Vail Daily column: Markets mulling mixed news
About this report
This market report was prepared by Northwestern Mutual Wealth Management for use by local advisers Ken Armstrong, Shane Fleury and Steve Shanley. They can be reached at 970-328-7526.
The major stock indexes barely budged from week to week as investors tried to make sense of mixed news from Greece about its bailout, the Federal Reserve about its timetable and the Commerce Department about growth. However, February was still a banner month for equities, with the S&P 500 gaining 5.5 percent, its fastest pace in more than three years, the Dow gaining 5.6 percent, its best month in more than two years, and the NASDAQ 7.1 percent, putting it on the brink of 5,000 for the first time since March 2000. Not surprisingly, during February, U.S. Treasuries had their biggest sell-off since June 2013.
The week began on an ominous note when Greece was a day late with the “memorandum” outlining what it would do over the coming four months to earn the next bailout payment needed to keep it solvent. When the proposal arrived on Tuesday, the Greek government pledged to step up its pursuit of tax evaders and battle corruption, without asking for a rollback in any of the austerity terms imposed by the troika. Even so, Mario Draghi, president of the European Central Bank (ECB), and Christine Lagarde, head of the International Monetary Fund, were concerned that the details were vague. To make matters worse, Yanis Varoufakis, the nation’s provocative finance minister, reportedly told Ms. Lagarde that he was “certain” that Greece wouldn’t be able to make its next debt payment and would ask for an extension. Still, by week’s end, most European Union (EU) members had signed off on the plan, though Germany’s finance minister, Wolfgang Schäuble, conceded that doing so was “not easy for me.”
Yellen on the hotseat
As for the Fed, Chairwoman Janet Yellen made her semiannual report to Congress but, in the end, the visit was more about politics than policy. After appearing before the Senate, investors were heartened when she underscored caution as the watchword because of slow wage growth and inflation. She also said that raising the benchmark rate was likely to appear on the agenda as early as March, leading most Fed-watchers to conclude that June would still be the starting date for rate raising. The reception in the House was far less cordial as republicans lobbied for greater oversight of the Fed and denounced Ms. Yellen’s liberal leanings for talking about economic inequality in her speeches. Representative Jeb Hensarling (R, Texas), the chairman of the House Financial Services Committee, said, “Fed reforms are needed, and I, for one, believe Fed reforms are coming.”
Overall, the relationship between the two parties seemed to be getting even chillier after President Obama, as expected, vetoed the bill to allow the Keystone XL pipeline. Plus, Homeland Security was almost shut down for lack of funding after House and Senate republicans differed on the details of a stopgap bill.
Slower growth but …
On Friday, the Commerce Department lowered its estimate for fourth-quarter GDP from the original 2.6% to 2.2 percent, a far cry from the third quarter’s 5 percent. The figure was the result of reduced estimates for business inventories and exports, but there were undeniable bright spots, including the fact that consumer spending was up 4.2 percent – the fastest pace since 2006 – that business investment was raised from 1.9 to 4.8 percent, and that the larger trade gap reflects a stronger dollar and a rising appetite for imports. The final estimate will come at the end of the month.
On Saturday, China’s central bank said it would reduce benchmark interest rates for the second time in three months in an effort to make it easier to borrow money and to stimulate growth; in the fourth quarter, GDP slowed to 7.3%, the slowest pace in more than two decades.
Germany gets negative
For the first time ever, Germany sold five-year bonds with a negative interest rate. Negative bonds are the fastest growing asset class in Europe right now, with about 30% of sovereign debt falling into that category, according to The New York Times.
Durable goods orders rebound
The Commerce Department reported that durable goods orders rose in January by the highest total in six months, increasing 2.8 percent. Much of the increase came from airplane orders, up 128.5 percent after falling 58.3 percent in December. Excluding transportation, orders climbed just 0.3 percent. In other news, the S&P/Case-Shiller Home Price Index rose 4.5 percent in December from a year ago as all 20 cities posted year-over-year gains. Sales of existing homes fell 4.9 percent in January to 4.82 million, the National Association of Realtors reported, the slowest pace in nine months. The Commerce Department announced that new-single home sales dipped 0.2 percent in January to an annual rate of 481,000 as supply reached its highest level since 2010. And the National Association of Realtors said its index of pending sales rose 1.7 percent to 104.2 in January, the highest reading since August 2013. Beyond the housing sector, the Labor Department reported that the Consumer Price Index fell 0.7 percent in January because of lower gas prices, the biggest drop since December 2008; core prices, excluding food and energy, rose 0.2 percent.
First-time jobless claims jumped 31,000 to 313,000, while the four-week moving average was up 11,500 to 294,500. The Chicago Purchasing Managers’ Index plunged from 59.4 in January to 45.8 in February (any reading below 50 indicates a contraction). The Conference Board said its Consumer Confidence Index fell to 96.4 in February from 103.8, though it was still the second highest reading since the recession began – a year ago it was 78.3. And the University of Michigan reported that its confidence index dipped to 95.4 in February from 98.1 in January, but it was still at an eight-year high.
A look ahead
There will be a flurry of economic reports to consider this week, including the latest on personal income and spending, construction spending, the Institute for Supply Management’s manufacturing and non-manufacturing indexes, Markit’s manufacturing, services, and composite PMIs, vehicle sales, the Fed’s Beige Book, factory orders, the trade balance, and, on Friday, the unemployment rate, forecast to tick down from 5.7 to 5.6 percent.
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.