It has been difficult to reconcile the markets. Only a few big tech stocks account for much of the market gains as the pandemic has fast-forwarded digital innovation while also exposing poorly run or heavily debt-laden traditional businesses. Equity markets have risen along with unemployment. Zero percent interest rates on government bonds and high-quality corporate bonds have pushed investors further out of the risk curve as stocks with little earnings have been soaring. Zero-interest rates have also been a big boon for housing and more — specifically single-family homes. Home sales have been on a tear, as well as home improvement. Working from home is likely to continue well into 2021 and our homes have become the center of our universe. Will people modify their behavior as the pandemic subsides and life feels more “normal”? The tech sector seems to be betting that our collective behavior has changed for good. Personally, I am not so certain, but do like the idea of working from home a couple of days of the week and I don’t mind wearing a mask when I go to the grocery store or pharmacy.
With weekly unemployment rising, the economic recovery appears to be slowing. Government assistance is designed to help bridge the gap for the many businesses that remain closed or heavily impacted. In order to provide this assistance, the U.S. Treasury continues to offer unprecedented amounts of debt into the market place with no end in sight to finance these benefits. Should confidence wane on the U.S. ability so service this massive debt, rates could move higher, and markets could be disrupted. This is unlikely but something to consider. Also, should mortgage deferments and delinquencies pick up again in the fall, banks may be faced to raise interest rates as well.
On the positive side, we’ve seen manufacturing data come in better than expected, and virus stats are improving. There are so many different trajectories we could go from here. We all continue to grind week by week, and day by day as we live through the first major pandemic in over 100 years. On the mortgage front, we see no reason to not take advantage of historically low-interest rates. There is just not much juice left to squeeze on interest rates at these levels.