Markets sailing into the new year | VailDaily.com

Markets sailing into the new year

Ken Armstrong, Shane Fleury & Steve Shanley
The Northwestern Mutual Wealth Management Company — Vail Valley

What a difference a year makes.

At the end of the first week of 2017, thanks to a brighter economic outlook and optimism about the incoming Trump administration, both the S&P 500 and the Nasdaq closed at all-time highs. Additionally the Dow came within a hair's breadth of the rarefied 20,000-point plateau, having reached 19,999.63 during the day before retreating.

There was more positive news about the economy on Friday with the latest jobs report. While only 156,000 new jobs were created, below expectations, wages were up 2.9 percent over the last 12 months. This is well above the pace of inflation and the highest reading since 2009. The unemployment rate inched up to 4.7 percent from 4.6 percent in November but was near the Federal Reserve's target and less than half of what it was at the height of the Great Recession. It was also the lowest year-ending jobless rate since 4.5 percent in 2006. In addition, according to The Wall Street Journal, the economy has now added jobs for 75 months in a row, the longest such streak since 1939, though the labor force participation rate, which ticked up from 62.6 percent in November to 62.7 percent last month, remains where it was in the 1970s.

The Fed's thinking

The minutes from the Fed's meeting on Dec. 13 and 14 revealed that committee members expect growth to be "slightly higher" over the next few years but probably not reach the 4 percent gross domestic product growth rate that President-elect Donald Trump is looking for, partly because of weak productivity. The Fed said it expects to raise its rate three times this year. However, referring to the Trump administration, the report noted, "Participants emphasized their uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate supply and demand."

Fourth-quarter earnings

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According to FactSet, fourth-quarter earnings for S&P 500 companies are expected to come in at 3 percent. That figure is well off the firm's September estimate of 5.2 percent. However, should earnings be in the black after having risen in the third quarter, it would be the first back-to-back quarters in positive territory since the last quarter of 2014 and the first three months of 2015.

China's capital controls

China's financial regulators have introduced new rules in an effort to slow the flow of capital from the country, and thus slow the decline in the value of the renminbi against the dollar because of speculators who've been converting it into greenbacks. The renminbi has bounced back in part because of these steps, but also because the U.S. dollar has slipped somewhat since the Fed raised its rate last month.

A Brexit setback?

Ivan Rogers, the man expected to be Britain's chief negotiator with the European Union over the terms of the Brexit, unexpectedly resigned last week, less than three months before the negotiations are slated to begin. Rogers didn't explain his reasons, but he's been portrayed as pessimistic about the negotiations, having said that they could last a decade or even fail.

Oil drives eurozone inflation

Partly because of the rising price of oil, eurozone inflation increased 1.1 percent in December from a year earlier, the fastest pace since 2013 and one that may restart the debate about the European Central Bank's stimulus spending. Core inflation, excluding food and energy, was up 0.9 percent.

Manufacturing, car sales end '16 on a high note

The Institute for Supply Management's (ISM) Manufacturing Index rose from 53.2 percent in November to 54.7 percent in December, its highest reading of 2016, which was also the case for the ISM's indexes for new orders (at 60.2 percent), employment (53.1 percent) and production (60.3 percent), while the index of prices paid gained 11 percentage points to 65 percent. The ISM's Non-Manufacturing Index for December was 57.2 percent, unchanged from the month before. Autodata reported that 1.69 vehicles were sold in December, up 3 percent from a year earlier. As a result, the auto industry set a record in 2016, selling 17.55 million vehicles (the previous record was 17.47 million in 2015). However, the record was only reached through deep sales incentives, so another record year in 2018 is seen as unlikely. In other economic news, the final figure for the trade balance for November was -$45.2 billion compared to -$42.4 billion in October. Construction spending rose 0.9 percent from a year earlier. Orders for factory goods fell 2.4 percent in November from the month before, and orders for durable goods were flat month over month after having gained 2.8 percent in October. First-time jobless claims for the week ending Dec. 31 plummeted 28,000 to 235,000; the four-week moving average for the week ending Dec. 24 dipped 5,750 to 256,750.

A look ahead

This week's releases will include updates on consumer credit, small business optimism, wholesale and business inventories, the Producer Price Index and advance retail sales.

This commentary was prepared specifically for local wealth management advisors 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.