Dow finally passes 20,000 plateau |

Dow finally passes 20,000 plateau

Ken Armstrong, Shane Fleury & Steve Shanley
The Northwestern Mutual Wealth Management Company — Vail Valley

In President Donald Trump’s first full week in office, the Dow Jones Industrial Average finally finished on the far side of 20,000 points. The S&P 500 and Nasdaq also reached new highs, more than once, in fact.

And while the stock indexes were advancing, no one could accuse the new president of being idle, however new to the Oval Office he may have been. He issued executive orders at a dizzying pace. He launched tweets in the wee hours. He met with Britain’s Prime Minister Theresa May and talked on the phone with Russia’s President Vladimir Putin and Mexico’s President Enrique Peňa Nieto (after their face-to-face meeting was canceled). He ordered new immigration restrictions. He sat with labor leaders and, separately, of course, business titans. Many of his actions will have a direct impact on the economy. For instance, he rejected President Barack Obama’s Trans-Pacific Partnership (which his rival Hillary Clinton had also spoken against). He vowed to renegotiate the North American Free Trade Agreement, in place since 1994. He revived two controversial pipeline projects that Obama had mothballed. He also moved forward to build a wall on our southern border, saying he’d pay for it with a new 20 percent tariff in imports.

GDP slows

There was also evidence of the challenges that Trump and his ambitious economic agenda will face, such as his pledge to push gross domestic product (GDP) growth to 4 percent in 2017. The government’s advance estimate for fourth-quarter growth came in at weaker-than-expected 1.9 percent compared to 3.5 percent in the third quarter, partly because of a wider trade gap and weak government spending. For all of 2016, the economy grew just 1.6 percent, the weakest showing since 2011, after expanding 2.6 percent in 2015. This weak growth is partly because consumer spending, which accounts for two-thirds of GDP growth, fell from 3.2 percent in 2015 to 2.7 percent in 2016.

A rising deficit

And that’s not the new administration’s only hurdle. The Congressional Budget Office (CBO) said the budget deficit will increase by almost $10 trillion by 2027, mainly because of the cost of entitlements, which may complicate the new president’s plans to cut taxes and increase federal spending. In 2027, the CBO estimates that the deficit will be $1.4 trillion, a projected 5 percent of GDP with the debt level at 89 percent of GDP.

Brexit update

Britain’s Supreme Court ruled on Tuesday that Prime Minister Theresa May must get Parliament’s approval before moving ahead with the Brexit. However, the ruling isn’t expected to impact the timetable for Britain extricating itself from the European Union (EU) beginning in late March, which the EU stipulates as two years. The court also said Scotland could not veto the deal, which could lead to another vote for Scottish independence as that nation voted to remain in the EU by a wide margin. In a related story, executives from more than 20 foreign banks will meet in Frankfurt today to discuss moving jobs from London to that city as a result of the Brexit. Lastly, despite the dire forecasts of the impact of the Brexit, Britain’s GDP increased 0.6 percent in the fourth quarter, above the 0.5 percent forecast.

Mega-deals blocked, announced

A federal judge blocked the $37 billion merger of the health insurance companies Aetna and Humana; another judge is expected to soon issue a ruling on the $48 billion merger of Anthem and Cigna – both deals were challenged by the Obama administration. And the health care giant Johnson & Johnson announced the acquisition of Actelion, a Swiss biotech firm, for $30 billion.

In other economic news, orders for durable goods fell 0.4 percent in December from the month before, mainly because of a steep drop in defense-relate orders – always volatile – which tumbled 33.4 percent; excluding nondefense capital goods (less aircraft), orders climbed 1.7 percent from November. Orders for capital goods rose 0.8 percent in December month over month. Manufacturing got off to a good start as Markit’s Manufacturing Purchasing Managers’ Indices for January rose to 55.1 from December’s 54.3, the biggest jump in almost two years. Wholesale inventories improved 1 percent in December from the month before; retail inventories were flat. The advance trade balance for December was -$65 billion compared to -$65.3 billion in November. Existing home sales were off 2.8 percent in December from the month before. However, according to the National Association of Realtors (NAR), much of the decline can be attributed to the lack of inventory as the number of previously owned homes available fell to 1.65 million at the end of December, the lowest total since the organization began keeping track in 1999. The NAR forecasts that sales will increase just 1 percent in 2017 after 5.45 million units were sold in 2016, the best year since 2006. Sales of new homes fell 10.4 percent in December from November, the government said, to a total of 536,000. For all of 2016, an estimated 563,000 new homes were sold, up 12.2 percent from 2015. First-time jobless claims for the week ending Jan. 21 rose 22,000 to 259,000; the four-week moving average for the week ending Jan. 14 fell 2,000 to 249,500, the lowest total since 1973. Lastly, the University of Michigan’s Consumer Sentiment Index climbed to 98.5 in January from December’s 98.2.

A look ahead

Trump’s second week in office promises to be eventful no matter what he does given the number of important economic events on the calendar, including updates on personal consumption, pending home sales, the S&P CoreLogic Case-Shiller Home Price Index, the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes, construction spending, auto sales, factory orders and nonfarm productivity. In addition, the Federal Reserve will have its first meeting of 2017. The Fed has said it may raise its benchmark rate “a few” times this year, and on Friday the government will announce the jobless rate for January, forecast to remain unchanged at 4.7 percent.

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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