Dow coming off worst week of the year

Weekly market commentary
Courtesy of Ken Armstrong, Shane Fleury and Steve Shanley of Northwestern Mutual Wealth Management — Vail Valley

Stock Indexes were largely driven by second quarter earnings news last week, and while the week began on a high note, with the Nasdaq climbing to a new record for the third session in a row, it was all downhill from there.

Last week there were lackluster reports from the likes of Apple leading to four days of declines — enough for the Dow to have its worst week of the year while falling into the red for 2015. As companies reported, Amazon surprised on the upside, but that was more than offset by a run of weak results from Microsoft, IBM, United Technologies, Caterpillar, 3M and American Express. Apple’s profit rose 38 percent, but that was seen as disappointing because of slower iPhone sales, and its stock, newly part of the Dow, was at the heart of last week’s decline.

Headway in Athens

There was less drama and more progress in Greece last week, as Athens used its bridge loan to pay its debts to the International Monetary Fund (IMF) (€2 billion), and the European Central Bank (ECB) (€4.2 billion), making it eligible for financial assistance. Plus, Standard & Poor’s raised Greece’s credit rating two notches to CCC+, saying default was “no longer inevitable” in the coming six to 12 months. Then, on Wednesday, Greece’s parliament approved the second round of changes necessary to kick off the bailout negotiations, including measures to overhaul the banking and judicial systems demanded by creditors. This time, with Prime Minister Alexis Tsipras having issued stern warnings to his fellow Syriza party members, the measures passed by a wider margin (even Yanis Varoufakis, the former finance minister who said he would vote no, came on board). Meanwhile, Greece’s creditors continued to disagree as to what sort of debt relief Greece would receive in addition to the €80 billion bailout. Before heading off on vacation, Germany’s Angela Merkel pushed to get the bailout negotiations underway as soon as possible but ruled out the debt reduction that the IMF is pushing for: “A classic haircut of 30, 40 percent of debt, cannot happen in a currency union,” she said. Merkel did mention other possible steps such as adjusting the maturity of the debt or lowering interest rates. Greece’s debt burden is currently 175 percent of GDP – the IMF’s “sustainable” target is 110 percent – and could reach 200 percent if growth continues to slow.

‘Too big to fail’ redux

Support Local Journalism

On Monday, the Federal Reserve approved new rules for the nation’s eight largest banks, which will have to meet new capital requirements on top of the $10 trillion in loans and securities that they currently hold. The new requirements, which won’t take full effect until 2019, may have the indirect result of having banks voluntarily reducing their size. As the Fed’s Chairwoman Janet Yellen said, “This final rule will confront these firms with a choice: They must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system.” The Fed was also in the news when economic projections from its June meeting “were inadvertently included in a computer file” – they’re not supposed to be released for five years. Representative Jeb Hensarling (R, Texas) the chairman of the House Financial Services Committee, said the error “points to the urgent need for accountability reforms.”

China: More government action

The Caixin China Manufacturer’s PMI, a private gauge, hit a 15-month low of 48.2 in July, following a reading of 49.4 in June, after which China’s government announced new steps designed to boost imports and exports in an effort to keep GDP from falling under this year’s target of 7 percent.

Home sales rise and fall

The National Association of Realtors reported that existing home sales rose 3.2 percent in June to an annualized rate of 5.49 million, the highest total since February 2007; sales are up 9.6 percent from a year ago, but listings have only gained 0.4 percent. Due to low inventory, the median price in June increased 6.5 percent from a year earlier to $236,400, a record, when not adjusted for inflation. However, the government said that sales of new homes dipped 6.8 percent in June to an annualized rate of 482,000, a seven-month low, though sales were up 18.1 percent from June 2014. In other economic news, the Conference Board announced that its leading index of economic indicators improved 0.6 percent, and the Labor Department said that jobless claims, often volatile in the summer because automakers shut down, tumbled 26,000 to 255,000, the lowest total since November 1973; the four-week moving average fell 4,000 to 278,500.

A done deal?

Anthem reached an agreement to buy Cigna for $48.3 billion, though the government may be concerned about the kind of antitrust issues that derailed Comcast’s purchase of Time Warner Cable. The deal comes not long after Aetna announced its acquisition of Humana for $37 billion, and the result of the two deals could be fewer options for consumers and higher rates.

A look ahead

In addition to more second quarter earnings news, this week will include a two-day meeting by the Fed (it’s not expected to raise its benchmark rate yet), and the government’s first estimate of growth for the second quarter, expected to come in at 2.6 percent after a final figure of -0.2 percent for the first three months of 2015. In addition, there will be updates on durable and capital goods orders, the S&P/Case-Shiller Home Price Index, pending home sales and consumer confidence.

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.

Support Local Journalism