Stocks continued their march higher, ending the month of August up a little over 3%. This has been one of the better summers for stocks that I have seen in awhile. The S&P 500 is now up about 9% for the year and is at all-time highs.
As I mentioned last month, this stock market is resilient to say the least, especially with what’s going on in DC and the trade wars. This stuff creates a lot of worry for investors, but as they say on Wall Street, markets climb a wall of worry. It’s when everyone thinks the storm has passed that stocks take a hit. That is why it is always prudent to monitor your investments regularly to ensure that you are properly diversified for any unseen events.
We’re now done with the dog days, school is back in session, football’s starting up, and the senators and reps should be getting back to “work” in Washington. Historically, September is the worst month for stocks but if any market can buck that trend, this market can. We shall see.
Bonds reversed course and headed higher in August as investors became more wary of the trade wars and headed for safe havens.
The yield on the benchmark 10 year US Treasury note fell back below 3% to 2.86%. This compares to a 2% yield for the S&P 500. This narrow spread keeps me invested in stocks. I’d 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 do not have an actual maturity date, such as bond mutual funds.
On the savings side, rates for savings, checking, and money market still stink but CD rates are bumping up nicely.
Currently, the average savings account is paying 0.09% and the average money market account is paying 0.20%, both unchanged from last month.
The 1 year CD interest rate is now averaging 2.49% (up from 2.41% last month) and the 5 year CD rate is at 2.85%(up from 2.77% last month).
Mortgage rates stayed pretty much flat this past month. The 30 year rate is 4.41%, down slightly from 4.47% from last month. Home sales have dropped a little bit over the summer but research shows that it’s mostly due to lack of inventory. This subsequently reduces demand for mortgages and should keep a lid on rates for a little bit.
Historically, rates are still extremely low but the path of least resistance is still up, for right now.
Oil prices stopped their free fall in August, finishing the month up 1.6% at $69.88.
We’re heading into the meat of the hurricane season and we usually see a spike in oil prices when one forms in the Gulf of Mexico, but so far, we’re clear skies (knock on wood).
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 $2.84 per gallon. These are the highest gas prices for the Labor Day weekend since 2014. FYI, a year ago, we were paying $2.58. Spartanburg, SC has the cheapest gas in the country for a third month in a row at $2.46.
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: Two of the big players in this case had major activity on August 22nd: Paul Manafort was found guilty on a bunch of charges and Michael Cohen plead guilty on a bunch of charges. Amazingly, the markets were not impressed and shrugged off the news. It appears the markets had already priced in guilty verdicts for these two. The markets will move when something unexpected comes out. For now, it seems like everybody is in wait and see mode to find out if there is some major corruption, obstruction, collusion, etc. Regardless, the odds are very low of Trump being indicted while he is in office.
- Trade Wars: This war is in full swing now and we’ll start to see its effect with prices rising for nearly all consumer goods. With regards to investments, you’ll probably won’t see the tariffs reflected in a company’s financials until after the end of this year. Domestic steel and aluminum producers are definitely going to benefit but that’s about it in the short term. Unfortunately, the same can’t be said for our farmers, especially soybean producers. They are taking it on the chin, bad enough that the government has started to bail them out to a tune of $6 billion. I’m still hopeful we can negotiate some good trade deals so we can end this trade war asap.
- Mid-Term Elections: The results of these elections will have huge ramifications if there is proof of involvement of Trump. There could be a potential for impeachment proceedings to begin if the democrats take control of Congress. I don’t know if that would be good or bad for investors. I do know it would be a short term market mover either way.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
