Dow nears 18,000 again |

Dow nears 18,000 again

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

The possibility of the Federal Reserve raising its benchmark interest rate in December became a probability by week’s end thanks to a blockbuster jobs report, and investors hardly flinched.

In fact, the S&P 500 was up for the sixth week straight, and the Dow inched closer to going back over the 18,000-point mark for the first time since July 21. Meanwhile, the yield on the two-year Treasury, seen as a yardstick of the Fed’s intentions, rose to a five-year high, and, as measured by The Wall Street Journal’s Index, the dollar surged to its highest level since 2002

The Fed had planned to raise its rate back in September, but the threat of a sluggish global economy triggered by China’s slowdown and a stubbornly low rate of inflation kept it from pulling the trigger. However, a mid-summer stock slump has since been recouped. The Fed’s Chairwoman Janet Yellen, a proponent of transparency even before she took over the top job, has been hinting that signs of economic good health in America would be enough to make the Fed act. Last Wednesday, she appeared before the House Financial Services Committee and said that while no decision has been made, the economy is “performing well” and that “it could be appropriate” to raise the rate at the December meeting. If the recent run of good news continued, she said, “December would be a live possibility.”

It was Friday’s jobs report that seemed to persuade investors that the Fed would be ready to go at its last meeting of the year on Dec. 15 and 16, a meeting followed by a press conference at which Yellen could make her case in the event of a hike. A robust 271,000 jobs were created in October, well above the forecast of 186,000, and the totals for August and September were upwardly revised by 12,000, bringing this year’s monthly average to 206,000. In addition, the separately calculated household survey jobless rate fell to 5.0 percent from 5.1 percent. Perhaps best of all, average hourly earnings rose a solid 0.4 percent after having been flat in September, adding up to a year-to-year increase of 2.5 percent, the fastest pace since July 2009. The underemployment rate fell from 10 percent to 9.8 percent, its lowest point since May 2008. A year ago it was 11.1 percent but the labor force participation rate remained unchanged at a 38-year low of 62.4 percent.

Making the case for the Fed

That wasn’t the only news last week that could be seen as buttressing the Fed’s case. Auto sales soared in October, with the notable – and not surprising – exception of Volkswagen. In fact, it was the best October in a decade, with 1.46 million vehicles being sold, up 13.6 percent from a year ago, according to Autodata. Plus, the annualized selling rate was over 18 million vehicles for two months straight, the first time that’s happened since 2000. In addition, the Fed said that consumer credit rose by $28.9 billion in September, the biggest monthly jump since the government started keeping track in 1941. The Institute for Supply Management Nonmanufacturing Index climbed from 56.9 in September to 59.1 in October – services account for two-thirds of the economy. The trade gap narrowed to -$40.8 billion in September, its lowest level since February (though the gap with China hit a new high of -$36.3 billion).

The glitches

Still, last week’s reports were not all upbeat. On Monday, the Institute for Supply Management Manufacturing Index fell to 50.1 in October from 50.2 the month before, its lowest reading since May of 2013 and one that put manufacturing on the brink of contraction. New orders for factory goods fell 1 percent in September after a revised drop of 2.1 percent in August.

The pipeline and the highways

After a seven-year review, President Obama cited global warming in rejecting the transcontinental Keystone XL pipeline, to the delight of environmentalists and the chagrin of the oil industry and the GOP. The House passed a bill to spend $300 billion to overhaul the nation’s roads and bridges, though the bill didn’t address the shortfall of the Federal Highway Trust Fund. That Fund is financed by a tax on gas. The rate hasn’t risen since 1993 and isn’t indexed for inflation, not to mention the fact that the GOP is adamantly against raising it. The bill has to be reconciled with the Senate version passed earlier this year.

China lowers its aim

China lowered its sights for GDP growth from 2016 to 2020 to 6.5 percent, well beyond the developed world, but a step back for an economy that registered double-digit expansion for decades. In comparison, the five-year plan that ends this year targeted annual growth of 7 percent. The new plan was released in a week during which China’s official Purchasing Manufactures’ Index for October came in unchanged at 49.8 (any reading below 50 signals contraction) while the Nonmanufacturing Index fell to 53.1, its lowest level since 2008.

Greece acts, but not fast enough

Greece’s parliament approved some of the steps demanded by its creditors to get the money for its third bailout, but put off some of the toughest legislation. Eurozone officials meet today to decide if more needs to be done for Greece to get the first bailout tranche of $2.2 billion.

A shutdown in Puerto Rico?

Beset by debt, Puerto Rico’s budget director said the government could run out of cash by Nov. 15, forcing a partial shutdown or reduced working hours for public employees.

A look ahead

This week’s updates will include the latest on small business optimism, wholesale inventories, retail sales, the Producer Price Index, business inventories and consumer confidence. The bond markets will be closed on Wednesday for Veterans Day but the equity markets will be open.

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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