Stocks post big October gains

The Dow and S&P 500 extended their weekly winning streaks to five, albeit narrowly. They also posted their biggest monthly gains in four years during October, rising 8.6 percent and 8.4 percent, respectively.

In getting there, investors all but erased the late-summer stock slump, if not some of the reasoning behind it, such as fear of a global slowdown and concern about the Federal Reserve raising its benchmark interest rate too soon.

Last week, in fact, the Fed did not raise that rate, but it also did nothing to dispel the idea that it might act on Dec. 15 and 16, at its last meeting of the year. The Fed’s statement read, “In determining whether it will be appropriate to raise the target rate at its next meeting, the committee will assess progress — both real and expected — toward its objective of maximum employment and 2 percent inflation,” with Fed watchers flagging words “at its next meeting.” Similarly, the Fed said the “economy has been expanding” as opposed to the previous statement that said it “is expanding.” In any case, the thinking is that Chairwoman Janet Yellen believes it’s better to get going sooner rather than later — increasing the rate in very small increments. In fact, the fixed-income market interpreted the Fed’s statement as being more hawkish on a rate hike than September’s, driving rates higher for the week.

Debt ceiling debate

One pressing and contentious concern was unexpectedly taken off the table last week when Congress extended the debt ceiling without the rancor or obstinacy that led to a shutdown and credit downgrade back in 2013. Speaker of the House John Boehner (R, Ohio), who handed his gavel to Representative Paul Ryan (R, Wisconsin) at week’s end, wanted his successor to start with a clean slate. He succeeded in doing so, brokering a deal that will allow the government to pay its bills through March 2017, by which time a new president will be in office. The package, already approved by the House and Senate, suspends the debt ceiling at $18.1 trillion while increasing spending by $80 billion over two years. It will also effect modest reductions to Medicare spending and change some eligibility rules for Social Security (entitlements now exceed 50 percent of federal outlays). The majority of the GOP voted against it in both chambers. However, that didn’t stop President Obama from saying, “This agreement is a reminder that Washington can still choose to help, rather than hinder, America’s progress.”

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After the vote, Ryan, the youngest Speaker since 1869, said, “Let’s be frank. The House is broken. We are not settling scores. We are wiping the slate clean.”

The return of EX/IM?

In a second bipartisan step, the House voted to reopen the Export-Import Bank by a vote of 313 to 118 (Boehner supported it; Ryan did not). Four months ago, the bank’s revival was blocked by conservatives to eliminate what they saw as another example of “corporate welfare.” If revived, the bank would be able assist foreign buyers of United States goods. However, its fate in the Senate is uncertain, especially since the Majority Leader Mitch McConnell (R, Kentucky) is against it.

Apple excels but . . .

Driven by iPhone sales, Apple’s profit rose 31 percent in the third quarter. The forecast, however, raised the question of what it would do to boost sales during the current quarter since a slowdown is expected — by Apple’s standards, anyway. At the same time, as expected, the world’s two biggest oil companies, Exxon Mobil and Chevron, saw their year-to-year revenues plummet thanks to the lower price of oil.

A Q3 slowdown

The government’s first estimate for third-quarter growth was issued last week, a disappointing 1.5 percent after the second quarter’s 3.9 percent. Optimists pointed out that consumer spending rose a healthy 3.2 percent, with the slowdown largely attributable to reduced business spending resulting from an inventory glut. Over the past year, the economy expanded 2.0 percent.

The bright spot

With concerns about growth preoccupying the Fed and investors, housing has remained a bright spot, but last week there was some decidedly mixed news. On the plus side, the S&P/Case-Shiller Home Prices Index for 20 major metropolitan areas was up 5.1 percent in August from a year earlier. The Commerce Department said that sales of single family homes fell 11.5 percent in September to an annual rate of 468,000, the lowest total since November 2014. The total was, however, up 2 percent from a year ago, and during that time the median price has climbed 13.5 percent to $296,900.

In other economic news, the government reported that orders for core capital goods, non-defense capital goods (excluding aircraft) fell 0.3 percent in September after a downwardly revised drop of 1.6 percent in August. Orders for durable goods fell 1.2 percent after dipping 3.0 percent in August. Personal spending gained 0.1 percent in September, the second worst performance of 2015, as income increased a modest 0.1 percent and personal savings rose from 4.7 percent to 4.8 percent. The impact of lower prices at the pump continues to be felt, and the Personal Consumption Expenditure Price Index, the Fed’s main gauge of inflation, fell 0.1 percent for the month and rose just 0.2 percent from last September; the Core Price Index was up 0.1 percent from the month before and 1.3 percent from a year earlier. The Labor Department said that initial jobless claims rose 1,000 to 260,000 for the week ending Oct. 24, while the four-week moving average was down 4,000 to 259,250 for the week ending Oct. 17, the lowest level since December 1973. Lastly, the Conference Board said its Consumer Confidence Index dropped from 102.6 in September to 97.6 in October.

A look ahead

November will begin with more third-quarter earnings news and updates on construction spending, manufacturing and nonmanufacturing indexes, factory orders, vehicle sales, the trade balance, consumer credit and nonfarm productivity. On Friday, the Labor Department will release the unemployment rate for November, expected to be unchanged at 5.1 percent with an estimated 180,000 new jobs having been created.

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.