Locking Bias

The stock market made history this morning, with the DOW Jones Industrial Average crossing the 17,000 thresholds for the very first time.  This significant milestone reflects the continued optimism in the US Economy, and the mindset of fund investors and individuals seeking higher returns.  The concern is that many investors seem to pour money into markets when they are over-priced, and then sell when they are undervalued.  This goes against the “Buy low sell high” strategy that has made many very wealthy people rich.

The BLS (Bureau of Labor Statistics) released their report on the job market this morning, with 288,000 new jobs reported for the month of June.  This was significantly higher than the 215,000 expected, and is further evidence that our job market is recovering. 

Also surprising the market was a drop in the unemployment rate.  While the market expected no change to May’s reading of 6.3%, June’s unemployment rate fell to 6.1%.  Considering that it wasn’t long ago when the unemployment rate was 1%+ higher than it is now, the strength in job growth is strong.  However, our Labor Participation Rate is still at multi-decade lows, showing that fewer people are wanting to work.  For some, the stock market growth has allowed for early retirement.  A significant number of people, however, have left the workforce to receive disability insurance from Social Security.  The record number of people living off of government subsidies evidences the trend in increased disability use. 

Mortgage bonds took a significant drop at the release of the report, but have since gained back some of their losses.  With the bond market closing today at 12:00 p.m. MST, the abbreviated market will likely increase volatility.  With the damage now done, we are hopeful that support will hold.  We don’t see a high probability of noticeable market improvement, so we will continue with our locking bias.  Keep in mind that a continuing climb higher in the stock market will add additional drag to the bond markets, pushing interest rates higher.  However, a pull back in stocks, if that eventually happens, will help mortgage bonds regain some losses of this week.