Financial markets went on a wild ride Wednesday, as investors sold off corporate stocks and fled to the relative safety of U.S. government bonds, helping push mortgage rates to the lowest levels in nearly 16 months.
By the end of the day, stocks had recovered half their losses, mortgage rates had ticked back up, and U.S. Treasury yields, which run counter to demand for the securities, had swung upward.
“It was one of the most wacky, volatile days you’ve ever seen and a reminder that volatility can arrive at any point in time,” said Brent Wilson, a mortgage strategist with Alpine Mortgage Planning in Roseville.
Stock indexes began tumbling on Wall Street early in the day as investor worries about a global economic slowdown and worse-than-expected financial news triggered a major sell-off.
“A lot of the concerns over the last week or two have been about global weakness: Europe sinking into recession and slower growth in China,” said Jeffrey Michael, head of the University of the Pacific’s Business Forecasting Center in Sacramento.
Wall Street’s so-called “fear index” – the Chicago Board Options Exchange’s volatility index, known as the VIX – has more than doubled over the past month, from 12 in September to 26 this week, the Associated Press reported.
On Wednesday morning, the producer-price index, which measures the prices U.S. companies receive for goods and services and is considered a key gauge of inflation, fell for the first time in more than a year. The latest PPI number was lower than many experts had predicted, Michael noted.
Also on Wednesday, the U.S. Commerce Department reported retail sales had slipped 0.3 percent from August to September, with fewer purchases of autos, gas, furniture and clothing.
The result: Nervous investors parted with corporate stocks at a rapid clip and put their money into the relatively safe haven of Treasury notes. Powerful demand for the government securities pushed down yields precipitously.
The bad news in financial markets translated into some good news for homebuyers or homeowners wanting to refinance. Yields on Treasuries track closely with mortgage rates, and in the middle of the day Wednesday home loan interest rates fell well below 4 percent, reaching the lowest level since June 2013.
“This morning, you could have gotten (a mortgage rate of) 3 7/8,” without paying any points or fees, Wilson said. “The horse was out of the barn today.”
At the same time, stock prices for home builders surged, based on the perception that home starts could rise as interest rates fall.
After Wednesday’s sell-off, stocks recovered much of the day’s losses, though major stock indexes remained lower than when the day began.
The Dow Jones industrial average plunged 460 points in afternoon trading, but by the end of the day had lost 173 points, or about 1 percent of its total. The Standard & Poor’s 500 index fell 15.21 points, or 0.8 percent, to 1,862.49 and the Nasdaq composite dropped 11.85 points, or 0.3 percent, to 4,215.32.
Wilson said Wednesday’s “spectacular volatility” makes the future of both financial markets and mortgage rates uncertain. “There’s a chance rates could go up from here. It’s anybody’s guess, and I don’t even think the bond market knows.”
Dan Starelli, senior vice president for home lending at Umpqua Bank in Sacramento, said he suspects interest rates will stay below 4 percent for at least a short time after hovering between 4 percent and 4.5 percent for much of the past year.
“The information that’s coming out about the economy is very sluggish,” Starelli said. “That’s what pushes interest rates down.”
Some financial experts said Wednesday’s fall in stock prices was a long-overdue correction to a stock market that has pushed higher even in a weakening global economy. Investors shouldn’t panic and sell, but instead should see the downturn as a chance to buy shares at lower prices, others said.
“The opportunities abound everywhere,” said Laura Pajak, a financial planner with Foord, Van Bruggen, Ebersole & Pajak, in Sacramento, who spent part of Wednesday reassuring clients.
“Unless there’s some extreme reason (for people to cash out),” they shouldn’t lament Wednesday’s losses too much, she said. “People should be in the market for a longer horizon.”
Call The Bee’s Hudson Sangree, (916) 321-1191. The Associated Press contributed to this report.