1812: First Official Issue
New York City issues a general obligation bond for a canal.
1817-1825: Facilitating Economic Growth
A few years later, 42 separate bond issues help fund the successful Erie Canal project.
1843: Growing Popularity
Municipal debt sits at about $25 million. Over the next two decades, this total increases exponentially to fund urban improvement and free public education.
Circa 1865: Railroad Expansion
For a few years after the American Civil War, a great deal of debt is issued to build railroads.
1873: The Panic of 1873
Excessive investment in railroads, real estate, and nonessential services leads to the downfall of the large bank Jay Cooke and Co., smaller firms, and the stock market. Many state and local governments default, temporarily halting municipal financing.
The 20th Century
1913: Exception Granted
U.S. Congress introduces a permanent federal income tax, and specifically excludes municipal bond income from taxation.
Note: today, a portion of municipal bonds are taxable.
1930: Expansion in the West
In the midst of the Great Depression, voters approve $35 million in funding to build the Golden Gate Bridge.
1939-1945: Diverted Resources
With financial resources directed to the military in WWII, municipal debt falls. By 1945, total debt sits at less than $20 billion.
1960: Exponential Growth
Only 25 years later, outstanding public debt—the total amount owed to creditors—more than triples to $66 billion.
1971: Investor Protection
Municipal bond insurance is introduced. That same year, insured municipal bonds finance the construction of hospital facilities in Alaska—bringing essential services and investment opportunities to a remote area.
1975: Marketplace Stewardship
Bringing further reassurance to the municipal bond market, the Municipal Securities Rulemaking Board (MSRB) is introduced to establish regulations for dealers, and for advisors at a later date.
1981: Continued Growth
Outstanding public debt reaches $361 billion.
Modern Day
2009-2010: Economic Recovery
More than $181 billion of federally-subsidized Build America Bonds are issued by state and local governments to help stimulate the economy after the financial crisis.
2016-2018: Investor Dollars at Work
In recent years, state and local debt has financed many important projects across the country.
- 2016: The New York State Thruway Authority issues $850 million in bonds to finance a portion of the new NY Bridge Project.
- 2017: California’s Department of Water Resources issues $428 million in bonds for the maintenance and construction of its water management infrastructure.
- 2018: The Denver International Airport issues $2.5B in bonds to finance capital improvements, the largest airport revenue bond in municipal bond history.
2018: Helping People and the Planet
Sustainable applications for municipal bonds continue to grow, with Californian voters approving $2 billion in financing for supportive housing. In addition, state and local governments issue $4.9 billion in U.S. municipal green bonds.
Today: A Sizable Investment Opportunity
As financing spans the nation, the U.S. municipal bond market is both large and active:
- $3.8 trillion capital market
- One million outstanding securities
- $11.6 billion in par traded per/day
- 40,000 daily trades
Not only that, municipals have offered a compelling after-tax yield. For example, high yield municipals offered 121% of the after-tax yield of high yield corporates as of September 30, 2019.
The Foundation of Infrastructure
For over 200 years, municipal bonds have provided critical financing to build hospitals, schools, highways, airports, and more. Today, two out of three infrastructure projects in the U.S. are financed by municipal bonds.
Additionally, municipals have weathered almost every economic storm, providing much-needed capital stimulus during some of the deepest U.S. recessions. As history continues to unfold, municipals hold great potential for issuers, communities, and investors.
Markets
Beyond Big Names: The Case for Small- and Mid-Cap Stocks
Small- and mid-cap stocks have historically outperformed large caps. What are the opportunities and risks to consider?
Beyond Big Names: The Case for Small- and Mid-Cap Stocks
Over the last 35 years, small- and mid-cap stocks have outperformed large caps, making them an attractive choice for investors.
According to data from Yahoo Finance, from February 1989 to February 2024, large-cap stocks returned +1,664% versus +2,062% for small caps and +3,176% for mid caps. Â
This graphic, sponsored by New York Life Investments, explores their return potential along with the risks to consider.
Higher Historical Returns
If you made a $100 investment in baskets of small-, mid-, and large-cap stocks in February 1989, what would each grouping be worth today?
Small Caps | Mid Caps | Large Caps | |
---|---|---|---|
Starting value (February 1989) | $100 | $100 | $100 |
Ending value (February 2024) | $2,162 | $3,276 | $1,764 |
Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Mid caps delivered the strongest performance since 1989, generating 86% more than large caps.
This superior historical track record is likely the result of the unique position mid-cap companies find themselves in. Mid-cap firms have generally successfully navigated early stage growth and are typically well-funded relative to small caps. And yet they are more dynamic and nimble than large-cap companies, allowing them to respond quicker to the market cycle.
Small caps also outperformed over this timeframe. They earned 23% more than large caps.Â
Higher Volatility
However, higher historical returns of small- and mid-cap stocks came with increased risk. They both endured greater volatility than large caps.Â
Small Caps | Mid Caps | Large Caps | |
---|---|---|---|
Total Volatility | 18.9% | 17.4% | 14.8% |
Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Small-cap companies are typically earlier in their life cycle and tend to have thinner financial cushions to withstand periods of loss relative to large caps. As a result, they are usually the most volatile group followed by mid caps. Large-cap companies, as more mature and established players, exhibit the most stability in their stock prices.
Investing in small caps and mid caps requires a higher risk tolerance to withstand their price swings. For investors with longer time horizons who are capable of enduring higher risk, current market pricing strengthens the case for stocks of smaller companies.
Attractive Valuations
Large-cap stocks have historically high valuations, with their forward price-to-earnings ratio (P/E ratio) trading above their 10-year average, according to analysis conducted by FactSet.
Conversely, the forward P/E ratios of small- and mid-cap stocks seem to be presenting a compelling entry point.Â
Small Caps/Large Caps | Mid Caps/Large Caps | |
---|---|---|
Relative Forward P/E Ratios | 0.71 | 0.75 |
Discount | 29% | 25% |
Source: Yardeni Research (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Looking at both groups’ relative forward P/E ratios (small-cap P/E ratio divided by large-cap P/E ratio, and mid-cap P/E ratio divided by large-cap P/E ratio), small and mid caps are trading at their steepest discounts versus large caps since the early 2000s.
Discovering Small- and Mid-Cap Stocks
Growth-oriented investors looking to add equity exposure could consider incorporating small and mid caps into their portfolios.
With superior historical returns and relatively attractive valuations, small- and mid-cap stocks present a compelling opportunity for investors capable of tolerating greater volatility.
Explore more insights from New York Life Investments
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