By Mike Miles
Many of us are wondering what exactly is going on with the stock market. It has been on cruise control for months. We’ve seen the broader indexes (Dow and S&P) gaining 20 percent in the last year with very little reason to think our economy isn’t on track. So, what happened yesterday?
What I’ve seen and read so far is that this was somewhat of an expected market correction. Despite the Dow losing over 1100 points yesterday (the single largest point drop ever), it doesn’t even rank in the top 100 worst days of the market. Speaking in terms of percentages, yesterday’s drop on the Dow was about 4.6 percent. The worst day ever for the Dow was October 19, 1987 when it dropped 22.61 percent. So, while yesterday’s decline was certainly eye-opening, it’s important to know some context.
There are a few things fueling this selloff. First, the market was due for a correction. Corrections of about 10 percent are quite normal and this one was arguably anticipated considering asset valuations have been so high.
Secondly, there is speculation that inflation is coming, which may cause the Fed to tighten the monetary policy. Additionally, there was a new Federal Reserve Chairperson sworn in yesterday.
Third, fear is clearly a driving force. I’ve been reading that the ‘Goldilocks Economy’ may be over. What exactly is this? This is an economy that sustains moderate growth with low inflation and market-friendly monetary policies. The fear that monetary policies are changing in part to stave off inflation is definitely a factor in the rapid pace of this correction.
As always, there is a silver lining in most things. In this situation, we may see a relief in mortgage interest rates. We’ve seen 30-year mortgage rates increase by at least .5 percent over the previous 30 days. Correspondingly, the 10-year Treasury bond yield has increased by about 40 basis points over the same period. We saw our first real drop yesterday in the 10-year Treasury yield of about 8 basis points. We should see mortgage rates slightly lower today. The decrease will be .125 percent at most so it’s not much, but it’s at least a positive to take from this market drop.
As I’ve written recently, I do not advise floating your interest rate. While this correction may provide temporary relief, I believe the current economic fundamentals identify that there isn’t anything indicating recessive characteristics. If you know you want to buy this spring, my advice is to lock and not bet on rates dropping.