In the first 12 trading days of October, the Dow Jones Industrial Average suffered six daily losses of 100 points or more. Given that the month started off with encouraging economic news, what could be plaguing the market? It seems the market has slipped into a worst-of-both-worlds mentality. That could make stocks a volatile place to be, and could eventually impact consumer interest rates.
The worst-of-both-worlds outlookToward the end of September, the Bureau of Economic Analysis released an upward revision to their estimate of second-quarter GDP growth, pushing it to 4.6 percent. A week later, the Bureau of Labor Statistics released an report showing strong employment growth -- 248,000 new jobs -- in September. With such a positive lead-in to October, why has it been such an ugly month for the stock market? There are a couple of factors at work. For one thing, the market has long been wary that signs of growth will bring higher interest rates, something that can have a suppressive effect on both economic growth and stock valuations. Meanwhile, the other factor is that a variety of developments have recently cast doubt over global economic growth rates. As a result, the market seems to be suffering from a worst-of-both-worlds outlook, viewing the economy as just strong enough for interest rates to rise, but not strong enough to withstand a global slowdown.
Impact on bank ratesThe worst-of-both-worlds scenario could result in the widening of two interest rate spreads that impact consumers:
- The spread between mortgage and savings account rates. Current mortgage rates may seem low, but according to the MoneyRates.com CLIP Index, they are actually unusually high compared to rates on savings accounts. This could actually get worse, as the Fed has already largely discontinued its active program to keep long-term rates low, but may keep short-term rates down a little longer if global growth concerns become pervasive.
- The spread between rates for bad and good credit customers. A slow economy often means lower interest rates, but it also raises credit concerns. So, people with shaky credit histories may actually see rates on things like credit cards and mortgages rise, while general market rates hold steady or decline. The message is, this is a very important time to keep your credit history in good shape.
The message for consumers is to lock in borrowing rates, and be alert for changes in savings rates. At just over 4 percent, current mortgage rates are still historically low, meaning that people in the market should act soon to secure their mortgages, and favor fixed over adjustable-rate loans.People with savings accounts, meanwhile, should closely watch both their own rate and the market for rates in general. A volatile environment tends to create both opportunities and risks. Photo: Ridofranz/Thinkstock