Fun Facts about July
- Birthstone: Ruby
- Flower: Larkspur or Water Lily
- Zodiac signs: Cancer and Leo
- July was named after the famous Roman general Julius Caesar, as it was the month he was born in. The month was previously called Quintilis (Latin for fifth).
- July is, on average, the warmest month of the year in the northern hemisphere. Its southern hemisphere equivalent is January.
Stocks moved higher for a fifth month in a row. The S&P 500 moved up a quiet 2.2% and is now up a very respectable 14.4% for the year. Normalization of our economy and, frankly, our lives, continues at a rapid pace. Talk of the pandemic, while still prevalent, is no longer front-page news, particularly as it relates to the financial headlines. Most news is positive regarding the markets: economies are expanding worldwide, earnings are growing for most corporations, lots of pent-up demand from consumers, and the travel and leisure industry is seeing a huge uptick in activity.
The one worry that has investors on edge is the rapid rise in inflation and how the Federal Reserve will act to tame it. The good news on that front is that raw material prices have fallen considerably (lumber is down over 40% from its peak in May) after their meteoric rise earlier this year. I think the Fed is doing a good job managing investors’ expectations so far. We just have to wait a bit longer to see if this inflation spike is just transitory and not permanent.
Take a look at the Outlook section below to see what events could move the markets over the short term.
Bond prices for bonds with longer maturities rose while short duration bond prices dropped. This was true for both government and corporate bonds. This means that the yield curve is moving to a less steep shape, or flatter. The uncertainty of whether inflation is transitory or not coupled with what the Federal reserve’s response to inflation will be is causing bond prices and interest rates to become more volatile. As I said in last month’s update, I still expect to see bond prices lower at the end of the year versus today due to the economy returning to a more normal state. Because of this, longer maturity bonds are not going to be the best investment right now. I would still try and keep your bond maturities short, no more than 2 years, to lower your portfolio risk.
The 10-year US Treasury note is now yielding 1.44% and the 30-year bond is at 2.06%, both noticeably lower from last month. These rates have taken a pause in going up in the last three months but it’s a good bet that they’ll resume their upward trajectory shortly. However, if the current inflation that we are seeing goes away, these rates may be stuck down here for a while.
Interest rates did absolutely nothing in June, which is what happened in May. The charts for most savings rates and CDs flatlined again. These rates should move higher over the rest of the year, but the savings rates will most likely still be too low to keep up with inflation.
Currently, the average savings account is paying 0.27%, exactly the same as last month. Although safe from market fluctuations, putting all your eggs in a savings account is not the best bet, especially if you need to grow your account value.
The 1-year CD interest rate is now averaging 0.51%, the same as last month. The 5-year CD rate is the same as last month as well, currently at 0.69%. Fyi, these CD rates have remained nearly exactly the same since February.
Mortgage rates reversed course and shifted higher in June. Currently, the 30-year rate sits at 3.33%, compared to 3.09% last month. Rates continue to remain incredibly low, which is great news for home buyers, real estate investors and refinancers. Demand remains very strong for both new and existing homes, despite prices breaking records in most locations. Also, with lumber prices dropping about 50% since May, new home sales should pick up as prices come down.
Oil prices marched higher for a third straight month. A barrel of oil cost 11% more than a month ago, now at $73.75. Besides the normal price rise due to the seasonal travel summer period, prices are also going up due to the added demand of the economy really ramping up as the pandemic subsides. On top of that, OPEC is making everyone guess if they are going to open the spigots more when they meet today.
Demand should continue to drive prices higher as the travel floodgates reopen. This will keep a floor under oil and gas prices even if we see increased supply by either OPEC or frackers in the U.S.
Gasoline prices crept higher yet again this past month. There is huge demand as pretty much everybody is traveling to vacation destinations. Also, there is a driver shortage to haul the gasoline to the gas stations, so that is keeping prices elevated as well. Prices at the pump are averaging about $3.11 per gallon, about 6 cents higher than a month ago. Mississippi has the cheapest gas right now, at $2.75. California has the most expensive at $4.28 per gallon. FYI, a year ago, we were paying $2.18.
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:
- Infrastructure Bill: It looks like the White House and a bipartisan group of senators put together an infrastructure bill they can agree on. Now, they have to sell it to everybody else, which could be tough. The good news is that infrastructure improvement is needed across the country and it does get bipartisan support, so there’s a good chance that something will get passed this year. The stock market already knows this and has priced this scenario in to some extent. Regardless, we should see a leg up in the markets if and when this bill gets signed into law just for the fact that it will show cooperation is still possible in DC.
- Coronavirus: Vaccinations have really slowed down. It seems that everybody that wanted one, got one. Those that haven’t been vaccinated have chosen not to for various reasons. Having said that, the U.S. population that has received at least one dose is only at 54%. That’s not going to cut it because the unvaccinated population will allow covid to continue to mutate and spread. Currently, over 90% of covid hospitalizations are patients who haven’t been fully vaccinated. The good news is that treatments have improved so the survival rate has improved as well. This means that the unvaccinated that survive are getting vaccinated anyway, albeit the hard way. So, we should reach herd immunity at some point this year (fingers crossed).
- Fed & Inflation: The Fed thinks the big rise in prices for pretty much everything is temporary and will return to normal once the supply chains catch up with the return-to-normal demand. We’re already seeing some raw material prices dropping but it’s not because the supply chains are fixed. I think it’s due to stuff costing too much. As they say, the best cure for high prices is, well, high prices. So now, we are seeing consumers slowing down on buying autos, homes, and other large ticket items. This will allow suppliers to catch up with demand a bit quicker and help prices level out even more.
Here’s a little public service announcement for Florida residents:
2021 Sales Tax Holiday on Specific Admissions and Outdoor Activity Supplies
From July 1, 2021 through July 7, 2021, admissions to music events, sporting events, cultural events, specified performances, movies, museums, state parks, and fitness facilities are exempt from sales tax. Also exempt during this period are qualifying boat and water activity supplies, camping supplies, fishing supplies, general outdoor supplies, and sports equipment. For more information and a list of qualifying items, visit TIP #21A01-05.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
