Stocks took a little breather in August. There was a lot of volatility throughout the month, mostly due to the back and forth between the U.S. and China regarding trade talks. In the end, however, the S&P 500 finished August with a small loss of about 1.6%.
With Q2 earnings out of the way, there is really only two major forces influencing stock prices right now: the White House and the Federal Reserve. Check out the Outlook section below to get my take on how these could move markets in the short term.
The swings in the stock and bond markets are beginning to pick up and I believe it is only going to get more volatile over the next year as we approach the presidential election. This type of uncertain environment creates opportunities to buy into great companies that might get thrown out with everything else as investors with no plan or conviction sell everything. So, it’s probably not a bad idea to make a list of some investments that you like but want to buy at a cheaper price.
Bonds had a very good month as yields tanked. This includes government bonds to junk bonds and everything in between. This price trend could continue as the trade war keeps everyone guessing (even more than usual) where the economy is heading.
As low as our bond yields are right now, they are looking pretty good compared to many European countries and Japan. Those countries’ bonds have a negative yield and if you look globally, there are about $17 trillion in bonds with negative yields, up from $13 trillion last month. The holders of these bonds could be in for some severe pain if interest rates reverse course and head higher.
Interest rates plummeted in August as they continued this downward trend since last fall. The economy still is showing no signs of inflation and the tariffs continue to impact commerce enough to hurt economic expansion across the globe. If the tariffs do stay in place much longer, we could see inflation as U.S. companies pass along this import tax to their customers.
On the savings side, short-term rates, like savings and money market accounts, as well as longer-term rates, like CDs, have continued to come down.
Currently, the average savings account is paying 1.24%, down slightly from 1.28%.
The 1 year CD interest rate is now averaging 2.28% and the 5 year CD rate is at 2.22%, both down from July. Notice that the 5 year rate is lower than the 1 year rate.
Mortgage rates continue to decline, with the 30 year still well below the 4% level. Currently, the 30 year rate is at 3.70%, down from 3.88% last month. Refi’s are looking great, especially if you plan on being in your home for at least 5 more years.
Oil prices meandered around in the low to mid 50’s range for most of the month of August. Price for a barrel of crude fell a few bucks to about $55.25. Prices usually rise during this time of year as more people are travelling on vacation and hurricanes are shutting down offshore rigs. They may get a bump if Hurricane Dorian hits the Gulf of Mexico this week. This price range, in the fifties, is a good price point for both consumers and producers.
Nationally, gasoline prices have dropped pretty significantly as we are seeing usage drop year-over-year. Prices at the pump are averaging about $2.58 per gallon, 14 cents lower than a month ago. Mississippi and Louisiana have the cheapest fuel for 2 months in a row, at $2.20. FYI, a year ago, we were paying $2.84.
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: They now have to counter the White House to keep our economy from stalling and possibly falling into a recession. Trump keeps berating the chairman, Powell, via Twitter of course, for not doing what he wants. Powell and the rest of the FOMC are maintaining their independence and watching the data, but they will have to cut interest rates if the tariffs stay in place. These low rates will continue to force investors to venture into higher risk, such as stocks and junk bonds, if they want to get a decent rate of return on their investments.
- Trade Wars: I’m saying the same thing as last month: The good news is that there are negotiations still going on between the U.S. and China to try and put an end to this trade war. The bad news is that little progress has been made, as far as the public knows anyway. It looks like talks will resume in September in the U.S. At some point, a deal will be made and when it happens, it will be a nice boost for the markets.
- Tariffs: First, regardless of what you hear, China is not paying the tariffs. U.S. companies that import from China are, and that means we are ultimately. Not a good plan. The new tariffs that are going to take effect today are going to hurt U.S. companies even more. These are also going to be too much for them to absorb and will have to pass these costs onto us, the consumers, in order to stay afloat. My biggest worry is for our farmers because it will be tough to get the China market back once they find suppliers elsewhere. In summary, tariffs will be a damper for most investments until they get rescinded.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
