Stock markets drop over 10% in two weeks – A 10% drop officially is termed “a correction.” This week was a very volatile week for stocks. The markets had the two highest point drops ever this week. There were several reasons experts cited. Some experts feel that stocks were simply overbought and had just risen too high too quickly. Some said that the administration promoting the rise in stocks may have oversold the strength, which is now correcting. Interest rates were also a concern, as higher rates increase borrowing costs to companies. The reason rates are rising is because investors are fearing higher inflation. They feel that the tax cuts basically stimulates the economy at a time when the economy is already quite strong. Usually, tax cuts occur when the economy is slow to try to stimulate it. The budget passing today has also been a concern as it massively increased spending. The increased spending will also stimulate the economy. At a time when unemployment is at a 17 year low and the economy is strong, it is feared that the tax cuts and extra spending will overheat the economy causing inflation, which increases interest rates. Both the extra spending and tax cuts also explode an already high deficit, which will increase the amount of bonds the government will need to sell to fund the deficit spending. This will also drive rates higher. Lastly, Jerome Powell took over Monday as the new Chairman of The Federal Reserve. It is widely felt that Mr. Powell is more adverse to the risk of inflation than Janet Yellen, his predecessor, and plans to increase rates at a quicker pace than Ms. Yellen would have. The Dow Jones Industrial Average closed the week at 24,190.90, down from last week’s close of 25,520.96. After dropping 5.2% this week and 4.1% last week, it’s now down 2.1% year-to-date. The S&P 500 closed the week at 2,619.55, down from 2,762.13 last week. It lost 5.2% this week and 3.9% last week. It’s down 2% year-to-date. The NASDAQ closed at 6,874.49, down from 7,240.95 last week. It dropped 5.1% this week, after falling 3.5% last week. It is down 0.4% year-t- date.
Treasury Bond Yields – The 10-year treasury bond closed the week yielding 2.83%, almost unchanged from 2.84% last week. The 30-year treasury bond yield ended the week at 3.14%, up from 3.08% last week. We watch bond rates because mortgage rates follow bond rates.
Mortgage rates higher this week – The February 8, 2018 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 4.33%, up from last week’s 4.22%. The 15-year fixed was 3.77%, up from 3.68% last week. The 5-year ARM was 3.57%, up from 3.53% last week.