Stocks are setting new record highs again this morning, with the S&P 500 crossing the 2700 level. The massive rally of 2017 surpassed what most analysts predicted, primarily being led by strong corporate profits and the Tax Reform bill that was passed just prior to Christmas. With the current bull market now one of the strongest in U.S. history, the chances of a pull-back in 2018 are increasing. If we see stocks take a breather in the coming months, that would be good news for mortgage interest rates. We would expect a large amount of money to flow out of stocks and into the bond market. However, that could just off-set the reduction in mortgage bond purchases by the Federal Reserve as they continue to advance their Quantitative Tightening plan.
We can expect to pay a higher price to fill our gas tanks soon, as oil prices just topped 2.5-year highs. The rise in price is due to a pending government report that is expected to show crude oil stockpiles falling to their lowest levels since last summer’s heavy driving season. Oil markets have experienced some of their hardest times in the past few years, with many rigs being shut down as drilling companies fought to minimize losses. With crude oil prices topping $61 for the first time in years, oil companies may be finding their path to profitability once more. That would be good news for many families who have been financially devastated through the oil crash.
Mortgage bonds have formed a head and Shoulders pattern. If they fail to close above opening levels, we can expect more upward pressure on interest rates. Given the strength in stocks, the safe play will be to maintain a locking bias.