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Has economic growth stalled?

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

Less than three weeks after the Dow and the S&P 500 notched new highs and the Nasdaq passed 5,000, all three indexes were down after a series of reports showed that economic growth had all but stalled. There are plenty of culprits, lousy winter weather, a stronger dollar, cheaper oil, the West Coast port slowdown, but it was hard to shrug off the numbers. Plus, the final figure for fourth-quarter GDP was below expectations, and the forecast for first-quarter growth was revised downward.

The government’s final revision for growth for the last three months of 2014 came in at 2.2 percent, not only below the expected 2.4 percent but less than half of the 5 percent pace posted in the third quarter of last year (though on par with the 2.1 percent for the first quarter of 2014). Consumer spending was robust, up 4.4 percent, but after-tax corporate profits were off 3 percent from the previous quarter, the biggest decline since the first quarter of 2011. More importantly, growth is expected to slow even further in the first quarter, with estimates now running from 0.4 percent to 1.4 percent. And because of the dollar’s surge against the euro and declining exports, FactSet lowered its the estimate for first-quarter earnings for S&P 500 companies all the way to -3.3 percent, compared to the increase of 5.8 percent predicted when 2015 began.

That wasn’t the only disappointing report. The government said that durable goods orders were off 1.4 percent in February, and durable goods excluding transportation were down 0.4 percent. Capital goods orders also fell, declining 1.4 percent. Job creation, however, remained a bright spot, and first-time jobless claims dropped 9,000 to 282,000, while the four-week moving average fell 7,750 to 297,000. Furthermore, when the unemployment report comes out on Friday, 247,000 jobs are expected to be added.

Yellen preaches gradualism

A week after the Federal Reserve removed the word “patient” from its statement about its benchmark rate, Janet Yellen, the Fed’s chairwoman, made it clear that once the Fed did start raising its rate, it would do it slowly because of the fragile economy. Speaking in San Francisco, she said, “The average pace of tightening observed during previous recoveries could well provide a highly misleading guide to the actual course of monetary policy over the next few years.” She also noted that the Fed would take a “gradualist approach.” She was referring to the fact that, beginning in June 2004, the Fed raised its rate by 0.25 percentage points at every meeting for two years.

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The budget and a bill

Without a single Democratic vote, the Senate passed a budget that will, among other steps, eliminate the Affordable Care Act, revise the tax code and balance the budget in the next decade. It has to be reconciled with the House budget, but the final bill will face resistance from the Democrats and a possible presidential veto. Senate Minority Leader Harry Reid (D, Nevada), who announced last week that he’ll retire in 2016, said, “Fortunately for the country, the Republican budget will not become law.” In a rare act of bipartisanship, the House approved a bill to overhaul Medicare by a count of 392 to 37. The bill will change the formula for paying doctors based on their performance, increase premiums for some beneficiaries (though most of the cost will be paid by the government) and fund an insurance program for children. “This is how Congress is supposed to work,” President Obama said.

Around the eurozone

An amicable meeting in Berlin on Monday between Greece’s Prime Minister Alexis Tsipras and Germany’s Chancellor Angela Merkel did nothing to change the terms of the deal Greece needs to meet to get more bailout money, and it has until today to show how it will follow through on its commitments to reform. Despite the drama, there were signs of life in the eurozone as Markit’s manufacturing Purchasing Managers’ Index (PMI) rose to 54.1 in February, and consumer confidence reached its highest level since 2008, before the crash. In Brussels, Mario Draghi, the president of the European Central Bank, told lawmakers, “The basis for the economic recovery in the euro area has clearly strengthened.”

China’s slowdown

Factory activity in China fell to its lowest point in 11 months in March as Markit’s preliminary PMI dipped to 49.2 – any reading below 50 indicates contraction. Some analysts now believe that first-quarter GDP will fall short of the government’s target of 7 percent.

The CPI bounces back

Consumer prices rose 0.2 percent in February, the first increase in four months, thanks in part to higher gas prices, though the Consumer Price Index (CPI) was down 0.1 percent from a year earlier. Core prices, less food and energy, were also up 0.2 percent, but climbed 1.7 percent over the past year. In other economic news, the National Association of Realtors said sales of existing homes rose 1.2 percent in February to an annual rate of 4.88 million, and the Commerce Department announced that new home sales jumped 7.8 percent in February, the fastest pace in seven years, to a seasonally adjusted annual rate of 539,000.

Deal-making

The Brazilian firm 3G Capital, which owns Heinz, announced that it was buying Kraft Foods, a deal which would create the third largest food company in the United States with a market value of more than $80 billion. In addition, Hillerich & Bradsby, the creator of the Louisville Slugger baseball bat, was sold to Wilson, which is owned by a Finnish company.

A look ahead

This week’s updates will include the latest on personal income and consumption expenditures, construction spending, pending home sales, the S&P/Case-Shiller Home Price Index, Markit’s manufacturing PMI, vehicle sales, the trade balance and factory orders. On Friday, the Labor Department will release its unemployment report for March.

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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