Interest Rates Down; Bond Investments Up; Stock Market Whipsawed
May brought the first month of stock market losses in 2019. Fortunately for our clients, every stock fund position is still nicely positive for 2019, despite the pull back in May. The same is true for every bond position in our client accounts. All but one of our eleven bond fund positions were positive in May and all eleven are positive for 2019 from a low of +1.73% in the municipal bond category to +5.42% in the nominal bond category. The bond market continues to be a friend to its investors.
Bond prices are directly tied to the direction of interest rates. As interest rates fall, the market prices for bonds go up. The opposite is true when interest rates rise. The interest rate (yield) on the U.S. 10-year Treasury Note closed May 31 at 2.13%. Last October, the 10-year yield peaked at 3.25%. On Monday, June 3, the 10-year yield closed at 2.08%. This decline in interest rates helped 30-year fixed mortgage rates to drop below 4%. These low rates should help boost the housing market and increase the probability that the Fed will cut interest rates in 2019, which should boost the stock market.
Now that the trade war with China has proven not so easy to win, the focus has turned to Mexico. The proposed tariffs on goods from Mexico could in fact be in violation of NAFTA and World Trade Organization rules. This would also continue President Trump’s pattern, unprecedented before this administration, of using tariffs as a tool for a non-trade issue. In the case of Mexico, he conceived of the new proposal as a punishment for the immigrants and asylum-seekers crossing into the U.S. from Mexico. But it is dangerous to think of tariffs as an all-purpose tool for foreign policy. The administration promises that the tariffs imposed on imports will be paid for by foreign trading partners, Mexico in this case and China since 2018. Economists Jeanna Smialek, writing in the May 30th New York Times, reports that economists for the Federal Reserve estimate that Trump’s tariffs have cost the average U.S. household $831 since the first tariffs were imposed. In this way, tariffs are actually a tax on U.S. tax-payers.
I give credit to Lisa Shalett, Chief Investment Officer at Morgan Stanley, for the following comment: What is the worst investment strategy in volatile markets? Being overtaken by fear and locking in losses by selling near the bottom. A lot of people think getting wealthy is about maximizing return. The real truth: It’s about minimizing the downside with a diversified plan built for your goals, your time horizon and your values. That’s what makes it easier to stay the course.