Optimism Versus Uncertainty: The Weekly Market Update

Where The Economy Stands

Optimism Carries The Day

During the past few months we have had a very solid rally in the stock market, which has been accompanied by higher interest rates. Certainly, the economic results that have been released have not changed that much during that period, and thus we can conclude that the changes in the markets are not because of a change in fundamentals. This conclusion is not surprising, because often the markets trade on feelings rather than results.

We do know that the change in psychology is due to a change in leadership. New leadership and new policies bring a lot of uncertainty to the table. Generally, the markets do not like uncertainty. On the other hand, it is not unusual for optimism to trump uncertainty (excuse the pun). If the markets are optimistic that the changes will help the economy, high stock prices and higher rates are justified. Of course, it does help that the economy is already heading in the right direction.

As slow as it has been, the recovery has seen a precipitous drop in the unemployment rate and a net gain of several million jobs. Revving up an economy which is already growing requires much less energy, as opposed to turning around an economy. And that is what is likely making the markets more optimistic. It is unusual to apply stimulus to a growing economy, as opposed to moving an economy out of recession. On the other hand, too much stimulus to a growing economy could stimulate inflation, and this is the risk which is supporting higher rates. Remember, the markets are not always right regarding what will happen, because there is no way of accurately predicting the future.

The Weekly Market Update

Last week, rates were slightly lower again. For the week ending February 16, Freddie Mac announced that 30-year fixed rates fell to 4.15% from 4.17% the week before. The average for 15-year loans decreased to 3.35%, and the average for five-year adjustables moved down to 3.18%. A year ago, 30-year fixed rates averaged 3.65%.

Attributed to Sean Becketti, chief economist, Freddie Mac -- "For the last 46 years, the rate on a 30-year fixed home loan has been almost perfectly correlated with the yield on the 10-year Treasury, but not this year. From Dec. 29, 2016, through today, the 30-year rate fell 17 basis points to this week's reading of 4.15 percent. In contrast, the 10-year Treasury yield began and ended the same period at 2.49 percent. While we expect rates on home loans to fall into line with Treasury yields shortly, this just may be a year full of surprises."

Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.