Virus Triggers Fear on Wall Street During Volatile Week of Trading
This week has been a wild ride as the potential pandemic of the coronavirus has caused a massive selloff on Wall Street as investors flee to the safety of government bonds. The Dow plummeted 1,000 points on Monday and the perpetual freefall continued as the week progressed, putting the Dow on track for its worst week since the 2008 financial crisis.
Thursday’s stock market downward spiral moved equities into correction territory, as the Dow fell another 1,190 points to close the day down 4.4%; it’s largest one-day decline in history. Early Friday morning the bloodbath continued with the Dow opening down another 800+ points, That put the Dow firmly in correction territory, more than 10% down from its 52-week high. The final drop happened after it was reported that a person in Northern California had contracted the virus from an unknown origin. Both the Dow and the S&P 500 posted six-day losing streaks on Thursday.
Treasury note yields fell right along with markets on the news as the benchmark 10-year note yield dropped to a new record low, trading at 1.241% intraday Thursday, closing just under 1.3% and then dropping to another record low of 1.186% in early trading Friday morning.
The ripple effect has been seen across the globe as European markets also slipped into correction territory. The pan-European Stoxx 600 closed more than 10% down from its record high it hit in Feb. 2019. This drop coincided with Estonia and Denmark reporting their first cases of the coronavirus. Italy has already seen a spread in cases and reported multiple deaths linked to the virus.
Goldman Sachs also came out with a bold prediction on Thursday, revising its earnings estimate for U.S. companies to $165 per share. That would mean 0% growth in 2020.
The biggest concern for business growth is the impact on supply chains. Large corporations with manufacturing or travel interests in China, like Apple or United Airlines, are taking the brunt of the business hit. Microsoft also said this week that the company does not expect to meet quarterly goals because of the virus.
Goldman’s chief U.S. equity strategist David Koston told clients that “A more severe pandemic could lead to a more prolonged disruption and a U.S. recession.”
Correction vs. Recession
We are currently in the 11th year of an economic expansion, the longest in U.S. history, so it’s natural for the word recession to be bandied about as an inevitability. A correction is when the stock market sees a drop of at least 10% from its recent high. The Dow slipped into correction territory on Thursday, taking just 10 sessions to fall from its all-time high.
Not counting this week, there have been 26 corrections since WWII with the most recent stretching from Sept. 2018 to Dec. 2018. All of those averaged a drop of 13.7% over four months, according to information from Goldman Sachs and research from CNBC (shown in chart below). It took four months to recover from these corrections.
Once the market falls to 20% below its most recent high, that is considered a bear market. Anything beyond that indicates considerable issues and longer recovery time. The second chart below, also from CNBC, shows the bear markets over the same time frame and time it has taken to recover. This includes Oct. 2007, the beginning of the Great Recession.
Speaking of Bear Markets…
The price of oil continues to tank as U.S. West Texas Intermediate crude fell more than 5% at the low to $45.88 per barrel. The coronavirus is also to blame for this price drop as investors worry that demand will drop. With more people staying home from work and not traveling, demand for gas and jet fuel is dropping and with it. “As China is the largest consumer in the world, the unclear impact of the coronavirus is driving WTI lower and lower,” said KKM Financial founder and CEO Jeff Kilburg.
Right now crude oil is deep into a bear market, sitting 29% below its 52-week intraday high from April 2019. Brent crude, the international benchmark, hit its lowest level since Dec. 2018 before rallying back slightly.
This drop in oil demand, which was already weak before the spread of the virus, has put the onus on next week’s OPEC+ meeting in Vienna. Some investors are predicting that OPEC+ will reduce oil supply in response to the weakening demand to balance out pricing.
Housing Industry Booming
The drop in the market this week, and correlating dip in Treasury note yields, has given way to lower interest rates for mortgages and created a boom for the mortgage industry. These rates were already low and dipped even further this week. Freddie Mac’s 30-year fixed-rate mortgage average is sitting at 3.45% with Mortgage News Daily’s weekly survey showing an average of 3.33% for a 30-year Conventional mortgage rate.
On Feb. 28, 2019, Freddie Mac’s 30-year fixed-rate average was 4.35%, making this a perfect opportunity for many people to refinance the home loan they got just one year ago and significantly reduce their interest rate. Right now, rates derived through Ginnie Mae mortgage backed securities are down to 3.125%. That means 77% of people who have an FHA or VA loan have a 50bp incentive to refinance, according to Brean Capital LLC analyst Scott Buchta. Buchta adds that Conventional rates dropped by 42bps putting more than “$800 billion worth of loans in the 50bp refinancing window.” That means, according to Buchta, “this pushes the percentage of conventional borrowers with at least 50bps of refinancing incentive up from 39% at year-end to 76% currently.”
The Mortgage Bankers Association senior VP and chief economist Mike Fratantoni said that FHA refinance applications jumped by more than 22% this week, even though there was a decrease in refi applications for conventional loans. We will likely see that refi number jump up next week considering recent volatility.
Purchase applications were also up 1.5% week-over-week, according to the MBA, and up a seasonally adjusted 6%. The National Association of Realtors released data this week showing that pending home sales were up 5.2% month-over-month, the second-highest monthly number in more than two years.
The Commerce Department released its home sale numbers this week showing new home sales hitting a 12.5-year high in the month of January. New home sales jumped by 7.9% to 764,000 units in January, the highest level since July 2007.
Inventory will continue to be the nagging issue especially since we’ve seen such a strong pre-spring buying season. While construction of new single-family homes is at its highest level since 2007, those homes won’t be finished for some time. And if January’s sales pace continues, we will run out of inventory in 5.1 months.
That lack of supply with increasing demand continues to drive prices upward. The S&P CoreLogic Case-Shiller National Home Price Index shows a 3.8% year-over-year price gain in December, up from 3.5% in November.
Contributed by Greg Richardson, MAXEX Managing Director
Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized contract.