The Volatility Issue: The Weekly Market Update

The Economic Environment
The Economic Environment

The Economic Environment

In the first three weeks of the year, the stock market experienced gains that were nothing short of spectacular, extending a great year for equities in 2017. Starting with the last week in January, the markets have been experiencing extreme amounts of volatility — both up and down. It has not been unusual to see the headlines read “the biggest one-day gain/loss in ___ years.”

The question is, should we be worried about such volatility? Though the markets have turned lower since the end of January, the magnitude of losses certainly are not worrisome. This is especially true considering the extent of gains we have experienced for the previous two years. Certainly, one would think that the markets are due for a breather after running so hard and fast. On the other hand, breathers don’t have to be accompanied by extremes. It should be noted that the volatility in stocks has not been accompanied by nearly the same amount of volatility in the bond or commodity sectors. If all sectors were extremely volatile, this might be interpreted as a more pressing concern.

Extremes can be caused by factors which are promoting uncertainty. For example, rising interest rates, implementation of tax reforms and threats of trade wars are factors we are dealing with today. Certainly, higher rates and threats of trade wars can cause uncertainty in the markets. On the other hand, tax reform has been a positive factor affecting the markets, up until the point of implementation. Uncertainty and volatility seem to go hand-in-hand. It may just be that stocks are finding a new level of comfort. However, if rates keep rising and trade wars bloom, that comfort level may be harder to find. In reality, we don’t know why markets behave as they do, but it helps to at least understand the factors influencing today’s environment.

The Weekly Market Update

Rates were stable in the past last week. For the week ending April 12, Freddie Mac announced that 30-year fixed rates rose to 4.42% from 4.40% the week before. The average for 15-year loans remained at 3.87% and the average for five-year adjustables moved down slightly to 3.61%. A year ago, 30-year fixed rates averaged 4.08%, higher than today's level.

Attributed to Len Kiefer, Deputy Chief Economist, Freddie Mac --“Rates on home loans have been holding steady over the past two months. Rates have bounced around 4.4 percent since mid-February. Rates could break out and head higher if inflation continues to firm. The U.S. Bureau of Labor Statistics reported this week that the Consumer Price Index increased 2.4 percent over the 12 months ending in March, the largest 12-month increase in a year. Members of the Federal Reserve’s Federal Open Market Committee are looking at inflation indicators to help determine the appropriate path for policy. If inflation continues to trend higher, we may see two or three more rate hikes from the Fed this year, and rates on home loans could follow. For now, rates are still quite low by historical standards, helping to support homebuyer affordability as the spring homebuying season ramps up.”

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.