Waiting on the Fed

The stock market continues to climb higher, once again setting new all-time high records. However, mortgage bonds are so far holding their ground at support provided by recent low prices of mortgage bonds. This is more of a technical hold, as stocks moving higher would generally cause mortgage bond prices to fall. If prices hold, we will see mortgage interest rates at least stabilize in the near term. I believe that bond traders will be nervous to push bond prices much higher today ahead of tomorrow’s Federal Reserve interest rate decision. Once the decision is announced, traders will likely move the market in one direction or the other. Given that mortgage rates are now higher than they were before the last Fed rate hike, we could see rates move higher once again. We’ll have to wait and see.

As we discussed in yesterday’s market update, the move higher in stocks has largely been influenced by the recent earnings reports that have been released. Approximately 80% of the reports have come in at or above estimates. Therefore, investors have been celebrating. However, it is important to note that this year’s earnings have been about 3.5% below the earnings reports of one year ago. Therefore, investors are taking stocks to new all-time high levels based on slowing corporate earnings. This is an interesting dynamic, and one that really doesn’t make sense. Again, the stock market is not in a rational state right now.

Unless bonds can break above their 100-day moving average, we will maintain a locking bias.