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Stocks post another strong week

Ken Armstrong, Shane Fleury & Steve Shanley
The Northwestern Mutual Wealth Management Company — Vail Valley

EAGLE COUNTY — Despite some reservations about the economy — and disappointing reports on retail sales and manufacturing — stocks had another strong week.

The Dow Jones Industrial Average moved back within hailing distance of the 18,000-point mark for the first time this year. Investors were also heartened late in the week as some of the nation’s biggest banks posted second-quarter earnings that were not as bad as expected and also showed an upswing in both consumer lending and private banking. At the same time, there was modest upward pressure on interest rates as the Treasury Department auction three-, 10- and 30-year securities.

Still ‘too big’

Speaking of banks, last week the Federal Reserve and the Federal Deposit Insurance Company (FDIC) said that five of the nation’s biggest financial institutions had no “credible” plan to withstand a crisis as required by the Dodd-Frank bill of 2010. They also mentioned that the American taxpayer might well have to bail them out, which is especially concerning as banks are now bigger than they were back in 2008. In a letter to JPMorgan Chase, for example, the regulators wrote that the current plan could “pose serious adverse effects to the financial stability of the United States.” In a statement, Thomas Hoenig, the vice chairman of the FDIC, said, “The goal to end too big to fail and protect the American taxpayer by ending bailouts remains just that: only a goal.” The banks have until Oct. 1 to revise their plans.

Nothing doing in Doha

For two weeks, the price of oil has fluctuated as speculators were either encouraged or skeptical regarding the outcome of yesterday’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producers in Qatar to discuss freezing production. The skeptics proved to be right — no agreement was reached as Saudi Arabia evidently insisted that every OPEC member commit to the freeze. Iran, recently free of sanctions and pumping oil at a record pace, didn’t even send a representative to the meeting. As a sign of just how low oil prices have gone — with the price of West Texas Intermediate crude oil averaging $30.32 a barrel in February — global energy spending as a percentage of personal consumption expenditures fell to an all-time low of just under 3.7 percent.

The word out of Washington

The International Monetary Fund (IMF) and the World Bank began a six-day meeting in Washington, D.C., last week with the former lowering its forecast for global growth in 2016 from the 3.4 percent estimated in January to 3.2 percent. The IMF expects improvement in 2017, but there was a long list of caveats including the prospect of a slowdown in emerging economies and China, the ongoing impact of low oil prices on Brazil and Russia and other nations reliant on oil revenues, and non-economic issues such as terrorism, the migrant crisis, rising nationalism and the wealth gap.

The latest on the “Brexit”

The IMF also warned that a “Brexit” could lead to “severe regional and global damage by disrupting established trading relationships.” There was bad news for those who hope that Great Britain will remain in the European Union (EU) come the referendum on June 23. A study by Oxford University demonstrated that the economic woes of the eurozone, to which Britain does not belong, have increased the number of southern Europeans looking for work in Great Britain; immigrants taking jobs from Brits is a hot button for voters. On the plus side, Jeremy Corbyn, the leader of the Labour Party and a long-time critic of the EU, said there was a “strong socialist case” for remaining an EU member, “warts and all.”

Chinese exports rebound

China’s stock markets rallied last week after the government reported that exports were up 11.5 percent in March from a year earlier, the first year-over-year increase since June and a sharp rebound from the 25 percent plunge in February.

Retail, industrial production numbers lag

As noted, investors were caught off guard when retail sales for March fell 0.3 percent; they had been expected to increase 0.1 percent. Core sales, less autos, gas, building materials and food services, were up 0.1 percent. Later in the week, the government said that industrial production was down 0.6 percent in March from February; it has now been lower for six of the last seven months. Manufacturing production was off 0.3 percent, while capacity utilization came in at 74.8 percent. In other economic news, import prices rose 0.2 percent in March from the month before, the first increase since June and the largest advance since May. Producer prices fell 0.1 percent in March from February as cheaper gas was offset by an increase in the cost of services. Over the last year, the Index was down the same 0.1 percent. Core Producer Price Index, less food and energy, dropped 0.1 percent from the month before but improved 1 percent over the last 12 months. The consumer price index rose 0.1 percent in March from February and 0.9 percent year over year. Core Consumer Price Index increased 0.1 percent, the smallest rise since August, but was up 2.2 percent over the past year. Business inventories were down 0.1 percent in February. First-time jobless claims fell 13,000 to 253,000 for the week ending April 9, the lowest level since November 1973; for the week ending April 2, the four-week moving average fell 1,500 to 265,000. The Small Business Optimism Index shed 0.3 points in March from the month before to 92.6. In addition, the University of Michigan’s Consumer Confidence Index unexpectedly dropped to 89.7 in April from a final reading of 91 in March.

A look ahead

This week will bring more second-quarter earnings news as well as updates on housing starts, building permits, existing home sales and Markit’s U.S. Manufacturing PMI. In addition, President Obama and Janet Yellen, the Fed’s chairwoman, will meet in the Oval Office today to discuss Wall Street reform and the state of the economy. The next time the Fed meets is on April 26 and 27 and it is not expected to raise its benchmark rate.

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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