Stocks do not like September, for whatever reason. Historically, it is the worst month for stocks, with the S&P 500 averaging a decline of 0.5%. This September, the S&P dropped 4.3%. This puts the index up about 8.5% for the year.
Anything related to Covid and its treatments are still the main market movers but the election news cycle is starting to claim more frontpage space as we near November, as evidenced by the fallout from the dumpster fire that was the first presidential debate this week.
Progress continues on several vaccines 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. It would take much longer to have it available to everybody but just knowing it’s out there will boost markets.
Interest rates continue to plummet. Although horrible for savers and risk averse investors, low rates put a hard deck under stock prices because investors want to make money and when rates are so low, they always come back to the stock market.
Even with the drop in September, I feel like stocks still need to come down a little bit more, based on technical analysis of the markets.
Take a look at the Outlook section below to see what events could move the markets over the short term.
Bond prices had little action in September and ended up flat or slightly lower in the case of high yield, or junk, bonds. The Fed is going to continue to buy up bonds as part of their Covid response, so this should help keep prices stable going into the end of the year.
The 10-year US Treasury note is yielding 0.69% and the 30 year is at 1.47%, both lower 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. In fact, the Federal Reserve stated in their September meeting that they don’t plan on raising the federal funds rate until at least 2023. 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 trended lower, particularly after the Fed meeting.
Currently, the average savings account is paying 0.39%, down from a month ago, 0.43%. Nobody is making money in cash, but at least it is safe.
The 1-year CD interest rate is now averaging 0.62%, noticeably lower than the 0.72% it was yielding a month ago. The 5-year CD rate is tracking lower as well, now at 0.77% from 0.91%. 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 and a lot of home improvement projects.
Mortgage rates continued to trend downward. Currently, the 30-year rate is at 3.09% down from 3.13% 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 remains at 2.59%. Never thought I would see mortgage rates this low. With rates this low, it is no surprise that new home sales are still on fire this year.
Oil prices finally halted their rise on expectations of a reopening economy. Reality might be setting in that the economy is going to take a bit longer to return to normalcy and that there is still a glut of oil sitting in storage around the world. The price for a barrel of crude dropped almost 7% in September to $39.74. I don’t want to jinx us, but the tropics seemed to have calmed down so that factors into lower oil prices as well.
Gasoline prices conformed with the drop in oil prices in September as opposed to the previous 2 months. Prices at the pump are averaging about $2.19 per gallon, $0.04 cents lower than a month ago. Mississippi takes the crown again with the cheapest fuel, at $1.85. FYI, a year ago, we were paying $2.65.
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 started to head back in the wrong direction. However, this was expected due to schools opening back up across the country. Fortunately, hospitalizations and deaths continue to trend down as more Covid data has helped improve prevention and treatments. Front page news has shifted away from the pandemic and now is focused on the supreme court nomination and the November elections. Pro sports are up and running with little disruption from the disease. The conferences in college football that canceled their seasons have a severe case of FOMO and plan to start play in October. Unless deaths spike, any new news regarding Covid should be positive for the markets.
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. During their September meeting, the Federal Reserve forecasted inflation remaining below 2% until 2023. They also projected the unemployment rate will remain relatively high during this period as well. As a result, they don’t plan on raising rates until at least then. This certainty in their stance is a big positive for the markets.
Election: Debates have started (please God, no more), and we are going to be in full election mode from here on out until November. Depending on what version of reality that you believe, most voters have already decided who they are siding with come November 3rd. Based on the amount of money pouring in for candidates, the real winners are going to be the media, TV networks, and online advertising.
Trade Wars/Tariffs: I don’t expect any progress on these issues until after the election. It is all about Covid and the elections right now.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
