Fun Facts about February
- Birthstone: Amethyst
- Flower: Primrose and Violet
- Zodiac signs: Aquarius and Pisces
- February was added to the Roman calendar in 713 BC. The length of the month changed over time and, at one time, it had as few as 23 days. When Julius Caesar remade the Roman calendar, the month was assigned 28 days during normal years and 29 days during leap years which occur every four years. 2020 was our last leap year.
- In the Southern Hemisphere, February is a summer month the equivalent to August.
- The month is named for the Latin word, februum, which means purification.
- February is Black History month.
- Notable days in February include Groundhog (2nd), Valentine’s (14th), and President’s (21st).
Stocks took a hit to start off the new year as investors came to terms with the fact that interest rates are going to go up in 2022. For the month, the S&P 500 lost about 5.2. This was the worst month for the stock market since March 2020, when the pandemic began. Historically, a down January usually doesn’t bode well for stocks for the rest of the year. But, if you remember in 2021, January was also negative for stocks, but they ended up turning in a pretty good performance for the rest of the year.
For the last 13 years, incredibly low interest rates have put in a nice floor for stock prices. That means when stocks take a downturn, it is not too deep and doesn’t last too long. The reason being that investors can’t make any money in bonds, CDs, or savings accounts because rates are so low. They have to get back into the stock market if they want capital appreciation, i.e., make money. Now, everyone expects rates to go up this year as the economy continues to grow and recover from the pandemic. So, it would be prudent to watch rates because if they rise too fast, it could spell trouble for stocks and bonds.
Earnings reports for Q4 and the entire 2021 year are starting to come out in a flurry and certainly could move stock prices in the near term. So far, companies that actually have earnings are doing well. Those with only hopes of positive earnings, not so much.
Take a look at the Outlook section below to see what events could move the markets over the short term.
Bond prices took the dive with stocks in January as the Fed confirmed that they plan on raising the Fed Funds rate soon. This price action is expected since bond prices act inversely to their yields. So, as yields, or interest rates, rise, the respective bond prices drop. This trend should hold going forward based on the Fed’s current strategy that they have spelled out in recent meetings. Bond buyers be wary in a rising interest rate environment. If you expect rates to go up, then please be cognizant of this when buying bonds with a maturity date greater than 1-2 years. In this type of interest rate environment, you can expect to lose principal unless you hold the bonds to maturity.
The 10-year US Treasury note is now yielding about 1.78% and the 30-year bond is at 2.10%, both higher than last month. The path of least resistance for these rates is up, so expect these yields to continue to rise and their respective bond prices to drop as the fed pumps the brakes on buying so many of these bonds every month.
Interest rates bumped up slightly for the third month in a row for all the same reasons that were mentioned above regarding bonds. CD, money market, and savings account rates all went up by small percentages once again but are still incredibly low. These rates should continue to move higher throughout 2022, but the savings rates will most likely still be too low to keep up with inflation. Now that we know what the Fed is going to do (raise rates), changes in these rates won’t come as too much of a surprise.
Currently, the average savings account is paying 0.30%, up slightly from last month. Although safe from market fluctuations, putting all your eggs in a savings account right now is not the best bet, especially if you need to grow your account value. Plus, you have to pay taxes on that interest. I certainly expect these rates to continue to inch up over the next year.
The 1-year CD interest rate is now averaging 0.51%, up from 0.49% last month. The 5-year CD rate is up as well, currently at 0.85% from 0.81% last month. You’re certainly not getting rich owning these. Hopefully, these rates will continue to move higher in a meaningful way over the next year or so. That way, we can at least make some money on our emergency reserves.
Mortgage rates had a big uptick in January as the Fed laid the groundwork for rising interest rates. Currently, the 30-year rate sits at 3.74%, up significantly from 3.19% a month ago. There is still high demand for mortgages as buyers try to lock in these low rates. Rates are still super low from a historical perspective.
Oil prices continued higher for the second month in a row. Fears of the omicron variant shutting down the world again were over blown, and demand is once again picking up as the economy continues to grow. The flights that I was on this past month were all booked solid, confirming signs of the recovery from the pandemic.
The price for a barrel of oil went up over 14% to settle near $88.15 at the end of the month. That’s a big rise, coupled with the 15% increase this past December. Inflation, a strong dollar, and high demand are all contributing to this price increase.
Gasoline prices are catching up to the rise in oil prices as reflected in recent gas prices at the pump. Regular unleaded gasoline is now averaging $3.37 per gallon, up $0.09 from last month. Mississippi now has the cheapest gas, at $3.00 a gallon. California has the most expensive at $4.64 per gallon. FYI, a year ago, we were paying $2.42.
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: We are continuing to see some pretty awful numbers here in the states. Although new cases have been dropping, we’re still averaging about 500,000 per day and the fatal cases are getting worse, since these typically lag the new cases by at least a few weeks. We’re now averaging over 3,300 deaths per day. The overwhelming majority of these deaths are people who are not vaccinated. We should see the death rate peak some time in February. Currently, we are at 75% of our citizens vaccinated with at least one dose, up from 73% a month ago. At this point, I think we are close to accepting that this disease will be with us for the foreseeable future, and we will start to learn how to live with it, similar to how we deal with the flu. This acceptance should bode well for stocks in 2022.
- Fed & Inflation: Economists are now expecting the Fed to raise interest rates 5 times in 2022 at a clip of 0.25% each time to combat the rise in inflation. This prediction is up from an expected 3 rate increases from a month ago. I think the markets have accepted that some interest rates bumps are inevitable. That’s an uncertainty that is now removed from the markets. This is always a good thing for stocks when markets know what to expect. Of course, if the Fed does something different, than we could see some wild swings in stock and bond prices. Historically, stocks have performed well when the Fed begins to raise rates. The same does not hold true for bonds, whose prices drop when rates rise. Also, since rates are still incredibly low, bond investors may shift some of their money to stocks to improve their portfolios’ performance. Monitoring these rate increases will be front and center for investors in 2022.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
