Markets on a wild ride
Courtesy of Ken Armstrong, Shane Fleury and Steve Shanley of Northwestern Mutual Wealth Management — Vail Valley
On Dec. 30, it seemed as if the S&P 500 and the Dow Jones Industrial Average might finish in the black for 2015 after all. But then the price of oil fell, as it did for much of the year, taking the stocks of energy companies with it.
As a result, these indexes had their worst year since 2008, with the S&P off 0.7 percent after three straight years of double-digit gains and the DJIA down 2.2 percent. It could have been worse, given all of last year’s headwinds — including the stronger dollar, the slowdown in China and its surprise currency devaluation, the decision by the Federal Reserve to begin to raise its rate for the first time since 2006 and, above all, those tumbling oil prices. In fact, it’s worth remembering that all three of the major indexes notched new nominal highs in 2015 and bounced back from a severe summer slump. Plus the Nasdaq, led by the soaring stocks of Netflix and Amazon, passed the 5,000-point mark for the first time since the dot-com era, finishing up 5.7 percent.
Further, despite a plunge of 40 percent last August, China’s Shanghai Index gained 9.4 percent, and the Europe Stoxx 600 rose 6.8 percent, overcoming the prospects of Greece going into default or leaving the eurozone. Finally, the S&P 500 (as shown in the chart) and the DJIA were both up in 2015 with dividends reinvested and, according to The Wall Street Journal, the former index, including dividends, has risen 249 percent since its recession low in 2009. As for bonds, the yield on the 10-year Treasury might have been expected to rise as the United States economy improved and the jobless rate fell, but it finished 2015 at 2.27 percent, not far from where it ended 2014, at 2.17 percent.
One reason the price of oil fell again last week was the announcement by Iran that, once the sanctions imposed by the West are removed in the wake of the nuclear arms pact negotiated with the U.S. in July, it will increase oil exports by 500,000 barrels a day, adding to the global glut. Iran moved a step closer to ending those sanctions when it turned over its bomb-making material to Russia, as stipulated by the recent treaty. American officials said that, as a result, the sanctions may be removed within the month.
New Year’s defaults
Puerto Rico rung in the new year by defaulting on $174 million in principal and interest payments, making it likely that lawsuits will be on its agenda for 2016. The government is adopting a “clawback” strategy; that is, not paying its low-grade bond obligations and using the money to pay off legally protected general obligation bonds. Governor Alejandro Garcia Padílla called the bondholders who will be getting the money “vulture funds” as they’ve been unwilling to negotiate over the terms and timing. Meanwhile, Treasury Secretary Jacob Lew said Puerto Rico was at a “dead end” and that there needed to be “an orderly restructuring regime paired with independent oversight.” In another case of a country defaulting on its loans, Russia said it’s going to file a suit against Ukraine after that country failed to repay a $3 billion eurobond and $75 million in interest due Dec. 31.
Mergers and acquisitions record
It was a big year for takeovers with the $4.3 trillion total passing the previous record set back in 2007. The biggest deals included Pfizer’s $160 billion purchase of Allergan, Dow Chemical $130 billion merger with DuPont and Anheuser-Busch InBev’s $110 billion acquisition of SABMiller.
From hawk to dove
Narayana Kocherlakota, who was the president of the Federal Reserve Bank of Minneapolis until Dec. 31, was adamantly against the Fed’s easy money strategy when he joined the central bank in 2009. However, as recently as October, he wanted to lower the benchmark rate, and as he prepared to step down last week, he told The Wall Street Journal that the Fed may have acted too soon, saying, “We might have lost the credibility of our inflation target” by lifting rates.
China’s slowdown continues
China’s manufacturing ended the year by contracting for the fifth month straight with the official Purchasing Managers’ Index at 49.7, slightly up from November but still below the 50-point mark that indicates expansion.
In other economic news, the S&P/Case-Shiller Home Price Index for 20 major metro markets was up 5.5 percent for the 12-month period ending in October, compared to 5.4 percent in September, as 12 cities saw prices higher than the month before. The National Association of Realtors Pending Home Sales Index declined 0.9 percent to 106.9 in November, the third dip in the last four months; sales are up 2.7 percent from a year ago. Customer Growth Partners reported that holiday sales fell short of its projection of a 3.2 percent increase, rising 3.1 percent. The advance trade good balance for November came in at -$60.5 billion compared to a revised -$61.3 billion in October, the government announced. Plus, the Labor Department said that first-time unemployment claims for the week ending Dec. 26 jumped 20,000 to 287,000, though the numbers may have been distorted by holiday hirings. The four-week moving average for the week ending Dec. 19 rose 4,500 to 277,000.
A look ahead
The first full week of 2016 will more than make up for the holiday slowdown, with a flurry of releases, including updates on construction spending, factory orders, durable and capital goods orders, the Institute for Supply Management’s Manufacturing and Nonmanufacturing Indexes, vehicle sales, wholesale inventories, consumer credit and the trade balance. In addition, the Fed will release the minutes of its meeting on Dec. 15 and 16, at which it decided to raise its rate, and the Labor Department will announce the unemployment rate for December, expected to remain unchanged at 5 percent.
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.
The valley’s commercial and residential property markets are similar in some ways — availability is tight and nothing is what you’d call “cheap.”