Stocks regained their May losses with a strong June rally. The S&P 500 gained almost 7%, making it the best June performance for the index since 1955. It also ended the first half of the year with a return of more than 17%, its best first half since 1997.
This rally is really due to the hopes that the Fed will cut interest rates and that a trade deal will get done between us and China.
Second quarter earnings will be coming out over the next few months and we should be able to see how the tariffs and trade wars have affected companies’ revenues.
Bonds of all flavors continued their upward trend. 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 3 months is paying 2.11% while the 5 year is paying 1.76%. 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 still not as bad as buying bonds from Germany, Japan, or France, where you pay them to lend them your money!
Interest rates continued to drop in June, especially longer-term rates, as reflected by the inverted yield curve. The economy is showing no signs of inflation and the tariffs are disrupting commerce enough to hurt economic expansion across the globe.
On the savings side, short-term rates, like savings and money market accounts, have stayed about the same since the beginning of the month but longer term rates, like CDs, have come down some.
Currently, the average savings account is paying 1.33%, down slightly from 1.34%.
The 1 year CD interest rate is now averaging 2.46% and the 5 year CD rate is at 2.44%, both down from May.
Mortgage rates continue to decline, with the 30 year busting through the 4% level with authority. Currently, the 30 year rate is at 3.80%, down from 4.01% last month and down for the sixth month in a row. Refi’s are looking better and better, especially if you plan on being in your home for at least 5 more years.
Oil prices, after bottoming in the middle of June at around $51 a barrel, rebounded a little bit to end the month higher. This comeback was mostly due to some nefarious activity in the Strait of Hormuz by Iran. A barrel of US oil now costs about $60, up from $55 a month ago.
Nationally, gasoline prices have come down despite the rise in oil prices, which is unusual. Prices at the pump are averaging about $2.71 per gallon, 12 cents lower than a month ago. Mississippi, again, has the cheapest fuel, at $2.31. FYI, a year ago, we were paying $2.85.
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: Everybody is looking for the Fed to cut rates at the end of July when they meet again. I think if the tariffs are still in place and the trade war with China is still going on, they’ll most likely cut rates at their meeting. Theoretically, this should push more money into stocks and high yielding bonds. But this cut will be priced into the market by the time they meet, so if they don’t cut, we could see a market drop.
- Trade Wars: After a six-week stalemate, it looks like we’re back at the negotiating table with China. That’s good news and could be the boost the markets need to get through the summer. We’ve seen this before so don’t get too excited until a deal is actually inked.
- Tariffs: Trump has postponed any more tariffs on Chinese goods for now as both countries get back to negotiating a trade deal. Any progress on this front will give the markets a little boost. Let’s make a deal people.
- Mueller Testimony: He’s baaaaack! Mueller is testifying publicly in front of Congress in the middle of this month. Based on what he has said in the past, which was very little, I can’t imagine that he will tell us anything new that wasn’t in his report. Unfortunately, hardly anyone has read the report and he’s probably mad about that. This will move markets only if he comes out with some kind of shocker.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
