Global stock markets are spiraling lower once again, fueled by oil prices dropping down to $28 per barrel. This has put US stocks back on the downward channel that has made 2016 the worse beginning to the US stock market in history. In yesterday’s update we mentioned that if stocks were to break beneath the floor that was currently holding prices from falling lower, it would quickly reach the next floor of support which was 80 points lower on the S&P 500. Well, that level was already achieved so far today. This puts the stock market near two-year lows. However, a bounce off this level seems likely, at least in the short term. The selloff in stocks has been far too rapid to sustain at this pace. Therefore, an improvement to some degree is expected soon.
Many of the proponents of the Federal Reserve’s Quantitative Easing and interest rate policies are in full swing right now, citing the increase in interest rates followed by a stock market sell off as proof of an artificially inflated market. They believe that the “Phony Wealth” will evaporate, and all we will be left with is the debt the Federal Reserve has created. They associate recent Fed policies as a “Fed induced intoxication”, where once the punchbowl is removed will lead to a global selloff in stock markets around the world. Hopefully, the critics of the Fed are not accurate and markets will resume to normal levels soon. However, there is reason to be fearful as evidenced by recent market events.
Mortgage bonds have received great benefit from the selloff in the stock market. If stocks are able to stabilize, we will likely give up some of the gains of the past couple of weeks. Floating at this point is highly risky. We suggest a locking bias for loans needing to close in the near term.