Stocks continued to drop through the month of November until Thanksgiving. Then, we got a nice little rally that helped most stock market averages end positive for the month. The S&P 500 ended November with a 2.9% gain and is now positive for the year again, at 2.4% on the plus side.
Who knows if this will last, but historically speaking, we are at the start of the best time of year to be invested in stocks. I feel like investors that were waiting on the sidelines finally jumped in during the last week of November, giving investors some relief.
The elections came and went with no major surprises. The biggest influences on the markets going forward will be the Federal Reserve, commodity prices, especially oil, and to a lesser degree, the Mueller investigation. See the Outlook section below for more details. Retail stocks should do well this month based on the amount of shopping that’s being done both online and, surprisingly, at brick and mortar shops.
Bonds were a mixed bag this past month. Low risk government bonds rose in price while higher risk corporate bonds dropped in price. This makes sense as investors dumped stocks and looked for a safe place to put their cash. As I said last month, 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.
Rising interest rates is still 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.
Currently, the average savings account is paying 1.58%, up from 1.22% last month.
The 1 year CD interest rate is now averaging 2.65% and the 5 year CD rate is at 3.05%, both higher than at the end of October.
Mortgage rates remain firmly above 4%, with the 30 year rate at 4.68%, down slightly from 4.73% 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 plummeted 22% in November, settling at $50.93. That is a huge drop! This is way more than the normal seasonal drop for this time of the year. In fact, it was the worst month for oil since 2008. Prices are now down over 12% for the year. One of the big reasons for the drop is this fact: the U.S. is now producing almost 12 million barrels per day. If prices head any lower, it will be more hurtful to our economy than helpful, since this will cause the energy industry to cut jobs, etc.
Nationally, gasoline prices are averaging about $2.49 per gallon. That’s a pretty big drop from $2.80 last month. FYI, a year ago, we were paying exactly the same, $2.49.
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: As everyone expected, once the elections were over, Mueller has become very active. There are so many moving parts in this investigation, it’s hard to keep track but it does seem like the circle is closing around the Trump family and its dealings with Russia. Any indictments of a member of the Trump family will be a negative for stocks.
- Trade Wars: As I’m writing this update, world leaders are meeting in Argentina and focusing on trade, especially between the U.S. and China. If they come away from this summit with a deal, the markets are going to respond very positively. If there’s no deal, it will keep a lid on any market upswings.
- Federal Reserve: Many of the federal reserve members have been speaking over the last few weeks and the consensus is that interest rates are at a pretty good level right now, based on price inflation and wage growth. This has helped stocks recover a little bit after the beating they took this past month. They’ll still raise rates another 25 basis points at their December meeting but that might be it for awhile, which will be positive for stocks.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
