Stocks ended up a healthy 3.7% for the month of July. The S&P 500 is now up about 5.4% for the year and nipping at the heels of its January highs. It seems like nothing can keep this market down for any significant period of time. I, for one, am very impressed by its resiliency.
We are now officially in the midst of the dog days of summer. Congress is on vacation, European companies pretty much shut down in August, and all the big institutional traders head off to the Hamptons to do whatever they do in the Hamptons. But that doesn’t mean it’s going to be quiet and boring for the markets. As you’ll read in the Outlook section, there’s some things that could make the dogs bark in the next few months.
Bonds dipped a little once again in July as investors felt better about taking on more risk in their portfolios after the initial scare of the trade tariffs.
The yield on the benchmark 10 year US Treasury note climbed back up to almost 3% once again. This compares to a 2% yield for the S&P 500. For me, if I had an investment time horizon of 10 years, I’d still rather invest in stocks of high quality companies that pay a decent dividend than in government bonds. However, I would consider those bonds if the 10 year Treasury yield went above 4%. 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.
On the savings side, rates started to inch up a little bit, but nothing too dramatic. Of course, we would all like to have a savings account paying 5% interest, but this slow, steady advance 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 0.20%.
The 1 year CD interest rate is now averaging 2.41% (up from 2.30% last month) and the 5 year CD rate is at 2.77%(up from 2.76% last month).
Mortgage rates are firmly above 4%, with the 30 year rate at 4.47%, up 0.07% 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. Recently, there have been signs of downward pricing pressure in the housing industry, particularly in California and the New York Metropolitan area. This should help keep mortgage rates from rising too quickly.
Oil prices did a huge about face in July, sinking 7.3%, its worst monthly decline since 2016. Price per barrel ended July at $68.76, down almost six bucks from a month ago.
Who knows if this is just a pause in the oil price rise or if it is something more. Typically, oil prices tend to peak in August/September so we’ll see if this seasonal trend holds true this year.
Nationally, gasoline prices are averaging about $2.87 per gallon. FYI, a year ago, we were paying $2.32. Spartanburg, SC has the cheapest gas in the country for a second month in a row at $2.52.
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: There are now 32 indictments and 5 guilty pleas so far. Manafort’s trial has started but it now looks like Mueller will be working on his investigation well into 2019. In any case, it is highly doubtful that Trump will be indicted. Also, I believe Manafort and others might clam up and take their chances at trial, in the hopes of getting a presidential pardon.
- Trade Wars: Reality will be setting in as a result of US tariffs: expect higher prices for cars, TVs, beer, soda, etc., expect company earnings to drop during the rest of this year, and expect layoffs. Of course, this could all go away if we do some negotiating. There’s good odds that Trump will make these tariffs go away before the November elections. If so, a lot of uncertainty will be removed from the stock market and we should get another leg up as a result.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
