Oil fuels market volatility
February 29, 2016
Once again, the major United States stock indexes were volatile, rising and falling sharply with the price of crude oil. For the second week straight, the price of oil finished up, as did the S&P 500, the Dow Jones Industrial Average and the Nasdaq. The yield on the 10-year Treasury also rose slightly as the move by investors to safe havens slowed.
The price of crude jumped on Monday after the International Energy Agency said that even though it didn't expect oil prices to recover until 2017, global inventories would shrink over that time. Prices tumbled the next day, however, after Saudi Arabia's oil minister, Ali bin Ibrahim al-Naimi, rejected the idea of reducing production. "There is no sense wasting our time seeking production cuts," he said while speaking at a conference in Houston, "That will not happen." Even so, U.S. crude ended up gaining 3.2 percent for the week.
The Group of 20 and China
The G-20 was unable to agree on new stimulus steps at its meeting in Shanghai over the weekend, with the U.S. and Germany in particular seeing the global economy as stabilizing. After the meeting, Treasury Secretary Jacob Lew exhorted China to shift to a "more consumption-driven economy," and to continue to move toward "a more market-determined exchange rate and transparent exchange rate policy in an orderly manner and clearly communicate its actions to the market." This comes at a time when, according to an article in last week's The New York Times, China has been moving to address its slowdown by curbing the release of economic information and censuring journalists who do otherwise. On Friday, the day after the Shanghai Index had dropped 6.4 percent, Zhou Xiaochuan, the governor of China's central bank, held a news conference at which he sought to reassure global investors that China did not intend to further devalue its currency. He said, "We will not resort to competitive depreciation so as to boost our advantage in exports." Zhou also addressed concern in the West about China's shrinking foreign exchange reserves, saying the reserves were not "static" like an oil field but rather like water in a reservoir, with "constant flows in and flows out."
The Fed's plans
The Federal Reserve's Vice Chairman, Stanley Fischer, said it's too early to judge whether this year's market turmoil will have an impact on the U.S. economy, while also noting that the Fed has no intentions of resorting to the negative interest rates that have been adopted by the Bank of Japan and European Central Bank. Meanwhile Esther George, president of the Federal Reserve Bank of Kansas City and a voting committee member, said the Fed should consider raising its benchmark rate when it meets on March 15 and 16 despite the recent volatility.
Recommended Stories For You
More on the "Brexit"
The week before last, Britain's Prime Minister David Cameron said that his country's referendum on membership in the European Union (EU) would be held on June 23, and also expressed hope that his nation would stay in the Union given the concessions made by the EU's leaders. Last week, however, Boris Johnson, the popular mayor of London and a member of Cameron's Conservative Party, came out in favor of leaving the EU, and as the week advanced the pound fell to a 14-year low against the dollar.
Q4 Gross Domestic Product
The government's first revision of fourth-quarter GDP growth came in at a better-than-expected 1 percent after the initial reading of 0.7 percent. The increase was mainly because business inventories contracted less than first estimated. However, those larger inventories may cut into second-quarter growth, expected to come in at around 2 percent. The next revision will be released on March 25.
Inflation on the wax
The Commerce Department said that personal consumption expenditures were up 0.1 percent in January from the month before and rose 1.3 percent over the last year, the largest year-over-year gain since October 2014 (though PCE still came in below the Fed's target of 2 percent for the 45th month straight). Core PCE, less food and energy, advanced 0.3 percent, the biggest month-over-month gain since January 2012, and was up 1.7 percent over the past year. At the same time, personal income and spending both increased 0.5 percent in January from December. In other economic news, the government said that sales of existing homes increased 0.4 percent in January from the month before to an annual rate of 5.47 million, a six-month high and the second highest total since 2007. Sales were up 11 percent from a year earlier, the biggest such gain since July 2013. Sales of new homes fell in January (from a 10-year high), with the Commerce Department reporting that they were off 9.2 percent from December to an annual rate of 494,000, the largest decline on a percentage basis since May 2010. The Standard & Poor's/Case-Shiller Home Price Index for 20 major metro areas was up 5.7 percent in December from a year earlier. New orders for durable goods rose 4.9 percent in January, the Commerce Department said, the biggest gain since January 2015 and a rebound from the 4.6 percent drop in December. Orders for nonmilitary capital goods excluding aircraft were up 3.9 percent. The Labor Department reported that first-time jobless claims increased 10,000 to 272,000 for the week ending Feb. 20; the four-week moving average for the week ending Feb. 13 fell 1,250 to 272,000. In addition, the University of Michigan's Consumer Confidence Index was 91.7 in February compared to the preliminary reading of 90.7 earlier this month, but was still down from January's 92.
A look ahead
This week's releases include the latest on pending home sales, the ISM's Manufacturing and Non-Manufacturing Indexes, factory orders, construction spending, vehicle sales, the Fed's Beige Book report, nonfarm productivity and the trade balance. On Friday, the Labor Department will announce the jobless rate for February, expected to remain unchanged at 4.9 percent.
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.