Indexes post first-quarter gains
April 3, 2017
It was a choppy week for stocks, but the major indexes all posted strong results for the first quarter, with the total return for the Dow Jones Industrial Average up 5.2 percent, while the S&P 500 added 6.1 percent, and the Nasdaq rose 10.1 percent.
The nature of the post-election stock-market surge has shifted somewhat, however. The "Trump rally" had been led by stocks likely to benefit from the new president's plans for lower taxes and deregulation, notably banks and healthcare companies. But more recently, with the president's proposed agenda running into roadblocks, including resistance from his own party, the gains are coming from stocks more likely to benefit from broader economic growth, such as technology. In fact, the S&P 500's tech sector rose 12.6 percent in the first three months of 2017, Apple's stock jumped 24.5 percent during its best quarter in five years, and the Nasdaq hit a new high of 5,914.34 on Thursday.
Last week there were more positive signs for the economy, with the government upping its estimate for fourth-quarter gross domestic product (GDP) from 1.9 percent to 2.1 percent as consumer spending was revised to 3.5 percent from 3 percent. In addition, the Conference Board's Consumer Confidence Index for March climbed to 125.6, its highest level since late 2000. This is a key metric as confidence has historically been a leading indicator of spending and growth. And Thomson Reuters estimated that first-quarter earnings will come in at a lofty 10.1 percent. The market was also boosted by higher oil prices, with United States crude moving back above the $50-a-barrel mark after Kuwait backed a proposed plan by the Organization of the Petroleum Exporting Countries to extend the production cuts originally scheduled to end in June through the end of the year.
The Fed's game plan?
According to The Wall Street Journal, the Federal Reserve is working on a plan that would include two more rate hikes this year, then perhaps a pause to see how the market responds before it begins selling off part of its $4.5 trillion portfolio of mortgage and Treasury securities, with rate increases recommencing in 2018. William Dudley, president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee, said that, assuming the economy continues to expand, two more rate hikes in 2017 "seems reasonable," adding, "When we decide to begin to normalize the balance sheet, we might actually decide at the same time to take a little pause in terms of raising short-term interest rates."
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With the healthcare overhaul shelved, albeit perhaps only temporarily, President Donald Trump and Speaker of the House Paul Ryan (R, Wisconsin), have said they'd turn their attention to tax reform. That may prove to be just as challenging, however, as they have to come up with a tax plan that is deficit neutral, a proposition made more difficult by the failure of the American Health Care Act, which the Congressional Budget Office said would have resulted in savings of $337 billion over a 10-year period.
The Brexit begins
On Wednesday, Great Britain's Prime Minister Theresa May officially began the Brexit by having a letter delivered to Donald Tusk, president of the European Council, invoking Article 50 of the Lisbon Treaty. In a speech that day, May said it was the first step toward a "truly global Britain, the best friend and neighbor to our European partners, but a country that reached beyond the borders of Europe, too." But the pending divorce quickly turned contentious, with Tusk and Germany's Chancellor Angela Merkel rejecting May's demand that discussions about the withdrawal and new trade terms occur simultaneously, while also saying that Great Britain had to pay any outstanding membership debts before trade talks begin. Merkel said her first step was determining "how we will disentangle our interlinked relationship," after which talks can commence about "our future relationship." As The New York Times noted of the two-year Brexit process, "the only sure winners will be lawyers and trade negotiators." Meanwhile, Scotland's Parliament narrowly voted to move ahead with a second referendum for independence (the first was in 2014), even though May has rejected any such step until after the Brexit negotiations end in 2019. Nonetheless, Scotland's First Minister Nicola Sturgeon said a referendum for Scotland was "an act of democratic self-determination," the same argument Britain used for the Brexit. She added that Scotland would hold a referendum "when the time was right," but before the Brexit is complete.
Inflation hits 2.1 percent
The Personal Consumption Expenditures Price (PCE) Index for February – the Fed's preferred gauge of inflation – rose to 2.1 percent from a year earlier for the first time since 2012 (the Fed's target is 2 percent). Core PCE, less food and energy, gained 1.8 percent. The Bureau of Economic Analysis said that personal income was up 0.4 percent in February from the month before, while spending rose 0.1 percent. In other economic news, the National Association of Realtors Pending Home Sales Index increased 5.5 percent in February to 112.3, its second highest point since 2006, and was up 2.4 percent year-over-year. The S&P CoreLogic Case-Shiller Home Price Indices climbed 5.9 percent in January from a year earlier, its best showing in almost three years. The government reported that both wholesale and retail inventories improved 0.4 percent in February from the month before. And first-time jobless claims for the week ending March 25 fell 3,000 to 258,000; the four-week moving average rose 7,750 to 254,250.
A look ahead
The coming week will provide plenty of economic fodder for investors, with updates on the Institute for Supply Management's Manufacturing and Non-Manufacturing Indexes, vehicle sales, construction spending, the trade balance, factory orders, orders for durable and capital goods, wholesale inventories, consumer credit and the unemployment rate for March. In addition, the Fed will release the minutes of its March session, at which it raised its benchmark rate. President Trump will also meet with a number of high-profile foreign leaders, including President Xi Jinping of China.
This commentary was prepared specifically for local wealth management advisers by Northwestern Mutual Wealth Management Company®.
The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.
All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.
The Dow Jones Industrial Average Index® is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Standard and Poor's 500 Index® (S&P 500®) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Standard & Poor's offers sector indices on the S&P 500 based upon the Global Industry Classification Standard (GICS®). This standard is jointly maintained by Standard & Poor's and MSCI. Each stock is classified into one of 10 sectors, 24 industry groups, 67 industries and 147 sub-industries according to their largest source of revenue. Standard & Poor's and MSCI jointly determine all classifications. The 10 sectors are Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities.
The NASDAQ Composite Index® Stocks traded on the NASDAQ stock market are usually the smaller, more volatile corporations and include many start-up companies.
NASDAQ – National Association of Security Dealers Automated Quotations. The NASDAQ is a computer-operated system owned by the NASD that provides dealers with price quotations for over-the-counter stocks.
The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.
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