Floating Bias

The stock market has so far been unable to build upon the gains it made during Thursday and Friday’s trading, with both the S&P 500 and the DOW Jones Industrial Averages both lower this morning.  The drop in stocks was fueled by renewed declines in the price of crude oil, forcing investors to sell both stocks and commodities in favor of more stable investments such as treasuries and mortgage backed securities.  America’s crude prices slide approached 5%, undoing some of the 21% surge oil prices experienced in recent trading days.  Even considering the recent recovery, oil prices are down about 16% this year amid overflowing US stockpiles and the prospect of additional Iran imports (now that sanctions against Iran have been lifted).  The challenges in the energy sector will likely continue through most of 2016 until supply levels are more in line with current demand. 

The Federal Reserve is meeting for the first time in 2016 to discuss their interest rate policy.  Although there is almost 0% chance they will announce a second rate hike at Wednesday’s announcement, investors will be listening closely to see if they back off the “4 rate hikes in 2016” statement they made at their last update.  In reality, the Fed does not have a strong track record on projecting future rate hikes or even growth in the US economy.  Their 4 rate hike projection is absurd and is not at all likely.  If they fail to back off this statement, we will likely see additional selloffs in the stock market.  However, if they do come to their senses and back off this statement, we could see the stock market rally.  Remember, stocks declining generally help improve mortgage interest rates, vice versa.

Mortgage bonds are performing well so far today.  Therefore, we see no rush to lock at the moment.  However, if you choose to float, do so carefully.  Sentiment can reverse quickly.