Market volatility returns as virus concerns reignite
A tumultuous final hour of trading Thursday was followed immediately by an uptick of 600 points in futures Friday morning as the Dow Jones Industrial Average tries to right the ship following a major selloff.
The Dow spiraled south on Thursday afternoon, dropping 1,800 points, spurred by reports of the increase in COVID-19 cases across the country. The Dow started its drop early Thursday, hitting a loss of 1,000 points by early afternoon before tanking in the final hour. The S&P 500 saw a 5.7% slide while the Nasdaq took a 5% loss. That was the indices’ biggest one-day losses since March. You can see in this chart below from CNBC just how drastic the drop was for the Dow.
The Nasdaq, just two days prior, went above 10,000 points for the first time ever. Airlines, cruise operators and retailers made up the major pieces of the selloff as investors recalibrated their expectations of a return to ‘normal’ in the economy.
The steep drop comes on the heels of a report from the National Bureau of Economic Research on Monday. The report states the COVID-19 pandemic pushed the economy into a recession, signaling an official end to the longest economic expansion in American history. According to the NBER’s report, the economy, labor sector and personal consumption all peaked in February. Generally, a recession equals two quarters of negative growth in production, measured in real gross domestic product.
GDP was part of the focus this week for the Federal Reserve. In its monthly meeting, the Fed issued its predictions for the year, forecasting a GDP contraction of 6.5% this year, with a 5% gain in 2021. The Commerce Department reported last week that GDP shrank by 5% in Q1 of this year with a predicted near 50% contraction by the end of Q2.
The Fed also voted to keep benchmark interest rates at zero. Federal Reserve Chair Jerome Powell emphasized that point, saying the central bank “is not even thinking about changing rates.”
The members added that the bank will continue to increase its bond holdings, targeting Treasury purchases at $80 billion a month. The Fed would also continue to purchase mortgage-backed securities at $40 billion per month. Powell reiterated that the Fed will stand pat because the economic recovery will “take some time.” Powell added that the predictions set forth were done with the “general expectation of an economic recovery beginning in the second half of this year and lasting over the next couple of years, supported by interest rates that remain at their current level near zero.”
The continued effects of the COVID-19 pandemic have stymied overall demand of goods as consumer prices dropped for a third straight month in May. The Labor Department’s report showed a 0.1% consumer price index (CPI) decline in May with underlying inflation remaining weak. Year-over-year, the CPI rose by just 0.1%, which is the smallest yearly increase since September 2015.
In addition, more than 1.5 million Americans filed for initial unemployment claims this week, according to the Bureau of Labor Statistics. While the pace of initial claims has slowed, it is still a dramatically high number comparatively. The number of continuing claims is also still staggering. Although down from the peak of more than 24 million the week of May 9, the number of people claiming unemployment benefits for at least two weeks is still over 20 million.
Controlling the Yield Curve
Earlier this week, the yield on the 10-year Treasury note climbed higher to .93%, the highest point since mid-March of this year. While that is a good sign of investors returning to the equity market with confidence, that was a bad sign for the Fed. As the U.S. tries to claw its way out of a recession, the Fed wants to keep lending rates, both short- and long-term, as low as possible.
One of two options faced the Fed as it entered its meetings this week. The first, would be to be steadfast in its position to hold interest rates steady at zero. The second, would be to buy up Treasuries to artificially control the bond yields and keep them under a specific level.
At Wednesday’s meeting, the Fed did both. It held steady with interest rates at zero and also increased its purchase of bond notes to $80 million per month. Furthermore, in its dot plot chart released Wednesday, only two members hold the opinion of raising rates in 2022.
Mortgage Rates Set Record Low
What happened on Wall Street this week helped push mortgage rates to their lowest level in history. Mortgage News Daily reported that average rates on a 30-year fixed-rate mortgage fell to 2.97% on Thursday. Freddie Mac’s 30-year fixed-rate mortgage average was still sitting above 3.21%, however their data was collected before the Thursday selloff on Wall Street.
Mortgage purchase applications were 13% higher this week than a year ago, according to the latest data from the Mortgage Bankers Association. That is the eighth straight week of increases in purchase applications. Week-over-week purchases increased by 5% with refinances also coming back into play with an 11% weekly gain. Refinances are up 80% from the levels a year ago.
And as buyers storm back into the market, the constant issue is inventory, or lack thereof. Chris Stewart, CEO and president of Berkshire Hathaway HomeServices, explained in an interview Mansion Global the inventory issue we’re seeing now is the complete opposite of the problem we had in 2008. “The problem we had in 2008 and 2009, was that we had 10 months of inventory,” says Stewart. “Going into this recession we only had 3. What happened in ’08 and ’09 was you had some sellers forced to sell because of foreclosure, which means they were also not in the buying pool, so you had too much inventory and that hurt us. Now, values are increasing, and sellers are going to be welcomed with the idea that their home is worth more now than in February and March, and they may consider selling. It won’t be the same situation as in ‘08 and ’09.”
A slight twist in the housing industry was offered up this week by the Secretary of the Department of Housing and Urban Development, Ben Carson. Carson now says that Deferred Action for Childhood Arrival (DACA) recipients are allowed to receive Federal Housing Administration (FHA) home loans.
This was in response to a Freedom of Information Act (FOIA) request fulfilled this week, which showed that HUD changed its policy in order to deny FHA loans to DACA recipients.
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.