Stocks made it 2 months in a row of negative returns. The S&P 500 ended the month of March down about 3.1%, which in turn, caused stocks to turn negative for the year. A really big wrench got thrown into the economy and the stock markets when Trump slapped tariffs on some imports, specifically for products coming from China. They retaliated with import tariffs of their own on many of our exports. We need to get to the negotiating table instead of just shooting from the hip with these tariffs. China has a calculated strategy for these tariffs – targeting products from states that are first in the primary election cycle. The other problem is that our tariffs on China will hurt our economy much more than they will help it unless Americans are willing to pay more for their finished goods. Finally, China can easily outlast us in a game of tariff chicken. There’s no doubt that we have been taken advantage of over the years with our poor trading policies so this should be an ideal time to renegotiate those deals. However, throwing tariffs out there as our first move in the negotiating process is probably not the best way to go about it. I have to believe that we are doing some deals behind closed doors with China and other countries but I can’t help feeling skeptical with all the dysfunction coming out of DC on a daily basis.
Bonds moved up in price modestly in March. This is normal behavior: bond prices tend to rise when stock prices drop and vice versa. This is a good reason to be properly diversified in different asset classes (stocks, bonds, real estate, etc.). You want to own stuff that zigs when your other stuff zags.
I don’t think interest rates have stopped going up but nothing ever goes straight up or down during a long term trend. Rising interest rates is the path of least resistance over the next 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 looks like he will be using the same playbook as his predecessor so at least we know what to expect over the rest of the year. They are looking to raise rates 3 more times this year. 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 0.80%.
The 1 year CD interest rate is now averaging 1.96% (up from 1.92% last month) and the 5 year CD rate is at 2.45%(up from 2.39% last month).
Mortgage rates remained above 4%, with the 30 year rate at 4.27%. These rates could accelerate higher if we start to see increased wage growth and consumer price inflation. Historically, rates are still extremely low but the path of least resistance is up, for right now.
Oil prices resumed upward trend after taking a breather in February. Price per barrel rose about 4% and now sits at $64.38.
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 $2.66 per gallon. FYI, a year ago, we were paying $2.33. Lubbock, TX has the cheapest gas in the country at $2.29.
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 has been kind of quiet other than Trump’s lawyer quitting. I suspect some plea bargains are being worked on right now. Whatever the outcome, it will be a major market mover when it hits the press.
- Escalating Tensions with North Korea: This has calmed down quite a bit. North Korea has already met with China and when Trump meets with Kim Jong Un this month, it could be an historic moment that could defuse the whole Korean peninsula. Then, we can finally get out of there.
- Tax Law Effects: Companies will be reporting their Q1 results over the next couple of months. This is the first earnings reports with the new tax laws in effect. Should be some pretty good comparisons between 2018 Q1 and 2017 Q1 which will bode well for stock prices.
- Infrastructure Bill: Word is that Congress will not be able to agree on a bill before the end of this year. However, they might approach it as several smaller bills, like one just for bridges and another just for highways. That seems like it would be more doable.
- Trade Wars: This could get ugly if we don’t sit down with China and the EU and negotiate some win-win deals.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
