Stocks mostly flat before inauguration
The Northwestern Mutual Wealth Management Company — Vail Valley
In the calm before this Friday’s inauguration and the changing of the guard in Washington, stocks were mostly flat last week and trading volumes were low.
The tech-heavy Nasdaq, however, continued its recent run of records, reaching a new high four times in five days. The yield on the 10-year Treasury, which has risen since the election while bank stocks have rebounded, was down for the fourth week in a row, finishing at 2.380 percent.
Speaking of bank stocks, they have been up since the election on the hopes of stronger economic growth and less regulation. On Friday, they rose sharply after some better-than-expected fourth-quarter earnings news for JPMorgan Chase and Bank of America, with the net profit for the two banks up 24 percent and 43 percent, respectively, from a year earlier.
Settlements, charges and fines
While it was a good week for banks, automakers didn’t fare nearly as well. Volkswagen is set to plead guilty and pay a settlement of $4.3 billion related to criminal charges for setting up cars to cheat on emissions tests. The day after the settlement was announced, the government said it was filing criminal charges against six Volkswagen executives involved in the case. Then the Environmental Protection Agency accused Fiat Chrysler of a similar tactic by installing software that allowed 100,000 diesel vehicles to evade emissions tests. Fiat Chrysler denied the charges, but the company’s stock fell 10.3 percent on Thursday after the announcement was made. In yet another settlement, Moody’s agreed to pay an $864 million fine for having issued inflated ratings for mortgage investments before the financial crash; two years ago, Standard & Poor’s paid $1.4 billion to settle similar charges.
‘Hard’ Brexit looming
Great Britain’s Prime Minister Theresa May will make a major speech today outlining her approach to the Brexit. Based on excerpts leaked to the media on Sunday, she’ll come down on the side of a “hard” Brexit, ending Britain’s privileged trade relationship with the European Union (EU) rather than trying to find some middle ground. May offered a preview of her plans last week in a television interview, saying, “We are leaving. We are coming out. We are not going to be a member of the EU any longer. We will be able to have control of our borders, control of our laws.”
Oil — volatility and Guyana
Fatih Birol, the head of the International Energy Agency, said that after an initial “rebalancing” because of production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members such as Russia beginning this month, there will be “much more volatility” in global oil pricing in 2017 than there was in 2016, especially if the United States continues to increase crude production as it did during the latter half of 2016. Guyana is poised to become what The New York Times called “the next big oil producer in the Western Hemisphere” after Exxon Mobil and Hess verified the joint discovery of a major off-shore oil and natural gas deposit in Guyanese waters. Neither firm would say how much oil and gas it expects to produce when the drilling comes on line in 2020.
China’s smooth slowdown
At a meeting in Beijing on Friday, China’s Premier Li Keqiang said his nation’s economy will come under pressure from global political and economic forces such as increased protectionism this year, but that the government will step in to ensure the economy runs smoothly. China’s gross domestic product grew an estimated 6.7 percent in 2016 but it is forecast to slow to 6.5 percent in 2017.
Retail sales rise
Driven by online purchases and car buying, U.S. retail sales totaled $469.1 billion in December, rising a solid 0.6 percent from November and up 3.3 percent for all of 2016 compared to a full-year gain of 2.3 percent in 2015; sales for the final quarter were 4.1 percent higher than in December 2015. The news for brick-and-mortar businesses continued to be disappointing, however, as department store sales fell 6 percent in 2016 while online sales jumped 11 percent. As further evidence of that trend, Amazon said it will add 100,000 new workers at its fulfillment centers over the next year and a half, while Macy’s announced that it was cutting 10,000 jobs, and the Limited said it was closing all 250 of its stores, adding up to 4,000 jobs lost.
Small business optimism soars
Small business optimism soared in December by the most since 1980 as expectations about the economy’s prospects have improved dramatically in the wake of the presidential election. The National Federation of Independent Business’s Index jumped 7.4 points from November’s 98.4 points to 105.8, the highest reading since the end of 2004. In other economic news, the University of Michigan’s preliminary consumer confidence survey for January was 98.1, not far from December’s 98.2, which was a 12-year high. Wholesale inventories were up 1 percent in November compared to an increase of 0.9 percent in October; business inventories climbed 0.7 percent from November versus -0.1 percent the month before. The Producer Price Index (PPI) improved 0.3 percent in December from November and 1.6 percent over the past year. Core PPI, less food and energy, was up 0.2 percent from November and the same 1.6 percent for the last 12 months. And first-time jobless claims for the week ending Jan. 7 rose 10,000 from the previous week to 247,000; the four-week moving average for the week ending Dec. 31 fell 1,750 to 256,500.
A look ahead
In one more week shortened by a national holiday, the short list of economic updates will include the latest on the Consumer Price Index, industrial production and capacity utilization, and housing starts and building permits. In addition, big names from the world of money and politics will descend on Davos, Switzerland, this week, for the annual World Economic Forum. And, of course, on Friday, Donald Trump will be sworn in as the 45th president of the United States.
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.
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