Stocks continued their recovery rally from the pandemic shutdown. The S&P 500 finished May with a 4.8% gain and is now down only about 6% for the year. This rise is just as impressive to me as the drop that happened back in March, which seems so long ago.
Earlier in May, I talked about why stocks are going up while the economy is spiraling downward. You can read what I said here: https://bakerassetmanagement.wordpress.com/2020/05/09/892/. The markets are basically saying that the worst is behind us. But there is still so much uncertainty about Covid-19 that it is hard for me to agree with that. We have seen a recent spike in new cases as well as deaths in many states, as the country slowly reopens. However, I like that the percentage of people infected is going down as we increase testing. Also, the hospitalization rate is .07%, which is very low. I think by the end of June we will have enough data since the time that we started to reopen to assess if we can open all the way up. Let’s keep our new and improved sanitary measures and habits in place, regardless.
The Fed is still doing its part to maintain stable financial markets and that is vital because Congress is no longer playing nice again. So, don’t bet on any help from the fiscal side of things while partisan politics ramps up as we move towards the November elections.
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 the smallest increase and just like last month, corporate bond prices moved solidly higher as the Fed continues to buy corporate bonds and bond exchange-traded funds.
The 10-year US Treasury note is yielding 0.65% and the 30 year is at 1.40%, both slightly higher than last month but still ridiculously low. 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 are trending lower again after a slight rise in April. Besides the poor economy, another reason for this trend is that more of us are saving our money since we can’t spend it as freely due to the shutdown. This past month showed that Americans are saving about 33% of our income, the highest rate ever recorded since the government started tracking it back in the 1950’s. For comparison, this rate is usually around 5% to 9%.
On the savings side, short-term rates, like savings and money market accounts, as well as longer-term rates, like CDs, have resumed their slide downward.
Currently, the average savings account is paying 0.60%, slightly lower from a month ago, 0.66%. Nobody is making money in cash, but at least it is safe.
The 1-year CD interest rate is now averaging 1.01%, less than the 1.19% it was yielding a month ago. The 5-year CD rate is tracking lower as well, now at 1.22% from 1.36%. With people saving their income at an unprecedented high rate, these rates will continue to stay historically low. The good news for stock investors is that all this cash is going to have to go somewhere and this usually is a precursor to higher stock prices.
Mortgage rates headed lower again in May, with the exception of the 30-year fixed rate, which was little changed. Currently, the 30-year rate is at 3.52%, no change from last month (3.53%). The Fed flooding the market with liquidity is helping to keep these rates extremely low, particularly for the variable rate mortgage loans.
Oil prices rose an incredible 135% in May after going negative just a month ago! Rising oil prices are reflecting the promise of more demand worldwide as countries begin to open to a more normal operating mode. These prices are good news for all those employed in the fossil fuels industries. I can’t see demand getting back to where it was 6 months ago so maybe oil prices in the $30 to $40 range will be the new normal. There is so much oil stored already and sitting in ships that it would be tough for prices to continue this uptrend unless there are significant production cuts by the U.S. and OPEC.
Gasoline prices bounced up along with the price of oil. Prices at the pump are averaging about $1.98 per gallon, 21 cents higher than a month ago. Mississippi has the cheapest fuel, at $1.59. FYI, a year ago, we were paying $2.83.
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: There are promising signs that the worst is behind us: more testing, less infections, less daily deaths. Hope jumps and fades every day as news of promising vaccines are reported. The markets have been rising and falling in response to this news cycle as well. We will have a vaccine and it could be like the one we have for the flu, where we have to take it every year. We just have to wait to find out, but the world is going to continue to open back up as the research continues.
- Interest Rates: Rates are at historical lows and will be for the foreseeable future. The savings rate for Americans is at 33%, the highest since we started tracking it in in the ‘50’s. How long will we leave our money in something that doesn’t earn any interest and loses value over time due to inflation? Once we start spending and/or investing this cash, it will give the markets a nice boost.
- Unemployment Rate: So far, there have been over 40 million Americans that have filed for unemployment since the Covid crisis began. This equates to an unemployment rate of about 15%, although many sources claim that the actual rate is closer to 20%. This is devastating. I have to believe this rate will drop over the next few months as we get back to work. But there could be no jobs to go back to for many (retail and tourism industries to name a few), which will be a long-term problem for our economy and country.
- Trade Wars/Tariffs: Tensions continue to ramp up between us and the rest of the world, especially China. As I’ve said before, now is not the time to be feuding with our biggest trading partner. There will be plenty of time for squabbling after we get back on our feet. This will continue to put a drag on our economy and the markets.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
