Stocks had the Santa Claus rally that everybody was hoping for, bumping up over 2% in December, making it four positive months in a row. The S&P 500 finished the year up about 28%, its best year since 2013.
Nobody can ever predict, with any accuracy, how the stock market will perform over a certain time period. When the markets tanked in December of 2018, there weren’t many “experts” saying to put all of your money in stocks. Also, during this past year, there were many events that could have derailed a market rise: tariffs, trade wars, Russian probe, impeachment, etc. But the market shrugged these off, taking one step backward and two steps forward at each obstacle, climbing a wall of worry to record highs.
Will this upward trend last? I have no idea, but I do know there is one thing that can help the rally continue: historically low interest rates. I believe these low rates are putting a solid floor underneath stock prices. Couple that with growing industries and fundamentally sound companies, and you could have a winning combination for your investments. Of course, there is always something that could derail this rally. Take a look at the Outlook section below to see what events could move the markets in the near future.
Bonds were a mixed bag in December: government treasury prices headed lower but corporate bonds moved up in price. It looks like the Fed is going to continue to hold off on changing short-term rates anytime soon, based on their last meeting notes. I think this bodes well for markets.
I took a look at the yield curve again and it is flat up to the 5 year note maturity and then rates start to climb. This is telling me that rates are trying to normalize: the longer that you lend out your money, the more interest that you should be paid.
Global bond yields are still in bizarro world but heading the right way to normal. Germany, France, Japan, and Switzerland have negative bond yields. Switzerland’s 50-year bond still has a negative yield. That’s ludicrous! This is a bubble that could burst big time if interest rates reverse course and quickly head higher. Stay away from any bonds that mature more than 2 years out.
Interest rates continued to drift lower as wage growth shows little movement along with consumer prices. The rate for the benchmark 10 year Treasury note continues to stay under 2%. Rates will most likely remain in this low range until we start to see signs of inflation, which, so far, are non existent.
On the savings side, short-term rates, like savings and money market accounts, as well as longer-term rates, like CDs, continued to trend down, just like in November.
Currently, the average savings account is paying 0.96%, down from 1.04%.
The 1-year CD interest rate is now averaging 1.97%, slightly less than the 1.98% it was yielding a month ago and the 5-year CD rate is at 2.06%, about the same as last month. Notice that the 5-year rate has stayed above the 1-year rate. That’s how it’s supposed to be, although I still wouldn’t touch a CD with a maturity longer than 1 year.
Mortgage rates ticked up in December, but the 30 year is still below the 4% level. Currently, the 30-year rate is at 3.86%, up a bit from 3.73% last month. Refi’s continue to look like a good move, especially if you plan on being in your home for at least 5 more years.
Oil prices rose steadily in December, topping out at a little over $61 per barrel. For the year, prices have gone up nearly 35%, which was surprising, given the glut of oil sitting in storage around the globe.
I really don’t see oil prices going much higher, unless we have a major event that halts production. It really seems like we are approaching peak demand for oil as companies and countries commit to becoming more energy efficient and environmentally friendly. This can really help keep prices low in the foreseeable future.
Nationally, gasoline prices are not following oil prices higher, which us drivers like. Prices at the pump are averaging about $2.58 per gallon, a penny lower than a month ago. Missouri has the cheapest fuel, at $2.22. FYI, a year ago, we were paying $2.27.
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:
- Trade Wars: We got the NAFTA upgrade completed in December, now known as the USMCA. This modernized our old trade agreement with Mexico and Canada, with major changes mostly in the automotive sector and labor. It definitely will discourage U.S. companies from moving plants to Mexico but could force them to relocate elsewhere because the agreement will cause prices to rise in all 3 countries. On the China front, no actual progress has been made. However, Trump recently tweeted that he will sign a Phase 1 trade deal with China by mid-January. This basically turns off the tariffs and gets us almost back to where we were before the trade war. If this actually happens, we should get a boost for stocks in January.
- Tariffs: These taxes on U.S. importers continue to take a heavy toll on our economy. According to a recent study by the Federal Reserve, the tariffs have led to higher producer prices and a loss of jobs across the country, specifically in the following industries: aluminum sheet, iron and steel, motor vehicles, household appliances, and electronic equipment. The tariffs go hand-in-hand with the trade war, so any deal would include a reduction or removal of tariffs, which would be good for U.S. companies and their stock prices.
- Impeachment: The president was impeached by the HOR in December. Now, it’s on to the Senate for the trial. Unless new witnesses appear in the trial with new information, it doesn’t look likely that there are enough votes in the Senate to remove Trump. This whole process looks like it will run through January so stay tuned. If the outcome is as expected, it would be positive for the markets, but I’m pretty sure that it is already priced in so we might not see any movement as a result.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
