As a money manager, one of the things that I like to do at least monthly is make a list of the forces that are moving the stock and bond markets. This helps in my decision-making processes, such as when to buy, sell, take some profit, or cut losses. I have been doing this exercise a bit more frequently over the last few months, as the world basically turned upside down and now is trying to right itself.
Here’s a brief list of market forces that I think are having the most influence on stock and bond prices right now:
Low Interest Rates – I talk about this one a lot. Low interest rates are usually an indicator that the economy is not doing well. I see low rates as sort of a sheep dog herding investors towards stocks and high yield bonds since they can’t make any money in government bonds or CD’s. One data point I watch frequently is the US Treasury 10-year note. Right now, it is yielding 0.70%. As an investor, I’d rather buy stock of a quality company that’s paying a 3% dividend and has the chance to appreciate in price as well. If the 10-year note yield starts to get near 3.5%, then I like to reduce my stock holdings.
Personal Savings Rate – This is the percent of money that people save from their income each month. Over the last 5 years, this rate has fluctuated between 6% and 8%. This past April, it was 33%. This big increase in the savings rate makes sense since much of the economy was literally shut down, so there were not many places to spend it. I’m sure the next few readings are going to drop off quite a bit from that high-water mark and that will be good for company’s profits, which will be good for their stock prices.
Economy Opening Back Up – This is a pretty obvious positive sign for investors. However, there are going to be certain parts of the economy that are going to take a awhile to get back to normal or that may have to have a new normal (airlines, rental cars, movie theaters, sports). This is where you have to choose the sectors that can recover the quickest from the pandemic, otherwise, you could be sitting on dead money for some time.
China Trade Tensions – This is still festering in the background. We’re not really hearing anything about it because of the pandemic, protests, and riots topping the news cycle. This will probably come back into play as we approach the November elections and is a net negative overall for US company profits since US companies are the ones paying the tariffs.
Oil Prices – I never thought that I’d see oil prices fall to below $0 per barrel in some areas but they did this year. Just as surprisingly, prices have rebounded smartly from those lows and now are in the mid-$30’s. There’s still going to be a ton of job losses in the fossil fuels industry but these higher prices could save some of the smaller drillers from going bankrupt. This isn’t as big as a factor as it once was on the overall economy in the U.S. since much of economy is consumer drive and service based, versus manufacturing.
To summarize, these forces are mostly positive for stocks and bonds but there is still so much uncertainty out there with regards to how the pandemic will play out. We’re starting to see a spike in cases as most of the country opens back up. If we start to see hospitals getting swamped again and deaths start to mount, it could be another market dive in the months ahead. Stay tuned and stay safe.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
