Stock markets suffered their largest weekly decline since October – Stock markets had their worst week since October as investors digested comments by the Fed, a disappointing fourth quarter GDP report, increasing job losses, and a pullback in consumer spending. The Fed shocked investors early in the week when they made comments suggesting that their key overnight rates would remain at or near zero percent for an extended period which could last years after the pandemic is over. This suggested that the Fed has data that the impact of the pandemic on the economy would last longer than investors believed.
On Friday a preliminary GDP report revealed that the economy contracted for the first time since the financial crisis, and suffered its largest yearly contraction since 1946. Retail and service sales reports showed that consumers had pulled back of purchases for goods and services in the fourth quarter, reversing a historic 33% quarter-over-quarter increase in the third quarter. Fortunately, it’s widely believed that the surge in the third quarter was partially attributed to stimulus from the CARES Act, and the $900 billion in stimulus from the CARES Act 2 that will be distributed in the first quarter of 2021 will increase consumer spending and grow the economy. Business investment, and residential real estate were sectors that surged in 2020, according to the GDP report. Complicating all of this was the debacle of GameStop, AMC and other stocks. Somehow private party investors fueled by social media began buying these stocks that have been beaten down by pandemic related loses and shorted by investment firms, and funds. Social media opinions went viral. Those opinions were that that these companies had been wrongly undervalued by investment funds that had released negative guidance and “shorted” these stocks assuming these companies would not recover quickly, and possibly not even survive. The social media stories included reasons why these companies would survive and thrive, suggesting that investment firms had miscalculated. Private party investors began purchasing these stocks and the shares began to increase in price exponentially. As the mainstream media began to report on what was happening more private stock investors jumped in. Next the funds had to purchase these stocks in order to protect their “short” positions, which further fueled speculation that the social media stories were correct. At one point on Thursday Robbin Hood and other private investor trading platforms shut down trading to these stocks, only to allow trading them again on Friday after a public outcry. GameStop was up 400% for the week. Unfortunately, the net result was an erosion of trust in the equity markets, as this trading was not based on fundamentals of the companies’ financials, but on speculation on what the stock could do if it was promoted on social media. As private party investors interviewed stated “who is to say that investment funds are not doing the same thing?” We shall see what long term effects are. The SEC has stepped in and promised to investigate in an attempt to build trust in the system.
The Dow Jones Industrial Average closed the week at 29,982.62, down 3.3% from 30,996.98 last week. It is down 2.0% year-to-date. The S&P 500 closed the week at 3,714.24, down 3.3% from 3,841.47 last week. It is down 1.1% year-to-date. The NASDAQ closed the week at13,070.69, down 3.4% from 13,354.06 last week. It is up 1.4% year-to-date.U.S. Treasury bond yields – The 10-year treasury bond closed the week yielding 1.11%, almost unchanged from 1.10% last week. The 30-year treasury bond yield ended the week at 1.87%, unchanged from 1.87% last week. We watch bond yields because mortgage rates often follow treasury bond yields.
Mortgage rates – The January 28, 2021 Freddie Mac Primary Mortgage Survey reported mortgage rates for the most popular loan products as follows: The 30-year fixed mortgage rate was 2.73%, down slightly from 2.77% last week. The 15-year fixed was 2.20%, unchanged from 2.21% last week. The 5-year ARM was 2.80%, unchanged from 2.80% last week. 2020 marked the highest number of U.S. existing-home sales since 2006 – The National Association of Realtors reported that the number of homes sold in December were 22.2% above the number of homes sold last December. Despite the pandemic, 2020 marked the highest number of homes sold since 2006. The median price paid for a home in December was $309,800, up 12.9% from $274,500 in December 2019. With new listings surging, but not able to keep pace with buyer demand, inventory shrunk to record low housing supplies in 2020. There was just a 1.9 month supply of homes for sale in December, down from a 3.0 month supply one year ago