Calendar Notes
- None.
Stocks stayed in the green for the third month in a row, climbing a wall of worry built mainly from tariffs. The index reached a series of new all-time highs, driven by strong performances in Q2 by our home-grown big technology companies.
For the month of July, the S&P 500 rose a respectable 2.2%, even with a pretty big drop in the last days of the month. That beat the historical July average of 1.28% and now takes the index to a year-to-date return of 8.50%.
The usually quiet summer months for stocks are anything but this year. With most of the Q2 earnings posted already, the stock market is now going to be fixated on trade policy, the job market, inflation, and interest rates. Each of these four elements can provide a boost or a bust for stocks over the next month. If the new tariffs that were recently implemented stay in place, inflation is going to continue higher as it has over the past few months. Layoffs from both the public and private sectors are now showing up in the data as the effects of DOGE, trade, and immigration policies take hold. Companies are embracing AI to reduce payroll as well. The Federal Reserve is more likely to cut interest rates by their September meeting (no meeting in August) now with the recent poor jobs data most likely outweighing the rising inflation data.
The good news is, as I have said many times this year, the economy can get back on track if we get rid of the tariffs and instead negotiate trade deals with our allies that are beneficial to both parties. This would especially help our small businesses that can’t afford to pay these levies and still remain viable. It would also benefit those that are in the lower- and middle-income tiers that can’t afford the price increases that our companies will have to pass on to their customers due to the tariffs.
Historically, August has been a pretty boring month for stocks, with an average return of about 0.5%. I think this August could be a little more exciting, to say the least.
Take a look at the Outlook section below to see what events could move the markets over the short term.
Bond prices were flat to slightly lower during July as the economy began to show signs of slowing, increasing the potential for short-term interest rates to be lowered by the Federal Reserve. Although the Federal Reserve held rates unchanged after their July meeting, sentiment increased sharply for a cut by the time that they meet again in September due to the poor jobs report that came out just after the Fed concluded their meeting.
While there is a recovery in market sentiment after a temporary pause on new tariffs, concerns over the long-term impact of trade policies and geopolitical risks still persist. This kind of uncertainty can drive investors toward safer assets like bonds, particularly government bonds, increasing demand and pushing prices up. We will most likely see this price action continue if the most recent tariffs stay in place for any significant period of time.
The 10-year US Treasury note yield finished higher in July, settling at 4.36%, higher than the 4.23% yield that it was at the beginning of the month. The 30-year bond yield closed out the month at 4.89%, about 12 basis points higher than a month ago.
With all of the uncertainty in the bond market, it is prudent to invest in bonds that mature sooner rather than later. I like bonds with a 12-to-18-month maturity and plan on holding onto them until they do mature.
Savings rates didn’t move much in July. Money market rates and bank savings accounts are averaging only about 0.46% but the best rates can be found at credit unions and online banks with rates approaching 4.5%. It is worth it to do some research here. With rates staying above 4%, I think more money is going to be funneled into the safe havens of money markets and CDs as the stock market rebound is showing signs of fatigue. So, CDs and MMAs continue to be a great place toput your cash and your emergency fund, for now. Knowing this, it makes sense in most situations to put cash that you don’t immediately need into CDs with up to 2-year maturities. For emergency cash, stick to high yielding money market and savings accounts, of which the best are yielding about 4.4%. As always, keep the total under $250,000 per person at any one bank to ensure you are fully covered by the FDIC.
Mortgage rates mirrored other rate categories and had little movement this past month. The expectations were low for any changes in rates by the Federal Reserve, so this was expected. Higher housing inventory continued to put downward pressure on mortgage rates as well. Active listings rose for the 21st consecutive month, but overall inventory remains below pre-pandemic levels. It has become a buyers’ market in most parts of the country, but prices are still historically high and coupled with high mortgage rates, makes home purchases out of reach for many, especially first-time home buyers.
The 30-year fixed rate finished the month at 6.72%, still within the narrow range of 6.5% and 7% that it has been in since October of last year. The trade and immigration policies are causing higher raw materials and labor costs for homebuilders and are starting to show up in new home prices now, making it even harder to afford a new home.
Here is a look at the one-year chart of the 15- and 30-year mortgage rates from Freddie Mac.
Oil prices were much calmer in July than they were in June of this year. That is, until the last week when oil prices surged due to renewed geopolitical risk causing a disruption in the global oil supply. Specifically, when the U.S. issued a deadline to Russia to end the war in Ukraine, threatening additional sanctions and tariffs on countries that continue to buy Russian oil. This, coupled with the seasonally strong summer demand could keep prices elevated at least through the end of August.
For the month, the price for a barrel of oil closed at $69.26, up from $65.11 at the beginning of July. For the year, it’s down about 3.40%. We certainly don’t want to see oil prices going higher now because that will raise the input costs for companies even higher as the tariffs take hold.
Here’s a look at the one-year chart for U.S. oil:
Gasoline prices dipped slightly in July. Regular unleaded gasoline is now averaging $3.15 per gallon, down four cents from last month. However, gas prices could be heading higher in the near future for reasons stated above in the oil prices section. Mississippi has the cheapest gas currently, checking in at $2.71 a gallon. California has the most expensive gasoline at $4.49 per gallon. FYI, a year ago, we were paying $3.48.
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:
- Fed & Inflation: The Federal Reserve had started leaning towards cutting rates even before the bad jobs report came out this past Friday. Cracks have begun to appear in our resilient labor market as layoffs from DOGE and the private sector are reflected in the latest data. Also, inflation is picking up as U.S. companies begin to raise prices to offset the tariffs they are paying on imported goods and raw materials. Higher unemployment and higher prices, aka stagflation, is a tough scenario for the Fed to fight at the same time. Right now, it looks like they need to focus on the labor side of the equation, which would mean to cut rates. However, they have to tread carefully because lower rates combined with tariffs could lead to runaway inflation, which would be devastating to the economy. The ideal situation would be if we cut rates and removed the tariffs. That would help our economy recover and spur growth. I’m still hopeful.
- Trump Administration Policies: The trade war is back on the front burner as tariffs are assessed on almost everything that our companies import for the products that they produce. As a reminder, the tariffs that we have been talking about this year are fees that U.S. companies pay our government. I like to think of these tariffs simply as an increase in the corporate tax for our companies. It basically increases the cost of doing business. So, in order for companies to keep the same profit margins pre-tariff, or in the case of many small businesses, to remain profitable at all, they have to either raise the prices that they charge their customers, lower expenses in other areas of their business, or a combination of both. Regardless of which avenue a company chooses, our economy will suffer, especially our small businesses and our lower income population that is already living paycheck to paycheck. As I said last month and will keep saying, the government needs to scuttle this absurd tariff strategy and go back to the drawing board to put together a plan that is realistic and can meet their objectives without damaging so many industries and so many lives. It’s not too late to save our small businesses, keep inflation in check, and get our economy back on track.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
