We just finished the first 30 days of what is historically considered to be the most volatile 90 days during a calendar year for stocks. August of 2020 certainly broke the mold in terms of historical returns. August usually returns an average of negative .1% but also it is known as the second-worst month of the year in terms of performance. August of 2020 definitely greatly surpassed it's historical averages by a wide margin.
August, September, and October have historically shown greater volatility than any other 90-day cycle of the year. September tends to show itself to be the weakest month of the year, averaging a loss of about .5% typically, but in an election year tends to only lose about .2%.
Even though long-term U.S. government bonds went soft (down) in the month of August, for the 2020-year to date, bonds still have outperformed stocks on a broad basis. Their outperformance is not only notable, but their stability in the face of huge risk factors of all varying degrees around the world is also something which can give many investors great nights of sleep. Look at their performance below in gold. They have not been negative all during 2020.
Graph of the year to date comparisons between the S&P 500 index, long term government bonds, as well as the newly updated version of the DJIA.
On a very, very different note, the oldest asset class known to mankind, gold/silver, though it has been full of volatility this year, it is definitely putting out a great performance. August was not a good month for precious metals. The chart indicates they bounced around, which they quite often do. But still, on a year-to-date basis, there's been a whole lot of shine in the precious metals world.
Look at this graph below and see the volatility of metals, but also realize the appreciation that their volatility has brought investors in Precious Metals versus the same amount of volatility to the S&P. The S&P 500 is just now having a month on the positive side of the market. While they are much more volatile than what we've seen in the U.S. Government Bond Market, precious metals also have delivered great appreciation coupled with that volatility.
So while many people seem to be cheering about the markets moving up against and over some of the all-time highs in some areas, we don't see that happening completely across the board. The Dow Jones Industrial Average is still shy of setting a new record and the Russell 2000, the index of smaller stocks, is almost 20% below its all-time highs.
We also look a little deeper into many factors which are strong contributors to typical and normal economies. So, today passengers on scheduled airliners are off by about 80% from a year ago. Also, as we look at the amount of gasoline being sold, in the U.S. we are seeing sales at the pump which are only 40% of what they were for the first 7 months of 2019. So while we may enjoy lower gas prices, for now, gas sales are also down substantially. There are so many other areas of so-called slack in the economy and yet we see many stock prices are at or setting new time highs on a regular basis.
Conversely, we do see areas of strength in broad and impacting areas of the economy. Housing. Housing is one area that has hardly skipped a beat in much of this pandemic/pandamonium economy. Last month, existing U.S. housing sales rose by 24.7%! Unprecedented low interest rates have helped in this area. Without a doubt, CRA continues to forecast a low to even lower interest rate environment continuing for months to come, maybe even well into late 2021. Adding to the home sales sprint higher is the always present furnishing of the home phenomenon. This is particularly true of existing home sales. Paint, flooring, lighting, along with light to very heavy duty remodeling seem to pull in the driveway as soon as the moving van backs out of the driveway. This all simply adds to the boom for the economy.
Secondly, another area posing of strength in the economy is consumer savings. This factor can be a double-edged sword for an economy needing business to happen and business to grow. While it is great news when people are saving money, the reality is when it is being saved, less is being spent and that lack of spending hurts an already ailing economy. At this juncture, it hurts the U.S. economy in a big way during a much needed time for more business to occur within. In March, when lockdowns began, spending declined steeply for low earners and high earners alike. But while low earners’ spending returned nearly to normal levels in May, higher earners’ spending has stayed at the lower than normal levels. The people who had the least job loss are precisely the people who have the biggest cut in spending. The stronger financial households are getting even stronger.
A 60-year-old, who tends to earn about $700,000 a year, has been saving enormous amounts of money during the pandemic. Recently, he realized just how much more slowly cash has been flowing out of his checking account this year: His balance was about $70,000 higher than it would have been in normal times. "There’s “just nothing I truly want to spend money on.” He said they used to spend $300 twice a week on restaurant meals, and $3,000 roughly once a month on short family getaways. He estimates his spending is down by at least $10,000 a month since the pandemic started, and that doesn’t factor in the $25,000 he got back after canceling a two-week vacation in Europe. “We’re skipping another big trip this Christmas,” he said, “so I’ll save another 25 grand.”
It's a nice life if you have it I do suppose.
Now, all that extra savings today will indeed bide for a much stronger tomorrow for these savers but the U.S. is in need of spending today to keep the train racing down the track. Then the questions become, "Do we actually need the train "racing" down the track, or do we simply want it to race and do we need to adjust our expectations towards a more sedate economy?" This last question is one most economists who have grown into adulthood over the last two decades often won't dare to ask or address.
In the words of Dr. Seuss, “Could this go on all day and night?” Well, maybe it can in a Dr. Seuss book but it certainly cannot continue to happen across not only the U.S. economy but across the world economies as well. The U.S. and Europe seem poised to try to do more to stimulate their respective economies and yet neither are still not seeing the results of the stimulus packages they've delivered up to now. So often more of the same is simply not the answer.
Our cartoon from last month seems still quite apropos. There is the market and then there is something that has to support it at some point. Currently, they are not in sync.
Please let us know if you would prefer an online appointment with us rather than face-to-face. We have been doing them for years and can do any reviews or meetings online if you would like us to.
We remain watchful.
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
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Mortgages - The outlook shared here over the last 12 months is, "Rates are headed lower."
This has no doubt happened and they have fallen in a big way. Interest rates for mortgages are at ALL TIME LOWS.
Now, out on the prediction limb. 15-year interest rates are the lowest they have ever been at 2.42% but, they will go lower still! I will predict that 15-year loans will be able to be obtained BELOW 2% sometime over the next 6 months. 30-year mortgages will be obtained below where 15-year mortgage rates are today.
Watch rates, please!
"While CRA has nothing to do with nor are we in the mortgage business, I am amazed at these falling rates. As you can see above, mortgage rates continue our predicted fall as we head into the fall/winter.
The growing problem...
So you might think it's interesting that just after the section where I note how low-interest rates are and I also predict them to go lower, the next section is on inflation. For many people, the thought of inflation going up while interest rates are going down seems a bit implausible to them. While it might seem implausible to many, it's not impossible at all. It really doesn't happen very often but it does indeed happen. The CRA outlook says that we are actually living in the middle of one of those times.
So let's first take a macro look at interest rates around the world. In Argentina, if you have really great credit, your mortgage interest rate is approximately 40% +! If you take out a $100,000 mortgage in Argentina today and you have excellent credit, a year from today you will have a mortgage of approximately $140,000+. It doesn't mean your house is worth that much more, though it well may be, it just means you're going to have to pay interest on the $140,000 loan vs $100,000 you originally borrowed or pay $40,000.00 in interest per year!
A great long-term friend of mine who lives in Argentina also reports that currently a loan on a brand new car is literally at 99% and you have to put a 40% down payment to get the loan!
And yet if you put money in the bank in Argentina, they pay you about 7% interest. Well, you might love to get a 7% interest on your money today in the U.S. but realize you would also have to be willing to pay 40-plus percent interest on your mortgage or 99% interest on your car as well.
I simply mention Argentina since they are at the opposite end of the spectrum of the U.S. in terms of the interest rate situation. With interest rates so low in the United States, on a global basis, we're actually not at the bottom of the interest rate scale. Denmark currently has the lowest interest rates on mortgages in the world. And they have had the lowest for the last 5 Years. In Denmark right now if you take out a $100,000 loan to buy a home, the mortgage company you deal with will actually send you $19 a month. A realistic example of this in Denmark would be if you bought a $250,000 house and you financed it for 30 years, your actual payment would be $646 a month. This is less than what a monthly payment would be for an interest-free loan.
I use those three examples, Argentina, the U.S., and Denmark to illustrate how misshapen things are across the globe and in the U.S. as it relates to interest rates.
The other side of the equation we are getting ready to face is inflation. In all fairness, we've already been experiencing quite a bit of it but that has been in limited areas. Housing costs/housing prices are rising at an alarming rate actually. Particularly when you factor in the current unemployment rate in the U.S. is in the 10% zone. So with 10% unemployment and housing prices going up pretty precipitously, we see that many people are going to be priced out of the housing market fairly soon. We also realize that rent rates are going up at the same rate that housing is going up.
Looking also at the prices of lumber, cotton, concrete, and various types of basic materials, all of these prices are rising as fast or faster than the S&P 500 in general. The interesting thing here is that things like gasoline, as pointed out in the main body of the newsletter here, have actually stayed fairly low because there's low demand. These items that we’re looking at here which cause inflation are always affected by simple supply and demand. The age-old rule in investing. So, when people are driving cars less, gas prices will stay soft. Pumpers could cut production to try to boost pricing but with soft demand, they want to give people all they are willing to burn. Economies around the world have to have a lot of money and so countries are not willing to cut production of oil because when they do, they cut off their own cash flows. Whether it's the U.S. or Russia, or Venezuela, or Africa, or the Middle East, or Canada, or South America, oil means cash flow and right now jobs, as well as cash flow, is King to economies.
So we have all been aware for a while that housing prices are rising on a pretty constant and fairly quickly level. But what we may not realize is that all these other basic materials mentioned above, have now been the new items going up as well. One of the problems for the home building industry and the remodeling business currently is this - availability of products. Drop by your local do-it-yourself Superstore and if you'll look, you will not see vast amounts of lumber products stacked all over the place. The shelves are either bare or certainly somewhat depleted.
One of the big issues that have affected finish lumber products is labor. The pandemic has impacted production due to limited numbers of employees but also the checks for unemployment from state and federal governments in many cases have sidelined truck drivers. Some of them have elected to stay home and collect unemployment checks rather than drive in the current situation.
This trucking issue bleeds over into other industries as well. One of our clients, who owns his own manufacturing companies, says his problem at this point is he has a lot of demand for his products and yet is somewhat restricted in getting the raw materials to his plants to create the products he sells. He states the products are clearly available but again the trucking issue, truckers staying home for a while so they can collect continued unemployment rather than driving. This has impacted his business since he can't get the product supplied to him he needs in order to create the finished product. As I said earlier, the supply and demand issues take over here. If you can't supply enough product to the market to meet the demand, prices will go up.
So to summarize a lot of this, supply and demand rule the day and the high supply of gasoline keeps pump prices lower and yet the low supply of many products from lumber to manufactured plastic products will continue to push production prices higher and that means you and I will pay more for the products we buy off the shelf.