Fun Facts about May
- Birthstone: Emerald
- Flower: Lily of the Valley
- Zodiac signs: Taurus and Gemini
- The month of May was named for the Greek goddess Maia. She was the goddess of fertility.
- It is the third and last full month of the season of spring.
- May in the Northern Hemisphere is similar to November in the Southern Hemisphere.
- The Kentucky Derby, the world’s most famous horse race, is held on the first Saturday of May. This year it is on May 7th.
- The Indianapolis 500 car race is on May 29th this year.
Stocks had a brutal month in April. There was no place to hide as selling accelerated due to uncertainty caused by the Russian/Ukraine conflict, Federal Reserve, and supply chain damage due to covid lockdowns in China.
For the month of April, the S&P 500 lost nearly 9%, its worst monthly performance since March 2020. For the year, it is down over 13%.
Earnings reports for Q1 have been coming in fast and furious and will continue to do so for the next few weeks. Companies will have a hard time beating last year’s Q1 numbers due to those issues that I mentioned earlier, namely the Russian-Ukraine war, high inflation/Federal Reserve, and more supply chain woes caused by China’s covid lockdowns.
Also, the Fed may surprise and only raise rates by 25 basis points after seeing how badly the stock and bond markets tanked.
Take a look at the Outlook section below to see what events could move the markets over the short term.
Bond prices slowed their descent downward but still ended the month of April in the red. Like equity investors, bond investors are worried about the Fed raising rates too much too fast. The threat of both bond and stock prices dropping at the same time leaves few safe havens for investors to put their money. Additionally, if inflation is peaking as some experts are saying, metals and other commodities might not be the best place to park cash either. This makes for a very tricky investing environment.
The Fed is intently watching inflation, wages, as well as the stock and bond markets in advance of their meeting next week. I think a 50-basis point hike is already baked into the cake for the markets. A different announcement could cause significant volatility with bond prices.
The 10-year US Treasury note is now yielding about 2.89% and the 30-year bond is at 2.95%, both about 0.50% higher than last month. The path of least resistance for these rates is still up, although we could see a pause after the runup that we had so far this year.
Savings rates continued to move higher for a sixth consecutive month. The last time that has happened was most likely in 2006/2007. CD, money market, and savings account rates all went up by small percentages once again but are still quite low. They certainly aren’t keeping up with inflation or the rate increases on credit card debt and other loans. The good news is that these rates should continue to move higher throughout 2022, but they 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 0.33%, little changed 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 0.85%, up from 0.74% last month. The 5-year CD rate had a nice gain and is now at 1.41%, up from 1.09% last month. Even with that big jump in the 5-year CD, nobody is getting rich putting their money in them. 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 went vertical in April, marking the fourth straight month of higher rates. Currently, the 30-year rate sits at 5.42%, way up from 4.53% a month ago. Mortgage applications are down again in April as rates continue to climb. It is still tough for builders to finish new homes because of the supply chain constraints. This is causing home prices to climb ever higher with inventory still very low for homebuyers. This problem should resolve itself over the course of the summer as supply chains get squared away.
Oil prices crept higher for the fifth straight month in April but have come down from their peaks in early March. The price for a barrel of oil settled up just above $104, $4 more than it was at the beginning of April. For the year, oil is now up over 38% and this upward trend in prices looks like it will continue.
Global oil production has increased about 5 million barrels per day in 2022 versus in 2021. Surprisingly, oil exports from Russia have not decreased at all despite the war and sanctions. This increase in supply should help slow the rise in oil prices. The problem is the energy traders: they are trading about 13 times the amount of physical oil supply, which increases price volatility significantly. For example, the day before Russia invaded Ukraine, oil was at $90. Since then, despite no change in oil production, the price shot up to $124, then down to $95, and now sits close to $104. It seems like regulators are nowhere to be found.
Gasoline prices have come down from the clouds a little bit. Regular unleaded gasoline is now averaging $4.16 per gallon, down $0.07 from last month. Georgia now has the cheapest gas, at $3.71 a gallon. California has the most expensive at $5.71 per gallon. We’re heading into driving season so don’t expect prices to drop down too much. Also, gas prices are heavily influenced by energy traders as well (see Oil prices section above). FYI, a year ago, we were paying $2.89.
Check out the prices at the pump in your area: AAA Gas Prices.
Outlook
Events on the horizon that could move the markets in the near term:
- Russia Invasion of Ukraine: Russia’s plan for the invasion of Ukraine has not gone as expected, to say the least. They are only making small gains in territory at great expense to their soldiers, equipment, and reputation. Putin is certainly embarrassed about his once mighty military, but his stubbornness will probably string this out for a while. The only thing that worries me is that he is being humiliated, which could make him do something radical (WMDs?) to save face. Having said that, I do think the world is adjusting to not having Russia as an integral part of the world economy so when this conflict ends, there may not be any major change to the markets.
- Coronavirus: I was hoping to take this off the board this month but after Apple’s announcement that they could take an $8 billion hit due to the covid lockdowns in China, it definitely is still a major factor in stock market direction. It also reinforces the necessity to have more technology production in the U.S. I know labor costs are much higher here but could be worth it when companies take hits like Apple is this quarter. The good news is that this is more than likely a short-term event and should be resolved by mid-summer.
- Fed & Inflation: As I mentioned earlier, the Fed is expected to hike rates another 50 basis points when they meet this week. Any move different than this could have a big influence on market direction in the short term. Regarding inflation, there are encouraging signs that inflation may have peaked. If this is the case, we could get a nice stock rally in May.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
