Stocks got crushed in October with rising interest rates and tariffs finally scaring investors enough to start selling. If it wasn’t for a big 2 day Halloween rally at the end of the month, the S&P 500 would have fared much worse. Still, it gave up all of its gains for the year, settling with a year-to-date loss of about 1% for 2018.
The markets were definitely due for a correction and it’s happening at a time of the year when these dips typically occur, historically speaking. This drop will go farther than most will believe just like when the market goes up more than most can believe. The good thing is that corrections always end. The other good thing is that they happen quickly compared to melt ups – “stocks take the stairs up but the elevator down”. Finally, the best thing about corrections is that they produce some great investment opportunities.
These drops are always good reminders to rebalance your portfolio on a consistent, periodic basis. That way, you force yourself to sell high and buy low, as opposed to the more common, but less profitable, sell low and buy high strategy.
I do suspect this volatility in stocks will go on through November, as everyone digests the election results.
Bonds dropped in price across the entire spectrum of issuers, with the exception of short term government treasury bills. This type of price action can be interpreted as a flight to safety by big institutional traders. They’re putting their sales proceeds from stocks and longer term bonds into some short term low risk government bonds until things settle down so they can get back into the higher risk markets. This is what the big firms do so they don’t have to show positions in stocks or bonds that have gone down so much in price on their holdings sheet. It’s a silly practice but it provides a great opportunity for astute investors to get on the other side of that trade.
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 continue to rise but at a nice, steady pace. I don’t like seeing any kind of interest rate changing too quickly. Slow and steady typically translates into a solid economy. I pulled the following rates from bankrate.com, which changed how they average national rates, hence the difference from last month’s update.
Currently, the average savings account is paying 1.22%. The 1 year CD interest rate is now averaging 2.59% and the 5 year CD rate is at 2.97%.
Mortgage rates remain firmly above 4%, with the 30 year rate at 4.73%, up 0.13% 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 on the east and west coasts. This should help keep mortgage rates from rising too quickly.
Oil prices continued its month higher, month lower trend by dropping over 10% in October after a 5% rise in September. Price per barrel ended October at $66.28, down from 73.50 a month ago.
Oil prices are still up almost 10% so far this year, but we are currently in a time of the year that energy prices drop so those gains might evaporate before the end of the year.
Nationally, gasoline prices are averaging about $2.80 per gallon. FYI, a year ago, we were paying $2.45. Baton Rouge, LA has the cheapest gas in the country 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:
- Russian Investigation: Mueller has pretty much gone dark on communications until after the elections. Should be interesting information coming out of his office over the next month or so.
- Trade Wars: Memo to Trump: There can be 2 winners in a negotiation. Trump is meeting with his counterpart from China soon but if they don’t agree on getting rid of the tariffs, both of our economies are going to suffer greatly. If there’s no resolution, this will become a war of attrition that we just can’t win against China. Still keeping my fingers crossed on this one.
- November Elections: The prognosticators say that democrats will take the HOR but republicans will keep control of the Senate. If this holds true, normally, a split party Congress is usually good for stocks. However, there is nothing normal about our current political situation, so proceed with caution.
- Federal Reserve: I have to believe the Fed will rethink their aggressive stance on raising interest rates, especially with the crippling effect that the current and proposed tariffs will have on our economy. If they pump the brakes a little, that should spark a rally in the markets. Their next meeting is right after elections so the first full week of November is going to be very exciting!
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
