Stock exchanges keep reaching new highs
The Northwestern Mutual Wealth Management Company — Vail Valley
In a quiet week — the July 22 trading volume was the year’s lowest — the S&P 500 and the Dow Jones Industrial Average meandered, driven mostly by second-quarter earnings news, on the way to finishing in the black for the fourth week straight. The S&P 500 gained 0.6 percent and the DJIA 0.3 percent.
Along the way, both indexes reached new highs twice, and have done so in seven of the last 10 trading sessions. The yield on the 10-year Treasury, meanwhile, rose slightly, but remained near its low watermark for the year, closing at 1.568 percent on Friday.
With 126 of the S&P 500’s companies having now reported, FactSet has projected that second-quarter earnings will be down 4.4 percent from a year earlier, slightly better than the previous estimate of a decline of 5.3 percent. The index was helped last week by encouraging reports from Microsoft and big banks, with its tech sector rising 2 percent for the week while financial shares gained 0.7 percent.
Great Britain’s new Prime Minister Theresa May made her first tour of the continent last week, meeting with Germany’s Chancellor Angela Merkel and France’s President François Hollande. While the meetings were seen as cordial overall, both Merkel and Hollande emphasized that Great Britain should not expect to be able to benefit from free trade with the eurozone unless it is going to allow free movement of workers across its borders. This is one of the key concerns that powered Britain’s vote to leave the European Union (EU). In his joint press conference with May, Hollande said, “There cannot be freedom of movement of goods, free movement of capital, free movement of services if there isn’t a free movement of people.”
In another sign that the economies of Great Britain and the eurozone may be moving in different directions, Markit’s Flash Composite Purchasing Managers’ Index for July tumbled into negative territory, falling from June’s 52.4 all the way to 47.7, its lowest reading since 2009, which was seen as a sign that Britain’s second quarter gross domestic product (GDP) will finish in the red. The eurozone’s composite Purchasing Managers Index (PMI) dipped slightly, falling from 53.1 in June to 52.9 in July, an 18-month low, but still comfortably above 50, which indicates growth. Retail sales in Great Britain declined 0.9 percent in June, their biggest drop in six months. In addition, the International Monetary Fund (IMF) cut its forecast for global GDP in 2016 from 3.2 percent to 3.1 percent because of the Brexit. The IMF said Britain’s growth would slow from 1.7 percent compared to its 1.9 percent forecast in February, and to 1.3 percent in 2017 compared to an initial estimate of 2.2 percent with the warning that the number could fall even lower if negotiations between Britain and the EU become complicated or contentious. Faced with the data, the newly appointed chancellor of the Exchequer, Philip Hammond, said the Bank of England would have to take monetary action to combat the negative effects of the Brexit.
European Central Bank stands pat
Not only did the ECB leave its benchmark rate unchanged when it met last week, it also issued an unusual statement regarding its longer-term intentions, which read, “The Governing Council continues to expect the key ECB rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”
Federal Reserve to convene
The Fed will meet on Tuesday and Wednesday this week. While it’s not expected to raise its benchmark rate, there have been recent stirrings that the Fed may yet act this year given the recent run of positive news about the American economy, notably the jobs report for July, and the fact that the major stock indexes have so far weathered the Brexit. After its last meeting in June, which was the week before Great Britain’s vote to leave the EU, many on Wall Street concluded that the Fed would not raise its rate until 2017.
The field is set
As of Friday, the tickets for this fall’s presidential elections were set, with Indiana’s Senator Mike Pence joining the party’s now official nominee Donald Trump, and Virginia’s Senator Tim Kaine being named as the running mate of Hillary Clinton, who will be chosen as her party’s candidate at this week’s convention in Philadelphia.
Mergers and acquisitions
Because of antitrust concerns, the government filed suit to stop two high-profile mergers in the pharmaceutical industry last week, Aetna’s $37 billion purchase of Humana and Anthem’s $48 billion acquisition of Cigna; both Aetna and Anthem said they would fight the suits. In related stories, Monsanto rejected Bayer’s takeover bid but said it was open to further discussion, and Yahoo is reportedly on the verge of selling its core business to Verizon.
In other news, builder confidence fell to 59 in June from 60 the month before, according to the National Association of Home Builders/Wells Fargo Index. Housing starts in June were up 4.8 percent from July to 1,189,000, the government reported, but were down 2 percent from a year earlier. Building permits increased 1.5 percent from May to June’s 1,153,000, but were off 13.6 percent from June 2015. Markit’s PMI for manufacturing increased to 52.9 in June from 51.3 in May. The Conference Board’s Leading Economic Indicators Index rose to 0.3 percent in June from the month before after having slipped 0.2 percent in May. In addition, first-time jobless claims for the week ending July 16 fell 1,000 from the week before to 253,000; the four-week moving average for the week ending July 9 declined 1,250 to 259,000.
A look ahead
In addition to the Fed’s meeting, this week will feature updates on the S&P/Case-Shiller Home Price Index, new and pending home sales, orders for durable and capital goods, personal consumption and consumer confidence. Investors will be especially attuned to the government’s first estimate for second-quarter GDP which will be released on Friday, with growth forecast to come in at 2.6 percent after a final reading of 1.1 percent for the first quarter.
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.
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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.
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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.