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Is the market skid slowing?

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

EAGLE COUNTY — A rebound in the price of oil and the prospect of further stimulus for both the eurozone and Japan was enough to drive stock indexes around the world up for the week for the first time in 2016 and put the brakes on a January skid that has rattled investors.

Even at midweek such a prospect seemed a long shot as the Dow Jones Industrial Average (DJIA) was down 500 points during the trading day and Japan’s Nikkei 225 had fallen into correction territory. But the DJIA rallied to gain 2.1 percent on Thursday and Friday to join the S&P 500, the Nasdaq, the Nikkei, the Stoxx 600, and the Shanghai Composite Index in the black by week’s end. At the same time, the yield on the 10-year Treasury, which had dipped to 1.99 percent on Wednesday, finished the week at 2.052 percent.

Oil and GDP



Last week the price of both United States and Brent crude fell below $27 a barrel before rallying to finish above $32 (though the jump was exacerbated by a change in the contract month). Still, the biggest surprise is not just how far the price of oil has fallen — especially given the record production in the U.S. and the unwillingness of Organization of the Petroleum Exporting Countries to cut its output — but how little impact it has had on consumer spending, which historically picks up when the price of oil dips. As John Williams, president of the Federal Reserve Bank of San Francisco, said about the effect of lower oil prices, “We got this wrong.” Many analysts expect this year’s contribution of lower oil prices to GDP to be flat. A slump in oil prices didn’t hurt the U.S. when most of our oil was imported, but that total fell to 27 percent in 2014, according to the U.S. Energy Information Administration, the lowest percentage since 1985. In addition, Americans have been banking rather than spending the dividend or buying more gas or better gas. Even so, the price will probably drop further this year because, as the EIA recently said, “Unless something changes, the oil market could drown in oversupply.” As just one more measure of the glut, oil-dependent Russia’s ruble fell to a new all-time low against the dollar on Thursday.

Stimulus?



The European Central Bank met last week, and though no action was taken, the bank’s President Mario Draghi said “Conditions have worsened” since the ECB’s meeting in December. Most notably, stubbornly low inflation is now forecast to rise just 0.7 percent in 2016. He said the bank could take further stimulus steps when it meets in March, adding, “There are no limits as to how far we are willing to deploy our instruments.” The ECB left its benchmark rate unchanged at a record low 0.05 percent. Also last week, a spokesman for Japan’s Prime Minister Shinzo Abe said, “Conditions for additional easing have fallen into place.” The Bank of Japan meets this Thursday and Friday.

China’s growth

While the state of China’s economy and the Chinese government’s handling of it were reportedly hot topics at the World Economic at Davos, China’s GDP came in at 6.8 percent in the fourth quarter, the lowest reading since 2009, and 6.9 percent for all of 2015, the slowest pace since 1990 (though in line with the government’s estimate of 7 percent). Addressing the concern that China will continue to adjust its currency to promote growth, Vice President Li Yuanchao said “The fluctuations in the currency market are a result of market forces, and the Chinese government has no intention and no policy to devalue its currency.”



The deficit

In a report that will provide fodder for presidential candidates, the Congressional Budget Office said the federal budget deficit, which has been dropping for six years, will increase again in 2016 because of entitlement payments for aging Americans — sooner than expected. The deficit for the fiscal year that ends Sept. 30 is projected to be $544 billion, up $105 billion from the year before and $130 billion higher than the projection made in August.

Existing home sales surge

Existing home sales roared back in December after falling to a 19-month low in November, according to the National Association of Realtors, rising a record 14.7 percent to an annual rate of 5.46 million. An increase was widely anticipated because November’s numbers were held back by a change in mortgage disclosure paperwork and also because the Fed finally raised its rate. For all of 2015, sales rose 6.5 percent to 5.26 million units, the best annual performance since 2006. However, December’s housing starts were down 2.5 percent from November to a seasonally adjusted annual rate of 1,149,000, though up 6.4 percent from a year earlier. For all of 2015, an estimated 1,111,200 housing units were started, up 10 percent from 2014. Building permits dipped 3.9 percent in December from the month before to an annualized rate of 1,232,000, but they increased 14.4 percent from December 2014. For 2015, starts increased 10.8 percent compared to 2014. In other economic news, consumer prices fell in December, the Labor Department said, down 0.1 percent from November. For the year, however, Consumer Price Index (CPI) rose 0.7 percent. Core CPI gained 0.1 percent in December and 2.1 percent over the last 12 months, the fastest pace since July 2012. For the week ending Jan. 16, the government said that first-time jobless claims climbed 10,000 to 293,000, a six-month high; the four-week moving average for the week ending Jan. 9 was up 6,500 to 285,000, the highest total since April.

A look ahead

In addition to the Federal Reserve’s meeting on Tuesday and Wednesday, at which it’s widely expected to leave its benchmark rate unchanged, the government will release its first estimate for fourth-quarter GDP growth this week, forecast to come in at 0.8 percent after a final reading of 2 percent for the third quarter. There will also be updates on the S&P/Case-Shiller Home Price Index, new and pending home sales, durable and capital goods orders, personal consumption, consumer confidence and the trade balance.

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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