Mixed news drives markets lower
The Northwestern Mutual Wealth Management Company — Vail Valley
The three major stock indexes fell for the second week in a row as investors were kept off balance by some mixed third-quarter earnings news and some purely contentious politics.
But while the elections will be behind us in less than a month, the question of when the Federal Reserve will raise its benchmark rate is not likely to be decided until the mid-December meeting, which could lead to another two months of investor uncertainty about both stocks and the yields on Treasurys, which rose once again last week.
Stocks began the week on a strong note as crude oil hit its highest point since July 2015 after Russia’s President Vladimir Putin said he’d support the Organization of the Petroleum Exporting Countries recently announced production cuts. In addition, Apple’s stock soared in the wake of Samsung’s Galaxy 7 woes, and Mylan’s shares surged after it reached a settlement with the government for overcharging for its EpiPen. On Tuesday, Alcoa and Illumina kicked off the earnings season with weak reports – the former’s stock dipped 11.4 percent and the latter’s 24.8 percent – and the Dow Jones Industrial Average shed 200 points. The market fell again on Thursday when China reported that its exports had tumbled 10 percent (in dollar terms) in September from a year earlier, the biggest drop since February. Stocks rebounded slightly at week’s end after JPMorgan Chase and Citibank announced better-than-expected earnings, but it wasn’t enough to pull the major indexes out of the red for the week.
The Fed released the minutes for its September meeting last week and they indicated that the committee was ready to raise its rate “relatively soon” as long as economic developments unfolded as the committee expected. However, some members were concerned that the statement might be misinterpreted to mean the passage of time, rather than the accumulation of evidence, would be the key factor, and noted that inflation was still below the Fed’s target of 2 percent. Nonetheless, the minutes also stated that “a reasonable argument could be made for an increase at this meeting,” and that the decision to leave the rate unchanged was a “close call” despite the 7-3 vote. Though the Fed meets next on Nov. 1 and 2, it isn’t expected to act that close to Election Day, and Patrick Harker, president of the Federal Reserve Bank of Philadelphia (a non-voting committee member) said last week, “It may be prudent to wait until we have resolved some of that uncertainty.” As for the meeting on Dec. 13 and 14, which will be followed by a press conference with Chairwoman Janet Yellen, Eric Rosengren, president of the Federal Reserve Bank of Boston (and a voting member), told CNBC on Friday that the market’s anticipation of a hike at that session “seems quite appropriate.”
The federal deficit for the fiscal year that ended on Sept. 30 was $587 billion, as predicted by the government because of the renewal of tax breaks in December, but nonetheless the first increase after six straight decreases; the deficit for the previous fiscal year was $438 billion. Furthermore, the latest deficit added up to 3.2 percent of gross domestic product compared to 2.5 percent the year before. Because of the aging American population, the costs of Medicare and Social Security are expected to continue to drive up the deficit for years to come.
Striking an ominous note, Puerto Rico’s Governor Alejandro García Padilla told the new oversight board created to manage the island’s $74 billion debt that, even if creditors agreed to reduce debt payments, Puerto Rico will “still need the assistance of the federal government to bring this economic and humanitarian crisis to an end.”
The precipitous dip in the pound against the dollar is seen as having buffered the impact of the Brexit by increasing Britain’s lower-priced exports to partially offset reduced consumer spending at home. Even so, the International Monetary Fund reported that Great Britain had dropped behind France and was now the world’s sixth largest economy because of the Brexit. And on Thursday, following up on remarks she made in the wake of the Brexit vote, Scotland’s First Minister Nicola Sturgeon said, “I am determined that Scotland will have the ability to reconsider the question of independence, and to do so before the U.K. leaves the EU, if that is necessary to protect our country’s interests.”
Retail sales rebound
Retail sales beat expectations, rising 0.6 percent in September from August, and were up 2.7 percent from a year earlier. In other economic news, and in another sign of the impact of the upcoming election, the University of Michigan’s Consumer Confidence Index fell to a 13-month low of 87.9 in October. The National Federation of Independent Business Optimism Index dipped 0.3 points in September from the month before to 94.1. The number of job openings decreased to 5.4 million on the last business day of August, the government reported, while hires and separations were little changed at 5.2 million and 5.0 million, respectively. The Producer Price Index (PPI) was up 0.3 percent in September from August and rose 0.7 percent from a year earlier; core PPI, less food and energy, increased 0.2 percent from the month before and climbed 1.2 percent over the past 12 months. Business inventories were up 0.2 percent in August from July. For the week ending Oct. 8, first-time jobless claims were unchanged at 246,000, the four-week moving average for the week ending Oct. 1 fell 3,500 to 249,250, its lowest level since 1973. Lastly, giving in to the withering criticism that has come his way, John Stumpf stepped down as the chief executive officer of Wells Fargo, which has been embroiled in a controversy over phantom customer accounts being created on his watch.
A look ahead
This week’s releases will include the latest on industrial production and capacity utilization, the Consumer Price Index, housing starts, building permits, existing home sales and the Fed’s Beige Book report, as well as more third-quarter earnings news.
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.