Stocks got whipsawed in February, dropping 10% in the first week of the month. They then proceeded to quickly recover those losses, recovering nearly 70% of those losses in just 6 days. It was pretty dramatic and felt even worse because we haven’t had any big swings in the markets in such a long time so I think a lot of investors were taken by surprise.
For long term investors, these dips are non events but do become great buying opportunities for certain investments.
After all the wild gyrations, the S&P 500 ended down 3.5% for the month, snapping a 10 month win streak.
It seems like investors are coming to the realization that interest rates are not going to stay at all-time lows forever and are figuring out what to do. The good news about rising interest rates is that it means the economy is doing well. Subsequently, in a rising interest rate environment, stocks tend to go up as well. We just have to watch how fast they go up because that is what really influences the markets.
Bonds of all varieties continued to drop in price in February as interest rates continue to creep up. This is a longer-term trend that should play out over several years. So, if you are investing in bonds, make sure their maturity is 3 years or less. Also, try to avoid investment vehicles that have no maturity constraints, such as bond mutual funds. Please read my recent blog on this topic for more details: Why Bonds May Be More Riskier Than Stocks.
The new Federal Reserve chairman Jerome Powell, held his first testimony in front of Congress this week and hinted that the Fed plans on raising interest rates incrementally this year, probably about 4 times by the end of 2018. Remember, the Fed only controls the Fed Funds Rate, which is the rate banks charge each other for overnight loans. However, this rate does influence pretty much every other interest rate out there. So, when the Fed raises the FFR, you can be pretty certain your credit card rate and variable rate on loans will be going up as well. As an example, my HELOC’s variable rate has been increasing in step with the FFR increases, so I have been paying it down more aggressively.
For those who weren’t around in the late 70’s/early 80’s and think rates are getting too high, here’s a nice 55 year chart of the interest rate of the US Treasury 10 year note to put it into perspective how low rates are right now: http://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart.
On the savings side, rates are starting to creep up with a little more speed but they’re certainly in no hurry.
Currently, the average money market/savings account is paying 0.84%.
The 1 year CD interest rate is now averaging 1.92% (up from 1.85% last month) and the 5 year CD rate is at 2.39%(up from 2.31% last month).
Mortgage rates have moved above 4%, with the 30 year rate at 4.28%. These rates could accelerate higher if we start to see increased wage growth and consumer price inflation. These higher rates seem to be affecting home builder stocks. I think this is crazy. Mortgage rates are still lower than when my dad bought our house in 1965 (rate was 6%).
Oil prices finally took a breather, dropping about 5% in February. Price per barrel now sits at $62.87.
As little as 5 years ago, all the conflict occurring now in the in the Middle East would have caused oil prices to rise and stay high for a long period of time. It is very obvious now that the impact of increasing the production of our own oil, as well as Mexico and Canada, has dramatically lessened the affect that the Middle East region (OPEC) has on oil prices. Hopefully, this will continue even as we transition to cleaner and renewable energy sources.
Nationally, gasoline prices are averaging about $2.52 per gallon. FYI, a year ago, we were paying $2.29. El Paso, TX has the cheapest gas in the country at $2.18.
Check out the prices at the pump in your area: Gas Buddy.
Outlook
Events on the horizon that could move the markets in the near term:
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Russian Investigation: This continues to heat up. More charges were filed against Manafort and Flynn as well as some Russian Nationalists. I don’t know if it will ever get all the way up the chain of command but it feels like somebody is going to succumb to the pressure and start singing.
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Escalating Tensions with North Korea: Now that the Olympics are over, North Korea seems to be feeling the love and wants to start talking. I’d love if we just backed away and let South Korea handle this. We have enough on our plates stateside.
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Tax Law Effects: Warren Buffet gave his blessing on the new tax law but why wouldn’t he. His company made a cool $29 billion due to the tax code changes. Hopefully, we’ll see some decent increases in wages and some new jobs as a result of these changes, not just share buybacks and insane salaries for CEOs.
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Infrastructure Bill: No progress on this item since last month. The details on this are few and far between but if Congress and the president can put something together before the end of the summer, we could see a big job creator and another rally starter for stocks.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
