10/12/18 – Stocks Tumble on Minimal News

Stocks declined sharply on Wednesday and Thursday this week. Financial headlines largely pinned the declines on raising interest rates and Fed policy. That is hard for me to believe. The Fed has been raising rates over the last two years and telegraphing to markets that it intends to continue raising rates. There was nothing new this week that should have spooked markets based on interest rates. Continued trade concerns was another factor mentioned. Again, there was nothing new that would spark a sharp sell-off in my opinion on the trade front. What seems most likely to me is computer algorithm trading firms started selling to lock in some gains and the selling snowballed, triggering additional selling. This is a reality in the current market environment. Longer-term, quality companies and quality economies will do well, but in the short-term there can be frustrating volatility from high-frequency computer trading. For the week the Dow was down 4.2% while the S&P 500 declined 4.1%. This was the worst week for the market since early February.

Ten years removed from the start of the financial crisis, no-down payment, subprime mortgages are making a comeback. Events are being held across the country introducing potential home buyers with poor credit to the product. The current iteration does require borrowers to submit income and employment documentation as well as attend counseling which explains the costs, reviews their budgets and attempts to determine if they can afford the payments. The loans are being offered by a Boston based non-profit called Neighborhood Assistance Corporation of America (NACA). The objectives seems admirable. The company sees low home ownership rates among lower income Americans and feels they are being left behind by overly caution lending standards. This pendulum tends to swing back and forth. When times are good, as they are now, jobs are plentiful and wages are increasing, foreclosures decline, prompting the decision to loosen lending standards. It remains to be seen how this will play out when the economy slows at some point in the future. Read More

Oil decreased this week, declining 3.7% to close at $71.57/barrel. The yield on the 10-yr Treasury moved lower, closing at 3.15% from 3.24% last week. The average rate on a 30-yr fixed rate mortgage moved sharply higher to 4.90%, from 4.71% last week.

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