Stock markets remain volatile
Provided by Ken Armstrong, Shane Fleury & Steve Shanley of The Northwestern Mutual Wealth Management Company – Vail Valley
With more mixed news about the fate of Greece and the state of the United States economy, the major stock indexes were volatile again last week. However, a strong, if somewhat inexplicable, finish, saw the S&P 500 inch to new highs on both Thursday and Friday, while the Dow climbed within 16 points of its all-time record.
Again, much of the week was taken up with news about Greece. As expected, the Greeks were able to make a debt payment of €757 million to the International Monetary Fund. Analysts doubt Greece will have the money to make upcoming payments, unless it gets the last bailout tranche of €7.2 billion by the end of the summer. Greece must pay almost €12 billion. The Greeks are reportedly angling for either a delay or having some of their debt forgiven, but both options seem to be long shots. Tensions are rising once more after Finance Minister Yanis Varoufakis said that the “soul” of Mario Draghi, the president of the European Central Bank, was “filled with fear” over the prospect of giving Greece a break on its debt payments because he was worried what Germany would do. Then on Friday, speaking in Athens, Prime Minister Alexis Tsipras said that while he wanted to come to terms with the troika, he would not take the further austerity steps demanded by creditors: “I want to reassure the Greek people that there is no possibility or chance that the Greek government will back down on pension and labor issues.”
Sales fall, stocks soar
For the first four days of last week, stocks were mostly down while the yield on the 10-year Treasury rose to its highest level in 2015 at 2.29 percent. Then on Friday, the government announced that retail sales were flat at in April (an increase of 0.2 percent had been forecast) from the month before, as were core retail sales, less gas, cars, building materials and food services. That was not the only tepid report of the day — the Federal Reserve said that industrial production declined for the fifth month in a row in April, down 0.3 percent. In addition, the preliminary University of Michigan Consumer Sentiment Index for May came in at 88.6, down from 95.9 in April. Plus the Producer Price Index (PPI) fell 0.4 percent in April, which is the third time this year it has dropped. Core prices, less food and energy, dropped 0.2 percent, and over the last year the PPI fell 1.3 percent, the biggest year-over-year decline since 2010, while core prices were up just 0.8 percent. Still, perhaps because the weak news meant that the Fed might wait longer to pull the trigger on raising its benchmark rate, the indexes soared on Friday, with the Dow gaining 191.75 points and the S&P 500 setting a record for the second day in a row.
Growth in the eurozone
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There was one positive report on Friday, however, as Eurostat said that gross domestic product (GDP) for the eurozone grew 1.6 percent in the first quarter, with France surprising on the upside as its economy expanded 0.6 percent, its best showing in almost two years. However, the GDP of two member nations, Greece and Finland, contracted for the second quarter in a row, the yardstick for a recession. Greece has been hamstrung by debt payments, and Finland by its close trade relationship with Russia.
Speaking of Russia, it reported that GDP contracted 1.9 percent in the first quarter, less than expected, as Russia appears to be recovering from the double-whammy of trade sanctions and low energy prices. Ukraine, still locked in conflict, did not fare nearly as well, with GDP for the first three months of 2015 tumbling 17.6 percent from a year earlier. Across the Channel, the Bank of England (BOE) left its interest rate unchanged at 0.5 percent, where it has remained since March 2009. The BOE also lowered its growth estimate for 2015 from 2.9 percent to 2.5 percent, while saying that inflation will hit 2 percent within the next two years, giving it some flexibility to not raise interest rates until perhaps the middle of next year.
Trade pact drama
In Washington, President Obama continued to battle his own party over the proposed Trans-Pacific Partnership. Early last week, the democrats in the Senate voted against allowing a fast-track version of the bill, which can’t be amended before it comes to a vote. After some negotiating, a second round of voting moved consideration of the bill forward, but the Senate democrats are still expected to vote against it when it comes back as a bill.
Jobless claims fall
In other news, first-time jobless claims fell 1,000 to 264,000, while the four-week average dipped 7,750 to 271,750, its lowest level since April 2000. The Treasury Department said that the April budget surplus was $156.7 billion compared to $106.9 billion a year earlier, the largest surplus since April 2008, as receipts totaled a record $471.8 billion. The National Federation of Independent Business announced that its Small Business Confidence Index was up 1.7 points in April to 96.9, the biggest rise since December. Plus, 60 percent of the companies reported capital outlays, the highest total since the recession ended. The government said that business inventories rose 0.1 percent in March compared to an increase of 0.2 percent in February. Lastly, Verizon agreed to buy AOL for $4.4 billion, in part to acquire AOL’s mobile video and advertising technology.
A look ahead
This week’s releases will include the latest on building permits and housing starts, existing home sales, the Consumer Price Index and Markit’s Manufacturing PMI. The Fed will also release the minutes of its meeting on April 28 and 29.
About this report
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.