Stocks continued their descent but not without having record up days as well during this past month. Still, the S&P 500 ended a bad month and a bad first quarter, dropping 13% and 20%, respectively.
In today’s day and age, the size of the market swings and the speed at which they occur are heavily influenced by some forces that weren’t even around just 20 years ago: quant funds using automated algorithmic traders and high frequency traders. If you are watching these gyrations all day, you better have a crash cart next to you because they will wreak havoc on your physical and emotional well-being. Paying too much attention will also cause you to make emotional, irrational investment decisions that could jeopardize your financial goals. So, turn it off and take a break from it for a while.
It is going to take months before we can even think about going back to some kind of normal. Having no national plan for the first few months when the virus was invading our shores really put us in catch up mode. But now, actions are being taken to fight this enemy on all fronts. On the economic front, the Coronavirus Aid, Relief, and Economic Security Act (CARES) was passed late last week which will provide much needed financial relief for individuals and small businesses. Congress is already working on another bill for additional aid that will certainly be vital to help us climb out of this hole. The Federal Reserve has also stepped up and is injecting massive amounts of capital into the money and fixed income markets to maintain liquidity. They say that they have plenty more weapons to deploy, if needed. I hope they are getting them ready.
There are so many unknowns about how widespread and deadly this virus will be and that is a big reason for keeping non-essential businesses in shut down mode and stay-at-home orders in place. Only until this uncertainty clears up, can we start to see a recovery in the financial markets.
Take a look at the Outlook section below to see what events could move the markets over the short term.
Bond prices moved lower on the corporate side while government bonds rose as panicked investors flocked to safety. March would have been a lot worse for corporate bond holders if it wasn’t for the Federal Reserve stepping in to say that they will be buying corporate bonds as well as other fixed income securities, including corporate bond ETFs.
The yield curve is no longer inverted, which is probably the only thing that is normal right now. The benchmark US Treasury 10-year note hit a record low yield of 0.32% while the 30-year bond hit a record as well at 0.70% yield. We even had a yield go negative for a few days: the 3-month T bill. These are numbers that I did not think were possible just a few months ago.
Interest rates accelerated lower yet again in March to nobody’s surprise. The Fed dropped the rate that banks use to lend money to each other down to 0%. This rate, as I’ve talked about in the past, indirectly influences almost every other lending/borrowing rate out there.
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.
Currently, the average savings account is paying 0.64%, a drop from 0.94% a month ago. At 0.64% savings rate, you can earn a whopping $6,400 a year with a $1 million deposit. Ugggh.
The 1-year CD interest rate is now averaging 1.25%, less than the 1.81% it was yielding a month ago. The 5-year CD rate is at 1.25%, down from 1.87%. These rates are brutal for savers and they may go even lower over the next 6 months.
Mortgage rates reversed course and headed back up in March. Currently, the 30-year rate is at 3.84%, up from 3.62% last month. That doesn’t seem right since most rates have continued to decline. One of the main reasons for this reversal is the lack of capacity for lenders to process loans. They are doing 2.5 to 3 times what they were doing this time last year. It is taking forever to close loans. So, one way to reduce demand is for lenders to increase rates. Even with this bump in mortgage rates, refi’s really look good right now, especially if you plan on being in your home for at least 5 more years.
Oil prices fell off a cliff in March, cratering below $20 a barrel at one point, but finished the month at $20.10. The drop was an incredible 55% from where it started in the beginning of the month. In Canada, oil went as low as $5 per barrel recently. We are now at price levels that are extremely damaging to the energy sector of the economy. This could close down wells permanently and cause a tremendous amount of layoffs, particularly in certain sectors of the oil markets. For instance, in Wyoming there is oil produced there used solely for asphalt paving that is selling at a negative price! That means the producer is paying you to take the oil away because they have no more storage. Looking at oil price futures, there is not a lot of faith that prices will rebound anytime soon either. Plus, Saudi Arabia is still planning to flood the market with more oil in April. Incredible.
Gasoline prices, as expected, are nose diving as well. Prices at the pump are averaging about $2.00 per gallon, 44 cents lower than a month ago. Oklahoma has the cheapest fuel, at $1.56. FYI, a year ago, we were paying $2.69.
Check out the prices at the pump in your area: Gas Buddy.
Finally, I thought this is an easy way to describe where all the money from the CARES Act is going:
Outlook
Events on the horizon that could move the markets in the near term:
- Coronavirus: Another month in the books and we still don’t have much clarity on when we will be able to control the spread of this virus. NYC is being overwhelmed by the number of cases and lack of healthcare equipment and personnel. Will we see Chicago, LA, Atlanta and other large cities meet the same fate? We hope not but there are still so many things that we don’t know about this virus that we have to prepare for the worst. We really have to act as if we all have the virus. That means social distancing, self-quarantine, and disinfecting. The sooner that we act together for the greater good, the sooner that we can get out of this mess.
- Interest Rates: The Fed did another cut to the Fed Funds rate, dropping it to 0%, just like back in 2008. As I said last month, this may help stock prices a little in the very short term, but it won’t cure people infected with the virus and it won’t help reconnect supply chains. However, when we do start to recover, lower rates will certainly help the speed at which we recover.
- Unemployment Rate: This number will be an absolute shocker when it comes out this Friday. I can’t say that the stock market has already priced it in because the number of unemployed is increasing rapidly every day.
- Trade Wars/Tariffs: I am shocked that Trump has not, at least, temporarily waived the tariffs that were imposed over the last year on our imported goods. With these still in place, our companies are paying so much more for imports at a time that couldn’t be worse. Take them off for the rest of the year and slap them back on in 2021.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
