Stocks managed to squeeze out another gain in May as it tries to claw back the losses from earlier in the year. The S&P 500 ended the month of May up 2.3%. For the year, it is back in the green but still well off its January highs.
The on again, off again trade wars is making investors very nervous. Now, Trump is going full protectionist mode, slapping tariffs on friends and foes alike. The end result will be higher prices for pretty much everything and a lot of angry consumers. It could also accelerate us into a recession. That would stink because the economy is humming along quite nicely right now despite all of the distractions.
Bonds moved up just a bit in price this May. The best performers were the bonds with the lowest risk, such as US government bonds and bonds from high quality companies.
The yield on the 10 year US Treasury note retreated back below 3% as traders sought out safe havens for their money. This yield is important because investors consider it the risk free rate and it is used to compare risk with other investments, such as stocks. When this rate rises to a point where it isn’t worth the risk to own stocks, investors sell stocks and buy treasuries.
As I mentioned previously, 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 and expect to hold the bonds until maturity. 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.
On the savings side, rates held pretty steady this month. This is a good thing. I don’t like seeing any kind of interest rate changing too quickly. Slow and steady typically translates into a solid economy.
Currently, the average savings account is paying 0.09% and the average money market account is paying 0.18%.
The 1 year CD interest rate is now averaging 2.17% (up from 2.10% last month) and the 5 year CD rate is at 2.62%(up from 2.61% last month).
Mortgage rates remained above 4%, with the 30 year rate at 4.35%, down just a bit from last month. 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 still up, for right now.
Oil prices ended slightly down from where they began in May but not before hitting almost $73 per barrel about a week ago. Price per barrel ended May at $67.04, down from $68.57 a month ago.
OPEC is still trying to remain relevant but they are becoming less so as the U.S. is set to become the largest oil exporter in the world. As long as oil prices stay at these levels or higher, we will reach that milestone.
Nationally, gasoline prices are averaging about $2.97 per gallon. FYI, a year ago, we were paying $2.39. New Orleans, LA has the cheapest gas in the country at $2.60.
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:
- Russian Investigation: No major revelations in May. Trump’s new lawyer, Rudy Giuliani, is saying that the investigation should be over in September. Until then, expect an onslaught of tweets from Trump but nothing from the other side.
- Negotiations with North Korea: It was looking pretty good until about a week ago. The meeting was scheduled with Trump and Kim. Then it was canceled. Any progress will be a positive for the markets. Personally, we should let NK and SK get to work resolving their problems. We should step back and assist if requested by them.
- Infrastructure Bill: I’m yanking this off the board until after the elections. No chance they’ll get anything done before then.
- Trade Wars: This is heating up big time. The metal tariffs that were proposed earlier this year are set to go into effect today, 06/01/18. Metal producers from Mexico, Canada, and Europe will be affected. Earlier this week, team Trump said it would proceed with tariffs against China as well. Affected countries are already retaliating with their own tariffs. This will have a negative impact on the markets, at least in the short term.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
