Fed still holding line on rates | VailDaily.com

Fed still holding line on rates

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

Some upbeat earnings reports, two mega-deals and enough so-so economic news to convince some investors that the Federal Reserve will hold off raising its benchmark rate — all added up to a third straight winning week for stocks, as the S&P 500 rose 0.9 percent, the Dow 0.8 percent and the Nasdaq 1.2 percent.

Going into the third-quarter earnings season, results were expected to fall 5.1 percent from the year before according to S&P Capital IQ, which would mean the first two negative quarters in a row since 2009. So far, with only 58 of the S&P 500’s companies having reported, earnings are off 4.8 percent, according to FactSet. This is thanks to better-than expected results from, among others, GE and Citigroup. Much of the forecasted falloff will be because of energy companies hurt by the lower price of oil, with S&P estimating a 66 percent plummet in earnings for those businesses. It’s unlikely to change in the near term, as last week the Organization of the Petroleum Exporting Countries (OPEC) said it wouldn’t reduce production. Iran will add to the glut once sanctions are eased in the wake of the nuclear arms accord.


This has been the year of the deal, with nearly $3.5 trillion in transactions so far, according to Thomson Reuters. Last Monday, investors were cheered when two deals adding up to $170 billion were announced, with Anheuser-Busch InBev the world’s biggest brewery, raising its bid for its leading rival SABMiller to $103 billion, while Dell said it had agreed to buy the data storage provider EMC for $67 billion. The Anheuser-Busch deal, however, will be subject to regulatory scrutiny by the government because of the colossus it would create.

Fed fodder

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Those looking for reasons for the Fed to wait until 2016 had plenty of fodder last week. Retail sales, for example, gained only 0.1 percent in September, partly because of lower gas prices. The Producer Price Index (PPI), one of the Fed’s yardsticks for inflation, fell 0.5 percent last month, the biggest decline since January, and was off 1.1 percent for the last year — the Fed’s target for inflation is 2 percent. Core PPI, less food and energy, declined 0.3 percent and rose 0.8 percent year on year. Low gas prices also pushed headline consumer prices down 0.2 percent in September (month-over-month), the biggest drop in eight months, while Consumer Price Index (CPI) rose 0.2 percent year on year. Core CPI increased 0.2 percent and was up 1.9 percent for the last year, the highest level since July 2014. At week’s end, the government said that industrial production was down in September for a second consecutive month, off 0.2 percent after a fall of 0.1 percent in August, while manufacturing dipped 0.1 percent on the heels of a 0.4 percent decline in August.

Those reports were enough to persuade some investors that the Fed would wait, as did comments from two voting members of the Fed’s Open Market Committee (FOMC). However, Chairwoman Janet Yellen has said she still expects the Fed to raise its rate this year for the first time in almost a decade, an opinion that Vice Chairman Stanley Fischer seconded last week. On Monday, Lael Brainard said that weakness in China had “tilted” the U.S. economy “to the downside,” and the next day Daniel Tarullo said that because of low inflation he didn’t expect it would be appropriate to raise rates this year (Brainard and Tarullo are Fed governors and FOMC voting members). The concern is less about the actual increase in the rate — the Fed has made it clear the first few hikes will be modest — but because any hike signals the end of an era in which the global economy has been supported by low rates. Regardless, most Fed watchers don’t expect a hike at the October meeting, looking instead to the last meeting of 2015 on Dec. 15 and 16, which will be followed by a press conference with Yellen.

Tick, tick, tick . . .

Speaker of the House John Boehner (R, Ohio), is scheduled to step down in less than two weeks and there’s still no viable successor on the horizon. The best hope, Paul Ryan (R, Wisconsin), is still weighing his decision. In the meantime, a debt-ceiling battle is looming, with Treasury Secretary Jacob Lew moving the drop-dead date to Nov. 3, by which time the Treasury would already be adopting “extraordinary measures” to keep government running.

A deficit decline

Thanks to the modest economic rebound, the government reported the lowest budget deficit since President Obama has been in office: $439 billion for the fiscal year that just ended, down $44 billion from the year before. The deficit peaked at $1.4 trillion during the recession, mainly because of stimulus spending. The $439 billion equals 2.5 percent of gross domestic product (GDP), the lowest total since 2007.

In other U.S. news, first-time job applications fell 7,000 to 255,000, the lowest total since November 1973; the four-week moving average dropped 2,250 to 265,000, its lowest point since December 1973. The index of small business optimism rose 0.2 points in September, and business inventories were flat in August.

Greece takes a next first step

With a raucous debate inside and protests outside, Greece’s parliament narrowly passed a slate of reforms and austerity steps to get the first tranche of its third bailout, freeing about €2 billion euros. It was only the first of a series of votes that is bound to get even more contentious as votes to end some long-held entitlements, such as early retirement for civil servants, are still to come.

A look ahead

This week investors will look at a flurry of third-quarter earnings releases as well as the latest on housing starts, building permits, existing home sales and Markit’s U.S. Manufacturing Purchasing Managers’ Index. The clock will continue ticking as Congress debates raising the debt ceiling and funding the federal government.

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.

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The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.

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