Stocks finally pumped the brakes in May after racking up positive returns for the last four months. The catalyst was more tariffs and, unfortunately, there are more to come. Just this week, Trump added tariffs to imports from Mexico, starting June 10th, to try and force our southern neighbor to halt people from flowing through their country into the U.S. illegally.
The S&P 500 lost over 6% in May but still remains up about 10% for the year. The economy is still in good shape but these trade wars are taking a serious toll on it. Companies that import products and materials to the U.S. pay the tariffs and they have to either eat the costs or pass them on to us, the consumers.
The good news is that we can use monetary policy to combat our own fiscal policy. The Fed can lower interest rates to help spur the economy again. Hopefully, we can just negotiate some trade deals that benefit all parties and be done with the tariffs. That would be the best for the stock and bond markets.
Bonds returned to their march higher in May after their April pause. The only exceptions were high yield bonds. The price gains can be attributed to the continued slide in interest rates due to concerns that the economy is slowing.
The interest rate drop is being amplified by the tariffs/trade wars. It is really causing a lot of uncertainty with regards to what the next steps the fed will take. Uncertainty is never a good thing for any markets. We’re also experiencing a yield curve inversion. This means that bonds with shorter maturity dates are yielding more than bonds that have longer maturity dates. For instance, a US government bond that matures in 1 month is paying 2.37% while the 10 year is paying 2.20%. That’s not normal. It means investors are willing to lend their money for longer periods of time and get paid less to do it. That’s bad but not as bad as buying bonds from Germany, Japan, or France, where you pay them to lend them your money!
Interest rates are still heading lower, now that sentiment has shifted from the Fed keeping rates the same to them cutting rates in the near future.
On the savings side, rates have increased a bit in May but only short term rates like savings accounts and money markets. Longer term rates like CDs pretty much stayed flat.
Currently, the average savings account is paying 1.34%, up slightly from 1.25%.
The 1 year CD interest rate is now averaging 2.66% and the 5 year CD rate is at 2.61%.
Mortgage rates continue to decline, with the 30 year barely holding on to the 4% level. Currently, the 30 year rate is at 4.01%, down from 4.04% last month and down for the fifth month in a row. Not a bad time to look at refinancing if you have a current loan over 5.5%.
Oil prices fell off a cliff in the last week of the month, dropping over 12%. Again, the root cause is the tariffs/trade wars affecting commerce and subsequently, the manufacturing and transportation of goods. A barrel of US oil now costs about $55, down from over $63 a month ago.
Although the falling oil prices reflect bad things happening in the economy, it does benefit the public and the companies that use a lot of fuel that aren’t affected too much by tariffs, such as commercial airlines.
Nationally, gasoline prices are heading back down, in concert with oil prices. Prices at the pump are averaging about $2.83 per gallon, 6 cents lower than a month ago. Mississippi has the cheapest fuel, at $2.42. FYI, a year ago, we were paying $2.96.
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:
• Federal Reserve: Due to the trade wars, the economy will continue to be hindered. This may push the Fed to reconsider their current stance on interest rates and begin lowering rates. Theoretically, this should push more money into stocks and high yielding bonds. However, it could be interpreted that the Fed is concerned about the economy’s strength and might cause investors to sell stocks and head for safety.
• Trade Wars: A deal with China is possible at the G20 Summit in Japan at the end of June but it’s a crap shoot at this point. No deal could be the catalyst for another down leg in the markets. Eventually, a deal will get done but the uncertainty of the timeline is what is hurting stocks. In any case, Trump won’t let the trade war go too long because that will hamper his reelection efforts.
• Tariffs: Trump is doubling down with more tariffs. These, coupled with the retaliatory tariffs from China and Europe, are only hurting the global economy. Countries that import our goods, particularly from our farmers, are lining up trade agreements with other countries to supply them. That means our farmers are going to lose that market share and may not get it back. For the most part, this has already happened with soybeans. We’ve already given two bailouts to farmers totaling almost $30 billion. These payments will have to continue as our farmers lose more market share. Stop the madness and get someone in there that can negotiate a deal that will be a win-win instead of a lose-lose.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
