Markets remain volatile
February 15, 2016
A new month began last week, but stocks remained stuck in the same cycle that defined January, with high volatility and more down days than good ones.
The concerns remained mostly unchanged — the fluctuating price of oil and fear of an economic slowdown abroad, Investors were nervous enough that on Friday indexes tumbled off the news of a jobs report that was largely positive and an earnings slowdown from a single tech company, LinkedIn, with the Dow Jones Industrial Average falling 1.29 percent, the S&P 500 1.85 percent and the Nasdaq 3.25 percent. Meanwhile, the yield on the 10-year Treasury, which moves in the opposite direction of the price, continued its recent decline, dropping to a 10-month low of 1.84 percent.
The Labor Department said that only 151,000 jobs were created in January, below the forecast of 190,000 and down from 2015's monthly average of 262,000. The household survey dipped from 5 percent to 4.9 percent, its lowest level since 2008, however, wages jumped 0.5 percent and were up a solid 2.5 percent over the last year. Even the stubbornly high labor force participation rate, though still low by historical standards, inched up to 62.7 percent from December's 62.6 percent. In addition, as the government estimates that about 120,000 new jobs are needed to keep up with people entering the workforce, there were more openings than applicants. Still, given the recent economic concerns and nervousness about when the Federal Reserve will next raise its benchmark rate, investors decided to spin the job numbers negatively, taking the major indexes sharply down on Friday.
The Fed's timetable
As for the Fed, its job has become increasingly complicated as one of its mandates, employment, seems to be well in hand, but its other, inflation, remains stubbornly stuck below the Fed's target of 2 percent. The Fed meets in mid-March and according to the market the chances are slim that it will raise its rate. In fact, the odds of its doing so don't even hit 50 percent until December. Last week, Fed Governor Lael Brainard told The Wall Street Journal, "Recent developments reinforce the case for watchful waiting."
Manufacturing here and in China
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Early in the week, stocks dipped over concern about manufacturing both here and in China. The Institute for Supply Management (ISM) said its U.S. Manufacturing Index inched up to 48.2 in January from 48 in December but remained below 50, which signals expansion and is mainly due to the strong dollar and weak overseas demand. On the plus side, new orders and production were up to 51.5 and 50.2, respectively — the first increases since October — though the indexes for exports and employment were below 50. In China, the official Purchasing Managers' Index for January was down for the sixth month in a row, dropping from 49.7 in December to 49.4, its lowest level since August 2012. This came at the same time that China said its gross domestic product (GDP) target for 2016 was 6.5 percent compared to 7 percent in 2015. Meanwhile, China's foreign-exchange reserves, already at a three-year low, are poised to post a second consecutive record monthly drop in January, this time falling $99.5 billion to $3.2 trillion, as policy makers have intervened to support the yuan.
Oil companies feel the pain
The price of U.S. crude fell back below $30 a barrel last week before closing at $30.89, but some of the major oil companies reported fourth-quarter earnings and, as expected, the numbers were grim. For example, British Petroleum lost $3.3 billion in the fourth quarter, Exxon Mobil's fourth-quarter earnings dropped to $2.78 billion from $6.57 billion a year ago, and Shell's earnings for all of 2015 fell to $3.84 billion from $19 billion in 2014.
The trade gap widens
The trade deficit for December widened for the third consecutive month, and the culprits were the same – the mighty dollar and slowing economies abroad. The deficit increased 2.7 percent to $43.4 billion, the Commerce Department said, as exports were off 0.3 percent and imports were up by the same amount. For all of 2015, the deficit increased 4.6 percent to $531.5 billion as imports fell 3.1 percent and exports were down 4.8 percent, the first time exports have fallen year over year since 2009.
In other economic news, 1.15 million new vehicles were sold in January, down 0.3 percent from a year ago, according to Autodata. However, the decline was partly attributed to the snow storm in the East and two fewer days of sales. The Commerce Department said that construction spending was up 0.1 percent in December; for all of 2015, construction spending rose 10.5 percent from the year before to $1.1 trillion, the highest total since 2007. The Commerce Department also reported that consumer spending dipped 0.1 percent in December though personal incomes rose 0.3 percent, in part because savings hit an after-tax rate of 5.5 percent, the highest level since December 2012. Real personal consumption expenditures, adjusted for inflation, gained 0.1 percent from the month before. The Core Personable Consumption Expenditures Price Index, less food and energy, was up 1.4 percent over the last year. The ISM said its U.S. Non-Manufacturing Index fell to 53.5 in January from 55.8 in December; it was the slowest pace since February 2014. Factory orders declined 2.9 percent in December from the month before and orders for durable goods fell 5 percent in December from November, though orders ex-transportation were only off 1 percent. In addition, first-time jobless claims for the week that ended Jan. 30 rose more than expected, climbing 8,000 to 285,000; the four-week moving average for the week ending Jan. 23 increased 2,000 to 284,750.
A look ahead
This week's releases will include the latest on small business optimism, wholesale inventories, retail sales, business inventories, consumer confidence and more fourth-quarter earnings news.
This commentary was prepared specifically for local wealth management advisors by Northwestern Mutual Wealth Management Company.
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