Stocks typically don’t do much as far as price movement in the dog days of summer. But this August was one of their best ones ever. The S&P 500 gained about 7% this past month, giving it an almost 9% gain for the year. I’m pretty sure in mid-March when the bottom was falling out, nobody was thinking that stocks would be performing this well.
Anything related to Covid and its treatments are the main market movers so far this summer. It will remain that way and will be joined by the election news cycle very shortly.
Progress continues on a vaccine for this disease. You can track where we are in this process here: https://www.nytimes.com/interactive/2020/science/coronavirus-vaccine-tracker.html.
Realistically, a vaccine could be approved by the end of the year, which would be the biggest step for getting back to some sort of normalcy.
Interest rates are as low as they have ever been. This puts a nice floor under stock prices because investors want to make money and when rates are so low, they always come back to the stock market.
We continue to have a very overbought market, so don’t be surprised if we have a correction between now and the elections in November.
Take a look at the Outlook section below to see what events could move the markets over the short term.
Bond prices halted their rise in August, with most government and corporate bonds remaining flat or dropping slightly in price. The Fed saying that they will let inflation creep up a little more than their 2% benchmark probably was the biggest contributor to this price movement.
The 10-year US Treasury note is yielding 0.73% and the 30 year is at 1.51%, both up from 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 trended lower over the last month as the economy is trying to figure how to exit from the pandemic. There is no reason for rates to go up at this time. The uncertainty of Covid 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, all took a slight dip and are at incredibly low levels.
Currently, the average savings account is paying 0.43%, down from a month ago, 0.51%. Nobody is making money in cash, but at least it is safe.
The 1-year CD interest rate is now averaging 0.72%, noticeably lower than the 0.85% it was yielding a month ago. The 5-year CD rate is tracking lower as well, now at 0.91% from 0.97%. 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 continued to trend downward. Currently, the 30-year rate is at 3.13% down from 3.14% 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. I wanted to point out that the 15 year fixed mortgage is at 2.59%. Never thought I would see mortgage rates this low. Amazing!
Oil prices are having a very nice rally, slow and steady since their lows in April. The price for a barrel of crude rose about 8% in August to $43.32. Besides world economies recovering from their self-induced shut downs, there is also a seasonal effect moving oil prices higher: hurricane season. When hurricanes enter the Gulf of Mexico, oil rigs have to shut down, which causes a drop in supply, which causes a rise in prices, all else being equal.
Gasoline prices, like last month, didn’t get as much of a bump as its oil cousin. This is mainly because we are still not driving as much as pre-Covid, even though many people are driving in lieu of flying. Prices at the pump are averaging about $2.23 per gallon, $0.04 cents higher than a month ago. Mississippi has the cheapest fuel again, at $1.89. FYI, a year ago, we were paying $2.58.
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: New cases in the U.S. have been decreasing since about mid-July and deaths have been trending down since early August. Now, as schools and colleges start to open, it will be interesting to see if these trends can stay intact. I can’t imagine that they would. As I said the last few months, the markets will rise and fall as news of a vaccine swirls around but when the real deal is announced, we will get a huge boost for stocks across the board. Here’s where we stand on Covid vaccines:
- Interest Rates: Historically, low rates are bad for savers, pension plans, and those on a fixed income. They are great for borrowers and for those that want to invest in riskier assets, such as stocks. According to the Federal Reserve, rates are not going up anytime soon, so this is good for stocks and even bonds. This was reinforced in August when the Fed indicated that they will give inflation a little more room to run.
- Election: Both major parties had their national conventions this past month. Everything is now official. They have a little over 2 months to sway any voters on the fence (are there any, really?) to jump to their side. Buckle up.
- 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
