Stocks had a great January, with the S&P 500 rising about 8%, its best performance since 1987. This comes off the heels of the worst December since the Great Depression.
Market performance in January tends to be a pretty accurate predictor of how the market will perform for the rest of the year. Since 1950, it has been correct 75% of the time. By the way, last year was one of those times that the January barometer was wrong. The S&P 500 had a great positive January in 2018 but ended the year in the red.
There are always many things that influence the markets in the short term and right now we have no shortage of that stuff: Trump investigations and trade tariffs, to name a few. But how stocks perform over the long term always boil down to how profitable companies are now and in the future. Finding these companies early in their profit cycle and avoiding all the short term noise is one of the keys to being a successful investor.
Bonds were big winners in January. Low risk government bonds and blue chip corporate bonds rose in price, as well as higher risk (junk) corporate bonds. Once bond investors got the word that the Fed was pulling back on its rate increases, they started to get back into the market. In this environment, it is a good idea to own bonds that mature in 1 or 2 years and to hold them to maturity. That way, you don’t have to worry about these big price moves during your holding period.
Interest rates have risen enough over the last few years that a pause is a good thing, but odds are still better for rates to move up than to move down. 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 have started to level off as the Fed pumps the brakes on raising short term rates. This is reflected in the rates for savings accounts, money markets, and CDs.
Currently, the average savings account is paying 1.23%, down quite a bit from 1.53% last month.
The 1 year CD interest rate is now averaging 2.71% and the 5 year CD rate is at 3.05%, both slightly slower than at the beginning of the month.
Mortgage rates have reversed course, although the 30 year still remains firmly above 4%. Currently, the 30 year rate is at 4.40%, down from 4.60% last month. These rates are responding to the slow down in home sales, the government shutdown, and the effects that the tariffs are having on our economy. Rates are responding the right way, so there’s no surprises here.
Oil prices stopped its 2 month slide in January, rising almost 20%. Prices finally settled at around $54. This was oil’s biggest increase in the month of January ever. The main reasons for the huge upswing were production cuts by OPEC and the dumpster fire that is Venezuela, which surprisingly, has the largest oil reserves in the world.
Obviously, higher prices is good for producers and since the U.S. is the biggest oil producer in the world now, it is good for our economy. But, we are also the world’s biggest oil consumer, so higher prices hurts us as well. It’s a blessing and a curse. Prices right now are in a nice sweet spot, between $50 and $75. Hopefully, they’ll stay there for awhile.
Nationally, gasoline prices haven’t jumped up that much with the increase in oil prices. Prices at the pump are averaging about $2.29 per gallon, only 3 cents higher than a month ago. Missouri has the cheapest fuel again, at $1.91. FYI, a year ago, we were paying $2.59.
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: Okay, this is turning into a James Michener/Tom Clancy novel. Here’s a progress report: There have been 34 people and 3 companies that have either been indicted or have plead guilty so far in this investigation. This doesn’t even include all the people that federal and state prosecutors are investigating regarding the Trump Organization and the Trump inauguration. When the investigation finally concludes, there is still going to be a battle over how much of the report gets released to the public. So, I think this event is going to be on the horizon for awhile and could cause huge market swings this entire year.
- Trade Wars: Things just got a little more complicated with trade negotiations between the U.S. and China. Right now, we’re trying to extradite Huawei’s CFO from Canada. She has been charged with stealing industrial secrets and doing business with Iran, among other things. Huawei is the world’s largest mobile phone and network equipment provider and is a China-based company. I know the trade deals will get done but resolving this issue will certainly become part of the negotiations. A resolution will give the market a nice boost.
- Federal Reserve: As I’m typing this, the Federal Open Market Committee (FOMC) meeting just ended and the Fed has said that they will keep a hold on raising interest rates. More importantly, they pledge to maintain a patient approach. That’s all I want to hear. Keep it simple (I’m talking to the Fed): let your actions get absorbed into the economy for a few months and watch the data before making any policy changes.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
