Tech Leads Volatile Week on Wall Street
Tech stocks are still driving markets, but creating a choppy wake leading to another bout of intense volatility on Wall Street. Over the first three days of this week, almost all of the FAANG (Facebook, Alphabet, Amazon, Netflix, Google) stocks, Microsoft and Tesla lost more than $1 trillion in collective market value. That pushed the Nasdaq into correction territory as it dropped by 10%.
One of the main reasons for the sell-off was simply fear. There has been a growing disparity between the rise of Wall Street and the reality of Main Street due to the coronavirus pandemic. While many local businesses have been forced to shut down, tech companies have soared. Investors started to worry that the high value of these stocks was creating a bubble, so that helped prompt the massive sell off. During that time, U.S. Treasury bonds were relatively unchanged. The yield on the benchmark 10-year Treasury note stayed mostly flat at 0.683%, while the 30-year bond yield stayed at 1.427%.
A few tech stocks rallied midweek with Apple gaining 4% and moving back to $2 trillion valuation. Tesla also rallied by 11% after coming off its worst day on record. The rally continued into Thursday before another round of selling started Thursday afternoon. The Dow dropped nearly 400 points Thursday afternoon, with the S&P 500 and Nasdaq dropping by 1.6% and 1.9%, respectively. Again, the drop was led by tech stocks with Apple dropping by 3.6%. In early Friday trading, Dow futures were up and indicating a gain of 160 points, with the S&P 500 and Nasdaq both showing futures gains of 0.8%. The 10-year note yield stayed steady, hovering around 0.68%.
Markets didn’t seem to be rattled by the employment situation in the U.S., which has appeared to turn stagnant. This week’s data from the Labor Department shows more than 880,000 initial claims for unemployment with the total unchanged from the week before. Remember, the Labor Department also changed how its reporting data over the last two weeks, so you can’t compare previous reports directly against the last two.
The latest Job Openings and Labor Turnover Summary (JOLTS) report from the Bureau of Labor Statistics shows that 6.6 million job openings were available while hiring slumped to 5.8 million in the month of July. The number of quits rose to 2.95 million, an increase of 13%. When the quits rate moves higher, the perception is that employees are more confident in the workforce because they’re willing to voluntarily leave their current job for a new position.
Unemployment is still a major focus on Capitol Hill as Congress attempts to figure out further stimulus packages. The Senate voted Thursday on a $300 billion aid bill and failed to move it forward. Democrats have been pushing for a $3 trillion version of a relief bill. It’s likely that no more votes will happen before the November 3 election.
We did see a slight indication of inflation in the latest consumer price index released Friday morning. The Bureau of Labor Statistics shows the CPI-U (for all urban consumers) rose by 0.4% in August (seasonally adjusted numbers). The largest factor in the increase was a sharp rise in the used cars and trucks index. The energy index also rose by 0.9% with the gasoline index hitting a 2.0% increase.
Did You Forget About Brexit?
Brexit is back in the news this week as yet another deadline looms over the United Kingdom’s exit from the European Union. More than four years after the initial referendum, there is still no sign of a trade deal between the U.K and the E.U. The latest plan announced by the U.K. apparently violates part of the Withdrawal Agreement put into place in January of this year. The main issue is Northern Ireland is now a non-E.U. country, while the Republic of Ireland remains in the E.U. However, part of the Withdrawal Agreement states that Northern Ireland will continue to follow the E.U.’s single market protocol on goods when it comes to items shipped between them and the Republic of Ireland.
The Internal Market Bill that’s being discussed in the U.K. now would affect state aid to Northern Ireland when it comes to how the country operates with the rest of the E.U. Essentially, it would override the rule that was already agreed upon in the Withdrawal Agreement, therefore violating international rules. The BBC has a full writeup on why the Internal Market Bill from the U.K. is causing all sorts of issues.
The United States may also have an issue with the bill as it stands. House Speaker Nancy Pelosi flatly said this week that if the U.K. moves forward with the bill, which would violate international agreements already in place, there would be “absolutely no chance of a U.S.-U.K. trade agreement passing the Congress.”
Housing Looks Like Wall Street
Much like on Wall Street, we are seeing two very different stories play out in the housing industry. On one hand, we have an incredible housing boom that saw $1.1 trillion in volume in the second quarter alone. On the other, we have the potential for massive foreclosures due to job loss because of the pandemic.
Let’s start with the bad news. According to CoreLogic’s chief economist Frank Nothaft, the number of loans with payments 90-119 days late quadrupled between May and June. That share is now at its highest level in 21 years. The serious delinquency rate, which includes homes already in foreclosure, is at its highest rate in five years. According to the Mortgage Bankers Association, about 3.2 million Americans are currently in forbearance.
Meanwhile, the mortgage industry is thriving. In Q2 of this year the housing industry hit a 20-year record high with $1.1 trillion in funding, according to Black Knight. The data also shows that 2.3 million refinances happened during Q2 2020. That’s the most on record in about 17 years. With a lot of assistance from the Federal Reserve, mortgage interest rates hit historic lows during the pandemic, allowing many people to cash out their equity as a safeguard, or just save money with a lower interest rate.
In a statement, Black Knight’s president of data and analytics Ben Graboske said, “With market conditions as they are and given the recent delay of the 50 basis points fee on GSE refinances until December, we would expect near-record low interest rates to continue to buoy the market. After all, there are still nearly 18 million homeowners with good credit and at least 20% equity who stand to cut at least 0.75% off their current first lien rate by refinancing.”
Look for more potential refinances as mortgage rates hit another historic low. This week’s Freddie Mac average on a 30-year fixed rate mortgage dropped to 2.86%. In Freddie’s latest release, they note, “These low rates have ignited robust purchase demand activity, which is up twenty-five percent from a year ago and has been growing at double digit rates for four consecutive months. However, heading into the fall it will be difficult to sustain the growth momentum in purchases because the lack of supply is already exhibiting a constraint on sales activity.” That recent drop in rates means that, according to Black Knight, more than 19 million Americans could benefit from a refinance at this time.
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