Stocks pumped the brakes on their recovery rally in June. The S&P 500 was essentially flat for the month. It remains down about 4% for the year. All things considered, the performance is amazing, but I can’t shake the feeling that we are whistling past the graveyard.
The markets are on shaky ground, at best right now, with Covid being the biggest influence. Positive cases are spiking in pretty much the entire country except for the northeast. The good news is that fatalities continue to drop. This is due to the fact that the average age of those testing positive has fallen dramatically, and we have learned how to better treat those that have to be hospitalized. This chart is a good illustration of that (Tri-State Area being NY, NJ, CT):
Unfortunately, the pandemic is still wreaking havoc on our small businesses. Here’s a glimpse of the devastation:
The Fed is still in the markets’ corner, helping out in many ways. We’ll still need some more fiscal support from Congress if this second wave of Covid cases continues to halt the country from reopening.
Take a look at the Outlook section below to see what events could move the markets over the short term.
Bond prices were a mixed bag in June. Lower quality bonds, i.e., junk bonds, saw their prices drop slightly while higher quality corporate and government bonds moved higher. Right now, bonds have the world’s biggest buyer, the United States, scooping them up so many investors are trying to front-run the Fed, hence the rise in prices on the high-quality side.
The 10-year US Treasury note is yielding 0.63% and the 30 year is at 1.38%, both slightly lower than last month. These low yields continue to 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 continued to trend lower in June. The word is out that the economy is not going to spring back as fast as it dropped. The uncertainty of the pandemic and all the shuttered or semi-open businesses is ensuring rates stay low.
On the savings side, short-term rates, like savings and money market accounts, as well as longer-term rates, like CDs, have continued their slow drip downward.
Currently, the average savings account is paying 0.53%, slightly lower from a month ago, 0.60%. Nobody is making money in cash, but at least it is safe.
The 1-year CD interest rate is now averaging 0.90%, less than the 1.01% it was yielding a month ago. The 5-year CD rate is tracking lower as well, now at 0.99% from 1.22%. 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 yet again in June. Currently, the 30-year rate is at 3.29% down from 3.52% a month ago. The Fed flooding the market with liquidity is helping to keep these rates extremely low, particularly for the variable rate mortgage loans. With rates this low, it’s no surprise that pending home sales rose over 44% in May, the biggest monthly jump since 2001.
Oil prices continued their bounce back after the drop into the abyss in April. The price for a barrel of crude rose about 10% to $39.31. If you are trading oil this year, you better have a crash cart close by. The price swings are insane. 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 $2.18 per gallon, 20 cents higher than a month ago. Mississippi has the cheapest fuel, at $1.82. FYI, a year ago, we were paying $2.72.
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: Depending on what part of the country that you are in really determines how you feel which way we’re heading with this disease. The northeast has seen a steady decrease in the number of new cases while pretty much everywhere else is seeing cases spike. It will be interesting to see if there is a resurgence in cases in the northeast as that area opens back up. Many other areas are putting restrictions back on to try and slow the rise in new covid cases. Basically, it’s going to be a mess until there’s a vaccine. The markets will rise and fall as news of vaccine rumors swirl around but when the real deal is announced, we will get a huge boost for stocks across the board.
- Interest Rates: {repeat from last month} 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? I see a lot of home improvement going on so I know that money is starting to be spent.
- Election: I didn’t want to put this on here for at least another month, but I felt compelled to after fielding a bunch of calls on how the election will affect portfolios. Both republicans and democrats are fearful of the other side winning. Someone is going to win, and the country and the markets will adjust accordingly, as they always do. Regardless, there are going to be some wild swings over the next few months heading into the elections. Plus, the way this year is unfolding, anything can happen!
- Trade Wars/Tariffs: I don’t expect any progress on these issues until after the election. It is all about Covid right now.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
