Stocks started off great in the first few weeks of 2020, but then the virus hit, Coronavirus, that is. Flights to and from China have been canceled by most countries. Its affect will be reflected in this quarter’s earnings for many companies, but it is already showing up in their stock prices. The S&P 500 finished almost exactly where it closed on New Year’s Eve one month ago.
They say that how stocks perform in January is a good predicter of how they will do for the rest of the year. Historically, that has been a very accurate statement. Since 1950, every year that the S&P 500 had a positive January, the annual gain was positive 87% of the time. Not bad. Here’s another interesting stat: only 4 of the last 23 election years (since 1923) were negative for the S&P 500. That means 83% of the time, an election year is positive for stocks. I don’t want time to fly but I’m very interested to see where the markets will end up at the end of this year. Take a look at the Outlook section below to see what events could move the markets between now and then.
Bonds were mostly higher in January with the exception of high yield, or junk, bonds, which tracked stock prices for the most part. As you know, bond prices move in the opposite direction of their yield. Over the past 18 months, bond yields have been slowly sliding lower, helping make bonds some of the best investments over that time period. I’m still in the camp that the path of least resistance for bond yields is up, meaning bond prices are going to drop. One day, I’ll be right but the way things are going, I don’t think it’s going to be anytime soon.
The yield curve continues to get back to normal, meaning longer term rates are higher than shorter term rates. That’s good stuff.
I’m sticking to my guns and staying away from bonds that mature more than two years from now. For me, there just seems like to much risk to take on, compared to other investment options, such as high quality stocks.
Interest rates keep heading lower. This is great for borrowers and bad for savers. This type of interest rate environment forces savers to take on more risk to get the returns that they want/need to hit their financial goals. The rate for the benchmark 10 year Treasury note continues to stay under 2%. The Fed just met and will keep rates low for the foreseeable future so don’t expect much movement upward with interest rates.
On the savings side, short-term rates, like savings and money market accounts, as well as longer-term rates, like CDs, continued to trend down, just like in November.
Currently, the average savings account is paying 0.87%, down a bit from 0.96%.
The 1-year CD interest rate is now averaging 1.89%, slightly less than the 1.97% it was yielding a month ago and the 5-year CD rate is at 1.95%, down from 2.06%. These rates are brutal for savers.
Mortgage rates headed back down in January. Currently, the 30-year rate is at 3.64%, down from 3.86% last month. Refi’s continue to look like a good move, especially if you plan on being in your home for at least 5 more years.
Oil headed lower in January, drifting down to under $52 a barrel to end the month. That is about a $10 drop. Much of that can be tied to the virus outbreak that occurred around mid-month.
I really don’t see oil prices going much higher, unless we have a major event that halts production. It really seems like we are approaching peak demand for oil as companies and countries commit to becoming more energy efficient and environmentally friendly. This can really help keep prices low in the foreseeable future.
Nationally, gasoline prices are following oil prices lower. Prices at the pump are averaging about $2.49 per gallon, 9 cents lower than a month ago. Missouri has the cheapest fuel again, at $2.13. FYI, a year ago, we were paying $2.26.
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:
- Coronavirus: The virus continues to spread worldwide. There is still a lot that experts don’t know about the virus and this fear of the unknown is causing much of the panic. For most Americans, the risk of getting sick or dying from the flu is much greater than the risk from coronavirus, as of right now. Already during this flu season, about 15 million Americans have been infected and more than 8,000 have died. Worldwide, flu kills about 650,000 people every year. I’m sure it will take awhile to get this under control, but this virus should not have any long-term effects on stock prices.
- Trade Wars/Tariffs: Trump signed a trade agreement with China, called Phase 1, that removes some tariffs and allows American businesses to work in China without having to share their technology. Also, China has committed to spending about $200 billion on U.S. goods and services over the next 2 years, which is a 50% increase from 2017. That’s great if China can fulfill that promise, especially for farmers, who are in deep kimchi since this trade war started. Finally, there is still a big 25% tariff on most products that our companies import from China. This is really hurting us, since these companies are paying these tariffs, not China. The deal hasn’t gotten us back to where we were before the trade war started, but we should get there by the end of this year. The stock market is considered a leading indicator and has already begun factoring in the effects of this trade deal, which are mostly positive.
- Impeachment: The trial is almost over. Each side will have their closing arguments and then the senators will vote whether or not to remove the president. As I said last month, there will not be enough votes to remove him and this outcome is already priced into the market, so I wouldn’t expect much impact once the trial concludes.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
