A good start after a bad quarter
September 6, 2016
Spurred by an unexpectedly weak jobs report and a rebound in the price of United States crude, stocks rallied Oct. 2 to finish up for the week.
However, the solid start for October comes after the third quarter closed with one of the worst months for stocks in years, the Dow having lost 7.6 percent and the S&P 500 6.9 percent, its biggest monthly dip since 2011 (the tech-heavy Nasdaq bucked the trend, gaining 2.3 percent). The yield on the 10-year Treasury, meanwhile, fell below 2 percent to a five-month low.
One of the concerns for investors of late has been that the Federal Reserve was going to begin raising its benchmark rate this year. Just the week before last, the Fed's Chairwoman Janet Yellen said that a hike was likely in 2015, despite a rate of inflation well below the Fed's target of 2 percent and the recent stock market turmoil, mostly triggered by the slowdown in China. The most positive economic indicator the Fed has had to hold onto – job growth – has now slowed, casting doubt on a hike this year, or so investors thought on Friday. The government announced that only 142,000 new jobs were added in September, well below the forecast of 200,000, and another 59,000 were shaved off the totals for July and August. By way of comparison, an average of 167,000 jobs was created each month in the third quarter of 2015, compared to an average 260,000 a month for all of 2014. The separate household survey showed that the jobless rate was unchanged at 5.1 percent, but that was only because of people leaving the workforce; in fact, the labor force participation rate fell to 62.4 percent, its lowest level since October 1977. Plus Friday's rise in the price of a barrel of oil was also a mixed blessing; the stocks of energy companies rebounded, but the climb of the price of a barrel of crude had a lot to do with the fact that only 614 U.S. rigs are currently in action, the fewest since August 2010.
Clock ticking in Washington
As expected, Speaker of the House John Boehner (R, Ohio), having recently announced that he'd step down on Oct. 30 because of the fractious GOP minority he presides over, teamed with democrats to push through a stop-gap spending bill that will fund the government through Dec. 11 (the new fiscal year began on Oct. 1 and the budget has yet to be approved). However, in doing so he further agitated the House's Tea Party bloc, which will make a budget deal that much more difficult to broker. To underscore their displeasure, House republicans followed up the vote by passing another proposal to defund Planned Parenthood, which will be blocked in the Senate by democrats. President Barrack Obama said he would not sign another budget extension and, worse still, Treasury Secretary Jacob Lew announced that the government would run out of money sooner than expected, by Nov. 5, meaning that the two sides have to increase the debt ceiling, another highly contentious issue and one that led to a government shutdown and a credit-rating downgrade in 2011. The hope, perhaps wishful thinking, is that Boehner will be able to get debt-ceiling and budget deals done before he steps down.
Back from the dead?
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Negotiations over the president's stalled Trans-Pacific Partnership started up again in Atlanta. Although they were extended into Sunday there was little hope that a deal, should it be struck, would get through Congress anytime soon, especially with the presidential campaign season in full swing and some of the candidates, such as the frontrunner Donald Trump, dead set against it.
A step forward for Portugal
Spain's economy is on the mend but the issue of secession arose anew after Catalan separatists won a majority of seats in regional elections, though they did not get a majority of the total votes cast. In any case, Spain's President Mariano Rajoy has said that any such step would be a violation of the Constitution, and he has threatened to remove secessionist politicians from office. In Portugal, though the votes of Sunday's election are still being tallied, it looks as if Prime Minister Pedro Passos Coehlo will be the first leader who has presided over austerity to be returned to office.
Volkswagen aside, car sales soar
The auto industry had a strong September with one notable, and hardly surprising, exception: Volkswagen. Overall, vehicle sales were up only 0.56 percent from a year ago, but Labor Day sales jumped 16 percent over last year and GM (12.5 percent), Ford (23.3 percent) and Fiat Chrysler (13.6 percent) all posted double-digit gains for the month. The annualized rate, according to Autodata, was 18.17 million, the highest level since July 2005. In other news, consumer spending was up 0.4 percent in August and personal income rose 0.3 percent. Due to low oil prices, inflation was up just 0.3 percent from last August, but core inflation, less food and energy increased 1.3 percent. The Institute for Supply Management said its manufacturing index fell to 50.2 in September, its lowest level since May 2013. The S&P/Case-Shiller Home Price Index for 20 major metro areas gained 5.0 percent in July from a year earlier as sales reached an eight-year high. However, the government reported that pending home sales were down 1.4 percent in August. The Commerce Department said that construction spending reached its highest point since 2008 in August, rising 0.7 percent. Lastly, factory orders were down 1.7 percent in August, the biggest dip since last December.
A look ahead
This week's releases will include updates on the ISM's Nonmanufacturing Index, the trade balance and wholesale inventories. In addition, the Fed will release the minutes of its meeting on Sept. 16 and 17, at which committee members decided to hold off on raising the benchmark rate.
This commentary was prepared specifically for your wealth management advisor 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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