What Does The Stock Market Rally Tell Us?

Economic Commentary

What’s It All About…Rally?

Okay, enough with the puns. Anyone under 50 probably does not remember the song anyway, unless they are an Austin Powers fan. However, the question is real. Why did we have such a strong stock market rally the last week of the first half of the year and early July? It was the strongest week in two years. For two months stocks were taking a breather and retreating from a strong first quarter. We were in the middle of a soft patch which had enabled oil prices and rates to retreat. Even gold was cooling down. Why the sudden reversal? There are several theories. One is the “dead cat bounce,” which is a brief recovery in a declining market. Certainly, bounces are common place in down markets, but this one was a doozy. It was more like a super ball bounce. The size of the bounce does not preclude the bounce theory, but it makes it less plausible. Unless you subscribe to the theory that we had a confluence of events. A bounce accompanied by end of the quarter adjustments in balance sheets along with lower volumes heading into the Holiday week. Certainly these factors could have magnified the bounce.

Finally, there is a whole other chain of thought. The markets may know something we don’t know as of yet. What is that? The markets could be signaling that the soft patch due to temporary factors is over and the economy is ready to march ahead. How will we know if this is the case? The markets are looking for strong earnings to continue in the second quarter. And the markets will need to see some stronger economic reports after the reporting of the employment numbers for June. The employment numbers were written off as disappointing even before they were released, even though a strong report on private sector jobs Thursday gave the markets temporary false hope. Again we will warn those who are watching and waiting that if the economy does indeed start heating up, those lower rates, lower oil prices and lower gold prices are likely to be out the window. The bounce we saw in the past two weeks gave a good glimpse of how quickly things can turn around. On the other hand, these numbers should be kept in perspective. A slight uptick in rates would still leave us in the ridiculously low range and housing will still be very affordable. Also, oil prices did not get that low. Prices in the range of $3.70 per gallon at the pump did not seem like a bargain to us.

The Markets

Rates on home loans increased in the past week in response to stronger economic news, however these numbers were released before the weak jobs report on Friday. Freddie Mac announced that for the week ending July 7, 30-year fixed rates averaged 4.60%, up from 4.51% the previous week. The average for 15-year fixed increased to 3.75%. Adjustable rates also rose with the average for one-year adjustables increasing to 3.01% and five-year adjustables rising to 3.30%. A year ago 30-year fixed rates were at 4.57%. Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac, Rates on home loans followed Treasury yields higher over the holiday week but remain quite affordable by historical standards. For instance, interest rates on all home loans outstanding in the first quarter of this year averaged just under 6.0%. With today’s rates, these homeowners who have the ability to refinance could shave $169 per month in interest on a $200,000, 30-year fixed loan.” Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

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