Stocks had one of their best months ever, rebounding in a big way as many parts of the world see signs that the worst is behind us regarding the number of infections and deaths from Covid-19. The S&P 500 finished April with a 12% gain but is still down about 10% for the year. Incredibly, that is not bad considering how our economy has been decimated by this virus and by the restrictions that we put in place to combat it.
We are certainly not out of the woods yet but we are beginning to open the country back up in small increments. I am very interested in watching the infection rates over the next month of the states that are starting to loosen up restrictions. If there is not a big spike in new cases, this will be a very encouraging sign for the stock market. I think if we continue to do the things that help minimize the spread of Covid-19 (masks, washing hands, disinfecting surfaces), we may be able to avoid a jump in the infection rate as we reopen the country.
I feel the Fed is doing a great job of shoring up the financial markets by basically flooding them with cash. On the fiscal side, Congress seems to be playing nice and getting things done to bring some relief to the millions of unemployed and to owners of shuttered businesses.
There is a lot of talk about faster testing, treatments and vaccines that may be available soon. The big question is when. Once we get a clear outlook on when these will become readily available, we can start to return to some form of normalcy in our lives and 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 higher across the board. Government bonds had just a slight move up but corporate bond prices had a big bump as the Fed began buying corporate bonds and bond exchange-traded funds.
The 10 year US Treasury note is yielding 0.61% and the 30 year is at 1.26%, amazing. These low yields force more money into the stock market because they are just too low to tie up money for such long periods of time.
Interest rates appear to be leveling off after the big drop off in March and based on the most recent Federal Reserve meeting, won’t be heading back up anytime soon.
On the savings side, short-term rates, like savings and money market accounts, as well as longer-term rates, like CDs, have more or less halted the downslide.
Currently, the average savings account is paying 0.66%, about the same from a month ago, 0.64%. Nobody is making money in cash, but at least it is safe.
The 1-year CD interest rate is now averaging 1.19%, slightly less than the 1.25% it was yielding a month ago. The 5-year CD rate is actually up in April, now at 1.36% from 1.25%. Regardless, these rates are brutal for savers and they may go even lower over the next 6 months, especially if stocks tank due to the virus.
Mortgage rates headed lower in April. Currently, the 30-year rate is at 3.53%, down from 3.84% last month. This seems more normal due to what is going on in the world versus when they went up in March. Also, the Fed keeping rates low for the foreseeable future really helps borrowers with variable rates loans.
Oil prices fell off another cliff in April, at one point turning negative for a few days. It finished the month at just under $17 a barrel, about a 20% drop from where it started at the beginning of the month. The drop makes sense since most of the world is sheltering in place but it is still incredible to see. The only place where anyone can make money producing oil at these prices is Saudi Arabia. This is devastating for everyone else in the fossil fuels industry. Conversely, it really lowers input costs for almost every other industry, which is a huge positive for those companies’ earnings.
Gasoline prices continue to drop in unison with oil. Prices at the pump are averaging about $1.77 per gallon, 23 cents lower than a month ago. Wisconsin has the cheapest fuel, at $1.30. FYI, a year ago, we were paying $2.88.
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: This past month seemed like 10 years to me as far as this virus is concerned. Unless you are on the front lines in hospitals, you don’t really see the devastation that this is causing, like you would during other catastrophes, such as hurricanes or earthquakes. But there is no doubt that Covid-19 is wreaking havoc on at least 2 major fronts: the health of the world’s population and the global economy. In the U.S., it’s weird to say that we are down to only 1,500 deaths per day. Even so, markets are cautiously inching upward as news continues to get better and better on testing, vaccines, and restarting America. To really get back to any kind of normalcy, we’ll need to have on-demand testing with accurate results within a day. To instill confidence in the public, however, we will need a vaccine. One could be ready within a year but how long it takes to mass produce will determine the timeline to whatever the new normal will be for us. The good news is that stocks and bonds will recover way before that, so if you’re on the sidelines now, you may want to start dollar cost averaging back into the companies and/or sectors that you think will perform the best in this environment.
- Interest Rates: The Fed just met this week and they basically said that they will be keeping rates low for the foreseeable future. The last time that we had an economic shock similar to what’s happening now was back in 2008 and the Fed didn’t raise rates for over 7 years. This should help put a floor under stock prices for at least a few years.
- Unemployment Rate: So far, there have been over 30 million Americans that have filed for unemployment since the Covid crisis began. Everyone will be watching the unemployment rate report that comes out next Friday to see how bad the damage is to our workforce. Any surprise, in either direction, will be a market mover.
- Trade Wars/Tariffs: $370 billion of Chinese goods imported into the United States are still subjected to tariffs of up to 25%. Similarly, 25% tariffs on foreign steel and a 10% duty on aluminum imports remain in place. These tariffs are being paid by American businesses at a time of little revenue. This is ridiculous. Trump can suspend or remove these and it would be a huge relief for our companies. It would also give the markets a nice boost and even provide a nice and a political win for him.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
