Markets jumbled by Fed’s inaction | VailDaily.com

Markets jumbled by Fed’s inaction

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

Until the Federal Reserve actually pulls the trigger and raises its benchmark rate for the first time since June 2006, stocks, bonds and investors will likely twist and turn on the latest economic reports and pronouncements from Fed committee members.

Last week, the Dow fell all five days as investors started coming to terms with the fact that the Fed is more likely to raise its rate in September, especially in the wake of yet another solid jobs report. The S&P 500 and Nasdaq were likewise down for the week, and the yield on the 10-year Treasury, similarly sensitive to the prospect of the Fed raising its rate, fell to 2.173 percent. Equities were also impacted by so-so second-quarter earnings and by the fact that the price of oil dipped to a four-month low, taking a toll on the shares of energy companies.

The Dow is now in the red for 2015 — though the S&P 500 and Nasdaq are still in positive territory — and a seven-day losing streak is the longest downturn since Summer 2011, when investors worried that we might be falling back into a recession. The Labor Department said that 215,000 new jobs were created in July, below the forecast of 225,000 but probably still good enough to satisfy the Fed as it weighs its first rate hike. In fact, after upward revisions to the totals for May and June, the economy has added an average of 235,000 jobs over the past three months. In another positive sign, wages improved 2.1 percent from a year ago. Still, the labor force participation rate was unchanged at 62.6 percent, stalled where it was in 1977, while the household rate remained at 5.3 percent, its lowest level since 2008. This was largely because of Americans who gave up looking for work.

The clock is ticking in Athens

With negotiators working to seal the deal on Greece's latest bailout in time to make a payment to the European Central Bank on August 20, stock markets reopened in Athens on Monday after having been closed since June 29. As expected, it was a rocky day, especially for the shares of that nation's beleaguered banks, which plummeted 30 percent. There was more bad news for Greece when the Markit Manufacturing Purchasing Managers Index collapsed to 30.2 in July from 46.9 in June — any reading below 50 signals contraction. There was one positive report, by Greek standards, anyway, when the jobless rate fell to a three-year low in May — but that rate was still a whopping 25 percent.

A default closer to home

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With a total debt load of some $72 billion, Puerto Rico defaulted in a $58 million bond debt payment last week, underscoring its financially dire straits but also making it tougher to borrow money. In addition, Puerto Rico said it has, for the moment, stopped making monthly payments of $92 million into a fund set up to pay off a separate $13 billion in general obligation bonds.

Spending lags, consumer credit rebounds

Consumer spending was up just 0.2 percent in June, the government reported, after having gained 0.7 percent in May, as personal income rose 0.4 percent for the second month straight. Over the past year, personal consumption expenditures (PCE) have climbed 0.3 percent. Core PCE, less food and energy expenses, increased 0.1 percent in June and was up 1.3 percent from a year ago. But in a sign that more jobs and cheap gas may finally be inducing Americans to spend, the Fed reported that consumer credit rose $20.74 billion in June, an annualized rate of 7.3 percent. Revolving credit, mostly credit cards, was up 7.4 percent compared to an increase of 2.1 percent in May.

Vehicle sales rise

Thanks to strong sales of trucks and SUVs, 1.5 million vehicles were sold in July, a 5.3 percent gain year-to-year, according to Autodata. That resulted in an annualized rate of 17.55 million, up more than a million from 12 months earlier. Detroit's "Big Three" all had good months, with GM's sales up 6.4 percent, Fiat Chrysler's 6.2 percent and Ford's 5.0 percent.

Commodities get bearish

With the slowdown in China a key factor, commodities are in bear territory, as they were at the dawn of the financial crisis in 2008. As measured by the Bloomberg Consumer Comfort Index, 18 of 22 components have recently fallen by at least 20 percent, and market observers forecast more of the same in the coming months. In other economic news, the Commerce Department said the trade deficit rose $2.9 billion, or 7.1 percent, to $43.8 billion in June. The ISM Manufacturing Index dipped to 52.7 in July from 53.5 in June. Later in the week, the ISM Services Index jumped to 60.3 in July from 56 in June, the second best reading since August 2006, and the ISM New Orders Index hit its highest level since 2005. The Labor Department reported that first-time jobless claims were up 3,000 to 270,000; the four-week moving average fell 6,500 to 268,250. Factory orders increased 1.8 percent in June; orders excluding transportation gained 0.5 percent. Plus, CoreLogic said its Home Price Index, which includes distressed sales, was up 6.5 percent in June from a year ago, making it 40 consecutive months of year-over-year increases.

A look ahead

This week's releases will include the latest on small business optimism, nonfarm productivity, wholesale and business inventories, retail sales and the Producer Price Index, as well as updates on industrial production and capacity utilization.

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.