Stocks continue to struggle
The Northwestern Mutual Wealth Management Company — Vail Valley
Despite a surge for stocks on Tuesday and the best retail sales report in a year on Friday, the major indexes were down yet again, with the S&P 500 now only narrowly up for 2016. With investors looking to other options, the yields on treasuries fell. Much of the drop came on Friday, when the yield on the 10-year dipped from 1.75 percent to 1.70 percent.
During the course of the week, the indexes were dealt a one-two punch by a decline in the stocks of both retail companies and energy companies, with the price of oil retreating once again after recently having made a run at the $50-a-barrel mark – United States crude closed the week at $46.21 a barrel, while Brent crude fell to $47.83 a barrel. The energy market was roiled when Saudi Arabia replaced its oil minister, Ali al-Naimi, who shaped the nation’s oil policy for two decades, with Khalid al-Falih, the chairman of Saudi Aramco. The move was reportedly made to better position Saudi Arabia for its “post-oil” era. As for retail, investors had to weigh disappointing earnings reports and projections from the likes of Nordstrom, Gap, Kohl’s, J. C. Penney and Macy’s. While retail sales were up a healthy 1.3 percent to $453.4 billion in April, the best such showing since March 2015, the increase was due to online sales, which rose 2.1 percent from the month before and 10.2 percent over the last year; department store sales were down 1.7 percent from April 2015. Still, the report was positive enough that the Federal Reserve Bank of Atlanta raised its estimate for second-quarter gross domestic product (GDP) growth to 2.8 percent (first-quarter GDP was 0.5 percent).
Lew in Puerto Rico
With Puerto Rico having missed a recent debt payment, Treasury Secretary Jacob Lew visited the territory last week to see the situation firsthand and to enjoin congress to come up with a plan. With a $2 billion payment looming on July 1, Lew said, “What Puerto Rico needs is the ability to restructure its debt.” Puerto Rico’s Governor Alejandro García Padilla issued a more ominous warning, saying, “If Congress does not act, we will need a bailout which will be very expensive for U.S. taxpayers.”
China and stimulus
In an unusually direct statement, a front-page article in the People’s Daily, the official paper of China’s communist party, highlighted the dangers of supporting growth with ever-increasing leverage, perhaps a turning point as policy makers address financial risks. In the article, an unnamed “authoritative person” was quoted saying, “High leverage will lead to high risks. If it’s not well controlled, the result could be financial crisis and contraction of the economy.” A move away from such leverage was seen as taking further rate cuts off the table.
Mark Carney, the Bank of England’s (BOE) governor, said that he had not compromised the bank’s neutral position when he warned about the impact of Brexit, having said that Great Britain’s departure from the European Union could lead to higher inflation and even a recession. Appearing on the British Broadcasting Corporation yesterday, Carney said the Bank had a responsibility to “explain risks and then take steps.” He added, “Ignoring a risk is not to reduce it.” Earlier in the week, the BOE left its monetary policy unchanged but pared its forecast for growth in 2016 from 2.2 percent to 2.0 percent.
The eurozone GDP – and Greece
The eurozone’s economy expanded 0.5 percent in the first quarter, slightly below the initial estimate of 0.6 percent but still the best showing in over a year. GDP in Germany, the zone’s largest economy, came in at 0.7 percent, its fastest pace in two years. However, GDP in Greece contracted 0.4 percent. Meanwhile, last week’s meeting about Greece, which included a discussion about debt relief, was inconclusive. Greece’s creditors will next meet on May 24 to decide if the nation has done enough to get its next bailout payment while one of those creditors, the International Monetary Fund, is pushing hard for debt relief. Jeroen Dijsselbloem, the head of the Eurogroup’s finance ministers, said of the impending meeting, “My assumption is that there will be a problem of debt sustainability that we need to address.”
Openings inch up, hirings dip
The U.S. government reported that job openings rose from 5.6 million in February to 5.8 million in March, near the record high set in July of last year and up 11 percent from a year earlier. Hiring, however, slowed from 5.5 million in February to 5.3 million. The Labor Department reported that first-time jobless claims unexpectedly jumped by 20,000 to 294,000 for the week ending May 7, their highest level since February 2015.The four-week moving average for the week ending April 30 was up 10,250 to 268,250. In other news, the Producer Price Index (PPI) gained 0.2 percent in April from March but was flat year-over-year. Core PPI, less food and energy, was up 0.1 percent from the month before and 0.9 percent from April of 2015. The government said that wholesale inventories increased 0.1 percent in March from February, while business inventories improved by 0.4 percent. Also, the University of Michigan’s preliminary Consumer Confidence Index rose sharply in May to 95.8 compared to the final reading of 89 in April.
Another merger derailed
Shares of both Office Depot and Staples tumbled after their proposed $6.3 billion merger was blocked by a federal judge; federal regulators also derailed a merger plan between the two back in 1997.
A look ahead
This week’s updates will include the latest on housing starts and building permits, existing home sales, the Consumer Price Index, industrial production and capacity utilization, and the Conference Board’s Leading Economic Index. In addition, the Fed will release the minutes from its most recent meeting on April 26 and 27. Its next meeting is scheduled for June 14 and 15. 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.