Stocks Get Hammered

After hitting near the top of the trading range yesterday, stocks have fallen sharply in early market trading. The level of volatility in the stock market is generally not a good sign, as high volatility can be a precursor to a bear market. Given the length of time stocks have been in a bull market, there are many reasons why a reversal is due. The upward path in stocks has widely been due to an accommodative Federal Reserve policy which has driven fixed income options so low that most conservative investors have been forced into the riskier assets of the stock market. As interest rates move higher and the Fed policy tightens, we will see continued headwinds for the US stock market. Combine that with an economic strategy that could lead to a trade war and you have a recipe for a stock market reversal. It will be interesting to see how things play out.

In a stunning surprise to me, this morning’s Bureau of Labor Statistics (BLS) Jobs Report came in showing only 103,000 new jobs created for the U.S. economy in the month of March. This was well below the 175,000 anticipated and significantly lower than February’s 326,000 new hires. This bond friendly news helped boost bond prices, adding downward pressure to mortgage interest rates.  If bonds are able to get a bit more of a boost, they can overtake the 50 day moving average which isn’t too far above current levels. Watch this closely.  If that move is made, we could see interest rates drop by 1/8%.

Since bonds are still below their 50 DMA, there is limited ability for rates to improve. We will continue to maintain a locking bias unless bonds breaks above this critical level.