Are financial markets taking a breather?
January 23, 2017
The major stock indexes rallied on Friday, the day that Donald Trump was sworn in as the 45th president of the United States.
However, they were still slightly down for the week as investors seemed to be taking a breather while waiting to see if the nation's new leader will make good on his campaign pledges to cut taxes, overhaul bank and trade regulations, undo the Affordable Care Act and ramp up federal spending. From the time President Trump was elected in November until his inauguration, however, the Dow Jones Industrial Average gained 8.2 percent, according to The Wall Street Journal, the best such run since Bill Clinton was reelected in 1997, when the Dow jumped 13 percent from November to January. For history buffs, the best two months ever came after the 1928 election of Herbert Hoover. Eight months after his inauguration, the stock market crashed and the world was plunged into the Great Depression. The yield on the 10-year Treasury fell to 2.47 percent, below its recent high of 2.60 percent in December, but still above the 2.05 percent of a year ago and last July's low of 1.36 percent.
In his inauguration speech, President Trump said he would refocus policy to benefit "the forgotten men and women of our country." He said the government would invest in infrastructure "all across our wonderful nation," and, regarding trade, said he would protect the nation from "the ravages of other countries making our products, stealing our companies and destroying our jobs." He also declared, "We will follow two simple rules; buy American and hire American."
Meanwhile, in Davos …
While President Trump assumed the presidency, many members of the global elite that he criticized in his speech were at the World Economic Forum in Davos, Switzerland, where they heard from the leader of another country that underwent a populist revolt last year, Great Britain's Prime Minister Theresa May. In her speech, May reiterated the message she had delivered on her home soil earlier last week, during which she said her country was going to make a clean break and it was time to "Get on with it," before adding, "Let me be clear, what I am proposing cannot mean remaining in the single market," as she rejected open borders and the jurisdiction of the European Court of Justice. At Davos, she repeated her message but added a more conciliatory note, saying that, though leaving the European Union, Britain was committed to be "even more global and internationalist in action and spirit."
President Xi speaks
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China's President Xi Jinping also spoke at Davos, the first Chinese leader ever to do so, and his speech was seen by some as a direct challenge to the trade policies articulated by President Trump as he advocated "economic globalization" and criticized protectionism. "Pursuing protectionism is just like locking oneself in a dark room," he said. "While wind and rain may be kept outside, so are light and air. No one will emerge as a winner in a trade war." Later in the week, China announced gross domestic product (GDP) growth of 6.8 percent in the fourth quarter and 6.7 percent for all of 2015, its lowest rate since 1990 but within the government's forecasted range of 6.5-to-7 percent. At Davos, Xi said China's GDP would be 6.5 percent in 2016 and his nation had entered a "new normal" for economic growth during which a slower rate of GDP growth would be offset by consumer consumption.
Yellen and Trump
Speaking in San Francisco, Janet Yellen, the chairwoman of the Federal Reserve, presented a more upbeat view of the economy than President Trump, saying, "Now, it's fair to say, the economy is near maximum employment, and inflation is moving toward our goal." Yellen also said she was expecting the Fed to raise its rate "a few times a year," if the economy stays on track, adding, "Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road."
U.S. oil output
As investors wait to see if the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members will stick to their pledge to lower production, the International Energy Agency said that U.S. crude oil production will rise by 320,000 barrels a day in 2017, well up from last month's estimate of 175,000 barrels a day because of the "recent upward bounce in output and the prospect of higher prices supporting increased activity in the U.S. shale patch." For the record, it fell 465,000 barrels a day in 2016. In other economic news, the government said that the Consumer Price Index (CPI) increased 0.3 percent from November and 2.1 percent in December from a year earlier, the biggest year-over-year gain since June 2014. Core CPI, excluding food and fuel, rose 0.2 percent from November and 2.2 percent year-over-year. Housing starts totaled 1,226,000 in December, up 11.3 percent from November and 5.7 percent from December 2015. For all of 2016, starts rose 4.9 percent from the year before. Building permits were 1,210,000 in December, down 0.2 percent from November's total and up 0.7 percent from a year ago; permits improved 0.4 percent in 2016 over 2015. Industrial production rose 0.8 percent in December from November but was off 0.6 percent for the fourth quarter as a whole from a year earlier; capacity utilization for the industrial sector increased from 74.9 percent to 75.5 percent. First-time jobless claims fell 15,000 to 234,000 for the week ending Jan. 14; the four-week moving average for the week ending Jan. 7 dipped 10,250 to 246,750, its lowest level since 1973. Lastly, the Justice Department and Deutsche Bank reached a settlement where the bank agreed to pay $7.2 billion for selling toxic mortgage securities prior to the 2008 crisis. The bank's CEO John Cryan said the bank's conduct at the time was "unacceptable" and Attorney General Loretta Lynch said that "Deutsche Bank did not merely mislead investors: It contributed directly to an international financial crisis."
A look ahead
As the new administration spends its first full week at work in Washington, the economic updates it will weigh will include the latest on existing and new home sales, the advance trade gap, wholesale and retail inventories, the Conference Board's Leading Economic Indicators Index, and orders for durable and capital goods. The government will also release its first estimate for fourth-quarter GDP, expected to be 2.1 percent after the third quarter's 3.5 percent.
This commentary was prepared specifically for local wealth management advisers by Northwestern Mutual Wealth Management Company®.
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