Stocks took a good, old-fashioned shellacking in December, as investors continued to shed their stock holdings. The S&P 500 dropped almost 10% this December, capping off a rarely seen 4th quarter slide which put the major index in the red for the year by nearly 7%.
The combination of rising interest rates, trade wars, and all the investigations into Trump’s activities (currently, over a dozen) have spooked many investors. The remedy to bringing confidence back to the markets will be to get some clarity on one or more of these situations. Interest rates and trade wars will be the easy ones, in my opinion. The investigations are the big unknowns and will only be getting more complicated with a democratic controlled House of Representatives. The good news is that great companies will continue to be great companies, regardless of what is going on in DC. So, try not to focus on all of the distractions and stick to your investment game plan.
Bonds were a mixed bag once again this past month. Low risk government bonds and blue chip corporate bonds rose in price while higher risk corporate bonds dropped in price. This makes sense as investors continued to lower their portfolio risk by moving to more conservative investments. As I said the last two months, 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 1.52%, down slightly from 1.58% last month.
The 1 year CD interest rate is now averaging 2.73% and the 5 year CD rate is at 3.08%, both slightly higher than at the beginning of the month.
Mortgage rates remain firmly above 4%, with the 30 year rate at 4.60%, down slightly from 4.68% last month. These rates could accelerate higher if we start to see increased wage growth and consumer price inflation. Historically, rates are extremely low but the path of least resistance is still up, for right now. There is solid evidence of downward pricing pressure in the housing industry, especially on the coasts. This should help keep mortgage rates from rising too quickly.
Oil prices continued to nose dive in December, dropping another 11% after losing 22% in November. Prices finally settled at around $46.25. Prices are now down over 19% for the year. One of the big reasons for the drop is that the U.S. is now running neck and neck with Russia and Saudi Arabia for being the largest producer of oil in the world. That’s great news, but If prices stay below $50 for an extended period of time, 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 reflecting the drop in oil prices, averaging about $2.26 per gallon. That’s another big monthly dip from $2.49 in November. Missouri has the cheapest fuel, at $1.85. FYI, a year ago, we were paying $2.48.
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: It’s looking more and more likely that this investigation is going to produce some major bombshells. I still think that Individual 1 will not be removed from office, even if the impeachment process is initiated. However, with this hanging over Trump’s head, along with Mattis and Kelly gone, I believe the White House will be even more unstable in 2019, if that’s even possible. This stuff is not good for Wall Street or Main Street.
- Trade Wars: Each time there is a rumor of a trade deal between the U.S. and China, stocks get a boost but then fall back when nothing gets done. A deal will get done, but until it happens, market volatility will remain high.
- Federal Reserve: I like that the Federal Reserve wants to be transparent when it comes to its next moves on interest rates, but they shouldn’t be telling us how many times they are going to raise rates over the next year or so. Just tell us that they will be making their moves based on the data available at the time. Their current policy is causing unnecessary volatility in the markets. Having said that, it appears that the Fed will be pumping the brakes in raising rates in the near future, which should ease market anxiety.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
