Major indexes back in the black |

Major indexes back in the black

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

The three major indexes all edged back into the black after two down weeks.

Third-quarter earnings and proposed mergers and acquisitions drove stocks last week rather than the Federal Reserve’s rate-cutting timetable. The yield on the 10-year Treasury, meanwhile, also changed direction, falling after a two-week climb.

The biggest story of the week, AT&T’s $85.4 billion acquisition of Time Warner, didn’t actually happen until Saturday, though the rumor mill was already hard at work on Friday. The deal, which will create a multimedia giant that can both create and deliver content on a number of platforms, is expected to face intense scrutiny by regulators because, even though the two companies are not direct competitors, their combination could nonetheless lead to unfair pricing and limit competition (AT&T also bought DirecTV last year). Further, both presidential candidates have spoken against such combinations, and Donald Trump decried the deal on Saturday. AT&T’s bold move was not the only mega-deal announced last week: British American Tobacco bid $47 billion to gain complete control of Reynolds American, which would create the world’s largest listed tobacco company by revenue and market value; BAT already owns 42.4 percent of Reynolds.

Q3 earnings better than expected

As noted, third-quarter earnings news triggered market swings last week, for better and for worse. The week’s outperformers included Netflix, UnitedHealth Group, Morgan Stanley, Goldman Sachs, American Express and Microsoft, whose stock hit a new all-time high on Friday. With about one quarter of S&P 500 companies having reported, earnings are down 0.3 percent, according to FactSet. This is far better than the Sept. 30 forecast of -2.1 percent.

China now the king of imported oil

China’s gross domestic product (GDP) was up 6.7 percent for the third quarter, hitting the government’s full-year target. Expansion was keyed by increased government spending, record lending by banks, and a still-sizzling property market, all adding up to more debt. Taking advantage of the low pricing, China is now the world’s biggest oil importer, unseating the United States, as its crude imports climbed to a record 8.08 million barrels a day in September, a year-on-year increase of 18 percent.

A deal on oil?

U.S. crude rose to its highest price per barrel in 15 months last week, and there are signs that that upward trend may continue. On Saturday, Venezuela’s Vice President Nicolas Maduro was quoted as saying that the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producers were “very close” to a deal limiting production. Venezuela, like Russia, has been economically battered by the ongoing oil glut. Maduro made his comments after visiting Iran, which has been against any production limits. OPEC, which has already informally agreed to modest reductions, will reportedly make those cuts official when it next meets on Nov. 30.

The ECB stands pat

The euro fell to its lowest level against the dollar since March last week after the European Central Bank (ECB) concluded its meeting without taking any new stimulus steps and leaving its interest rate unchanged. The ECB’s President Marion Draghi said, “Our approach at today’s meeting was not wait and see, but work and assess.” The bank next meets on Dec. 3.

The Brexit

British banks are expected to report strong third-quarter results this week despite the Brexit, thanks to the boost provided by consumer spending. Still, a senior executive at one of the nation’s largest banks was quoted in The New York Times as saying, “This is a period of calm – maybe a false period of calm – before the storm, but don’t be fooled by it.” At the end of last week, there were some signs that consumer spending might be challenged when the rate of inflation for September was up 1 percent from a year earlier, its fastest pace since November 2014, while core inflation hit 1.5 percent year over year, a two-year high. Prime Minister Theresa May is said to be weighing a plan by which Britain would pay the European Union billions of pounds to maintain access to the single market after the Brexit.

Consumer prices, industrial production bounce back

Consumer prices had their fastest gain since February in September, up 0.3 percent from August’s 0.2 percent. Over the last year, Consumer Price Indexes (CPI) rose 1.5 percent, the biggest year-over-year increase since October 2014. Core CPI, less food and energy, was up 0.1 percent from August and 2.2 percent for the year. In other news, industrial production gained 0.1 percent in September after having dipped 0.5 percent in August. For the third quarter, production increased at an annual rate of 1.8 percent. Manufacturing increased 0.2 percent in September from August and at an annual rate of 0.9 percent during the third quarter. Capacity utilization inched up to 75.4 percent from 75.3 percent. The National Association of Realtors said sales of previously owned homes improved 3.2 percent in September from the month before to a seasonally adjusted annual rate of 5.47 million. Housing starts plunged 9 percent in September from August to an annualized rate of 1.04 million, off 11.9 percent from a year earlier. Building permits, however, climbed 6.3 percent in September from August to 1.2 million, and were up 8.5 percent from September 2015. The National Association of Home Builders/Wells Fargo Housing Market Index of builder confidence fell to 63 in October from 65 in September. And first-time jobless claims for the week ending Oct. 15 rose 13,000 to 260,000; the four-week moving average for the week ending Oct. 8 climbed 2,250 to 251,750.

A look ahead

This week’s releases will include the S&P CoreLogic/Case-Shiller Home Price Index, new and pending home sales, consumer confidence, the advance trade balance, wholesale inventories, orders for capital and durable goods, personal consumption and more earnings news. The government will also release its advance estimate for third-quarter GDP, forecast to come in at 2.5 percent after a final reading of 1.4 percent for the second quarter.

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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