Surprises and the Markets: Weekly Market Update

Surprises and the Markets

The Election is Over

Whether your candidate won or lost the election, we think we can speak for most by saying that we are glad the election is finally over with. It seems like the election season went on for years, instead of months. Now it is time for us to move beyond the many levels of rhetoric and to come together. Politically, that has not happened for several years, but hopefully, with a new President and several new members of Congress, an air of cooperation will return. Ever the optimists we are.

Judging by the reaction, the financial markets were happy the election was coming to an end, with a major stock rally starting from the beginning of the week. And even though the markets don’t like surprises and the results were definitely within the surprise category, the rally continued the day after the election in a very volatile day. And the volatility was not limited to the equity markets, as long-term interest rates spiked sharply. By the end of the week, the Dow was in record territory. Compared to the Brexit surprise vote, after which stocks plummeted and interest rates fell, it was a very different reaction we experienced this time around.

The question is–where do the markets go from here? The calendar does not change. We still have another employment report to be released in early December and a meeting of the Federal Reserve Board’s Open Market Committee afterwards. It is expected by the markets that the Fed will raise its benchmark interest rate by 0.25% in December. Any larger move would be a surprise, which could rile the markets. But a 0.25% increase should be expected and probably will not provide much mayhem in this regard. This is especially true if the recent rise in long-term rates holds. In this case, we would definitely think that the market would have priced an increase by the Fed into the markets.

The Weekly Market Update

Rates rose slightly in the past week, but these numbers did not reflect the sharp increase which took place the day after the election. For the week ending November 10, Freddie Mac announced that 30-year fixed rates rose to 3.57% from 3.54% the week before. The average for 15-year loans also increased to 2.88%, and the average for five-year adjustables moved up one tick to 2.88%. A year ago, 30-year fixed rates were at 3.98%, still more than one-third of one percent higher than today's levels.

Attributed to Sean Becketti, Chief Economist, Freddie Mac -- "This week's survey reflects pre-election market conditions. As a result, the rate on 30-year fixed loans increased to 3.98 percent, only 3 basis points higher than last week's level. On Wednesday, the 10-year Treasury yield closed above 2 percent, about 25 basis points higher than its pre-election value, and its highest yield since January. At this point, it is too soon to tell whether Treasuries will hold this new level or if rates on home loans will increase as much over the coming week."

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.