Panic ensued this week when U.S. stocks plummeted to historic lows, and analysts scrambled to figure out why.
Theories about what sent Wall Street into a frenzy ranged from growing investor concern about inflation to the effects of computerized trading to speculation that the market was correcting itself after a sustained period of little to no volatility. By week’s end, the market tension began to calm before dipping again.
Here are three things you should know about the stock market hysteria this week.
1) Volatility is back
Following a massive sell-off in equities that began last week and gained speed on Monday, volatility swept into the U.S. stock market, raising widespread concern and shaking investor confidence.
The Dow Jones Industrial Average fell 1,175 points on Monday — its biggest one-day drop in history — before falling another 1,000 or so points on Thursday and entering 10 percent correction territory. The S&P 500 lost 227 points on its worst day since 2011 and also ended the week in correction territory. Despite the downward momentum, technical strategist Katie Stockton told CNBC it doesn’t appear to be the start of a bearish market, a condition in which the stock market’s downward spiral is self-sustaining. Both stocks regained points Friday morning.
The moves were in stark contrast to the historic stock market gains we’ve seen since President Donald Trump took office. Why the change?
Some economists speculate that rising wages could be the culprit. After years of remaining stagnant, last week’s jobs report showed that U.S. wages were finally on the rise. Rising wages puts upward pressure on inflation, which flusters investors. Their fears were likely reinforced when the Federal Reserve made hawkish comments last Friday indicating that inflation was likely on an upswing, strengthening the potential for a faster pace of interest rate hikes.
Here’s another possible suspect: Computers. Nowadays, computers perform complex algorithms enabling them to trade stocks incredibly fast. Because of how quickly stocks fell on Monday, analysts question whether a program went awry and instigated the flash crash.
2) Rates are moving higher
So what does all this volatility mean for the mortgage industry? Rates are going up.
Mortgage rates hit a 14-month high this week as investors began frantically selling bonds, pushing down the price of bonds and causing yields to rise. Mortgage rates follow the direction of the yield.
As odd as it may sound, the economy’s vigor is sending investors into a panic. When the economy grows stronger, inflation rises. And when inflation rises, it can devalue mortgage-backed bonds. Acting on reports that inflation will rise again, investors this week divested themselves of bonds they felt would lose value over time. That phenomenon causes bond prices to fall, which in turn causes yields and mortgage rates to rise.
We shouldn’t fret just yet. Although rates are rising, demand for housing is still keeping mortgage applications aloft, and rates are still lower than they have been in past years. By Thursday, investors were retreating from stocks and back into government bonds, knocking yield on the 10-year Treasury down to 2.82% from 2.88%.
3) The Fed will take action
New Federal Reserve Chairman Jerome Powell had quite the first week on the job, wouldn’t you say? The morning he settled into his new role, the stock market crashed.
There’s no doubt the Fed is closely watching the market activity unfold. The Fed’s first major action this year will be in March when the policymakers are expected to raise the benchmark interest rates by a quarter of a point.
Comments from New York Fed President William Dudley suggested that the central bank is not backing away from its plans to normalize rates, despite the market volatility. He told Bloomberg News this week that he considered the turbulence in the stock market “small potatoes,” and added that a rise in bond yields coupled with a fall in stock prices is just the market adjusting to stronger economic growth.
In other mortgage news…
- Mortgage applications increased 0.7 percent from last week while refinance applications went up 1 percent, according to the Mortgage Bankers Association.
- Americans’ confidence in the housing market continues to rise, despite rising home prices and other affordability issues, according to the Fannie Mae’s Home Purchase Sentiment Index. The HPSI rose 3.7 points in January to 89.5, an all-time survey high.
- Airbnb partnered with Quicken Loans, Fannie Mae, Better Mortgage and Citizens Bank to offer a service allowing hosts to use their income for mortgage applications.