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Not a happy new year so far

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

So much for a happy new year. In the first full week of trading in 2016, investors were rattled by the slowdown in China and, perhaps more importantly, by how China’s leadership plans to handle that slowdown.

As a result, our major stock indexes got off to a stumbling start, with the S&P 500 dropping 6 percent, the Dow shedding 6.2 percent, and the Nasdaq falling 7.3 percent. It was, according to The Wall Street Journal, “the worst first five days of any year,” as China’s story more than offset any optimism that might have been generated by yet another strong jobs report. Plus, it was the worst week at any time of the year since September 2011 when the fight over the debt ceiling between the president and the House led to Standard & Poor’s cutting our nation’s credit rating.

What’s next for China?

The week began on an off note when China’s Caixin Manufacturing PMI for December fell to 48.2 (any reading below 50 signals contraction), and by the time the stock markets in the United States opened, the Shanghai Index had dropped 7 percent. In addition, China’s central bank set the renminbi at its lowest level since May 2011, which will result in cheaper Chinese exports. It also didn’t help that the Institute of Supply Management’s U.S. Manufacturing Index for December was down for the second month in a row at 48.2, the weakest reading since November 2009. While the brewing conflict between Saudi Arabia and Iran over the former’s execution of a Shiite cleric sent oil prices up early in the day, they’d fallen by the time the markets closed. In fact, by week’s end, the prices of both U.S. and Brent crude had tumbled 10 percent to where they were in 2004. On Wednesday, the stock market got another jolt when China’s Caixin Services PMI fell to a 17-month low of 50.2, still above 50, which indicates expansion, but nonetheless in sharp contrast to China’s National Bureau of Statistics Services PMI released the week before which showed an increase to 54.4. Investors decided to focus on the negatives and twice last week, trading on the Shanghai Index was automatically suspended for 15 minutes by its much-criticized circuit-breaker system after stocks fell more than 5 percent. The Index gained 2 percent on Friday after the government said it was suspending such shutdowns, but it was still down 10 percent for the week.

Cars and jobs

Despite the grim week for stocks, there was some positive news about the American economy. On Tuesday, for example, it was announced that 17.5 million vehicles were sold in 2015, a new record (the previous high was 17.4 million in 2000). Sales were up 9 percent in December from a year earlier and rose 6 percent for all of 2015. On Friday, the Labor Department said that 292,000 jobs were created in December, well above the forecast of 200,000, while the separate household survey remained unchanged at 5.0 percent. The total for 2015 was 2.65 million jobs, the second best year since 1999 according to the Labor Department (trailing only 2014). Wages rose 2.5 percent for the year, a figure that looked stronger given the low rate of inflation. While the labor force participation rate increased from 62.5 percent to 62.6 percent, it was still near where it was in the 1970s.

The Fed and inflation

Though the 17 Federal Reserve committee members were unanimous when voting to raise the benchmark rate last month for the first time since 2006, the minutes of the meeting on Dec. 15 and 16 showed members expressing concern about the stubbornly low rate of inflation that is also part of the Fed’s mandate. The minutes said the decision was a “close call” because “many participants remained concerned about the downside risks attending the outlook of inflation.” The minutes also indicated that Fed officials were likely to raise the rate by one percentage point in 2016, and on CNBC on Wednesday, the Fed’s Vice Chairman Stanley Fischer said, “Those numbers are in the ballpark.” The minutes suggested, however, that some members would like to see inflation moving toward the 2 percent target before any further rate hikes, and the Fed is not expected to raise the rate at its meeting later this month.

The battle rejoined

In its first action of 2016, the House voted to overturn the Affordable Health Care Act, the 62nd time it has done so. However, this was the first time it actually reached the president’s desk because it had already passed in the Senate as part of the budget reconciliation bill; President Obama vetoed the bill on Friday as expected.

In other news, construction spending fell 0.4 percent in December, the first drop since June 2014. Initial jobless claims dipped 10,000 to 277,000 for the week ending Jan. 2; the four-week moving average fell 1,250 to 275,750 for the week ending Dec. 26. Wholesale inventories were down 0.3 percent in November. The Fed said that consumer borrowing rose $14 billion in November to a new high of $3.53 trillion. The ISM’s Non-Manufacturing Index fell from 55.9 in November to 55.3 in December, still a very solid figure. Factory orders were off 0.2 percent in November after climbing 1.3 percent in October. Orders for durable goods were flat in November for the second month in a row. The trade gap came in at $42.4 billion in November, down from $44.6 billion in October, though the deficit with China rose from $30.2 billion to $31.3 billion. Lastly, TransCanada, the Canadian company that wanted to build the Keystone XL Pipeline, is suing the federal government for $15 billion in damages.

A look ahead

This week’s releases will include updates on small business optimism, retail sales, the Producer Price Index, industrial production and capital utilization, and consumer confidence, as well as the Fed’s Beige Book report. In addition, fourth-quarter earnings reports will begin, with FactSet estimating that earnings for S&P 500 companies will be down 4.7 percent from a year earlier.

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.


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