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Markets gain despite rough week

Weekly Market Commentary
Courtesy of Ken Armstrong, Shane Fleury & Steve Shanley of The Northwestern Mutual Wealth Management Company – Vail Valley

The Dow and S&P 500 managed to eke out gains for the week, despite the fact that it was a bad one for compromise, with the Greeks refusing to play ball with their creditors.

House Democrats defied the pleas of their president and all but scuttled his trade pact. Bonds, like stocks, showed some volatility during the week, but they ended up more or less where they began.

Greece remains in limbo

With the clock ticking on a possible “Grexit,” events took an ominous turn on Thursday when the International Monetary Fund’s (IMF) delegation walked out of meetings with Greece because of “major differences.” Gerry Rice, an IMF spokesman, said, “The IMF never leaves the table, but the ball is very much in Greece’s court. This came the day after S&P further downgraded Greece’s credit rating, from CCC+ to CCC with a negative outlook, because of the possibility that Greece will default on its debts if it can’t reach an accord. Even worse, S&P noted that even if a deal was reached, it would only be a stopgap solution. Then on Saturday, Greece’s Prime Minister Alexis Tsipras, whose delegation traveled to Brussels to resume negotiations, said he would only compromise – calling it a “sustainable solution” – if Greece received debt relief, a plan not likely to be embraced by his nation’s largest creditor, Germany. “If Europe desires the split and the continuation of subjugation,” he said, “we will make the decision to say ‘no’ and fight the battle for the dignity of the people and our national sovereignty.”

On the same day his Finance Minister Yanis Varoufakis, who’s recently been taking a lower profile, proposed a plan whereby the European Central Bank (ECB) would extend to Greece a new low interest, 30-year bailout. The plan would allow Greece to buy back its own bonds and make the lump payment of €1.6 billion owed to the IMF due at the end of this month, as well as the €6.7 billion due to the ECB in July and August. Meanwhile, one stopgap solution, apparently being floated by the troika, would extend the end of Greece’s bailout, and its chance to receive a final payment of €7.2 billion, from the end of June until early next year, giving Greece and its creditors more time to come to terms. They’ve been trying since February and talks broke down again on Sunday

House Democrats defy president

As if the president didn’t have enough trouble with both the House and Senate in the GOP’s hands, on Friday, despite his lobbying, House democrats all but torpedoed his proposed Pacific Trade Pact by rejecting one of its key components, a workers-aid program. “We want a better deal for workers,” said House Minority Leader Representative Nancy Pelosi (D, California), a long-time ally of the president, after what was reported as intense lobbying against the pact by union leaders. There’s still a remote possibility that the president will be able to win over enough House democrats and that Speaker of the House John Boehner (R, Ohio), who’s in favor of the pact, can do the same with some of his GOP holdouts, for another try this week.

Retail sales rebound

Sales in May were up a solid 1.2 percent after declining 0.2 percent in April, an indication that job growth and consumer confidence are starting to drive spending. Core retail sales, the metric the government takes into account when calculating gross domestic product growth, increased 0.7 percent.

Deficit dips once again

For the first eight months of the fiscal year, the deficit was $365.2 billion, down 16.3 percent from last year, mainly because of higher tax revenues, up 8.6 percent. Total revenue for that period was $2.1 trillion and total spending was $2.47 trillion. For the year, the Congressional Budget Office is forecasting a deficit of $486 billion compared to $483.4 billion last year and $680.2 billion in 2013, prior to which it was over one trillion for four straight years.

Net worth reaches a new high

The Federal Reserve said that, thanks to stocks and rising home prices, up $487 billion and $503 billion, respectively, the total net worth of Americans climbed to a new high of $84.9 trillion in the first quarter of 2015 compared to $83.3 trillion a year earlier. In other economic news, the Labor Department reported that job openings were up 5.2 percent in April to a seasonally adjusted 5.4 million, the most since December 2000. First-time jobless claims rose 2,000 to 279,000 last week, while the four-week moving average was up 3,750 to 278,750, still near a post-recession low. Despite higher prices at the pump, the University of Michigan said its Index of Consumer Confidence rose to 94.6 in June from 90.7 in May. The Commerce Department announced that the Producer Price Index climbed 0.5 percent in May, the largest increase since September 2012; core prices, less food and energy, were up 0.1 percent. Wholesale inventories increased 0.4 percent, doubling the 0.2 percent pace in March; wholesale inventories less autos rose 0.2 percent. Business inventories increased 0.4 percent in April, the largest gain since May 2014. And the NFIB Index of Small Business Optimism gained 1.4 points in May to 98.3.

A world leader

In 2014 the United States was the global leader in oil production for the first time since 1975, while also representing a remarkable 75 percent of the growth in global oil output last year.

A look ahead

With the recent run of economic good news, speculation has been building, yet again, about when the Fed will finally begin to raise its benchmark rate. Analysts and odds-makers will have new material to work with this week as the FOMC meets on Tuesday and Wednesday, followed by Chairwoman Janet Yellen’s press conference. The week will also see updates on industrial production and capacity utilization, building permits and housing starts, the current account balance and the Consumer Price Index.

This commentary was prepared specifically for your wealth management advisor 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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