Stocks post first weekly decline in a month |

Stocks post first weekly decline in a month

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

The major stock indexes were down for the first time in a month last week after some solid, if not spectacular, economic reports seemed to have persuaded investors that the Federal Reserve will indeed raise its benchmark this year.

As the reality of a messy Brexit took hold, the pound tumbled to a 31-year low against the dollar. The yield on the 10-year Treasury, meanwhile, rose to a four-month high.

The run of positive economic news began early last week when the Institute for Supply Management’s (ISM) Manufacturing Index rebounded from its recent dip into contraction in August at 49.4 and climbed to 51.5 in September; the ISM New Orders Index jumped from 49.1 to 55.1. These prompted Loretta Mester, the president of the Federal Reserve Bank of Cleveland and a “hawk” to say the time had come to raise the Fed’s rate. (At week’s end, the CME Group put the odds of a hike in 2016 at 66 percent). Then the ISM’s Non-Manufacturing Index came in at 57.1 from 51.4 in August, the largest gain in the index’s almost 20-year history. And on Friday, the Labor Department announced that 156,000 new jobs had been created in September, below the forecast of 170,000, but enough to create positions for first-time entrants to the workforce. The unemployment rate rose from 4.9 percent in August to 5 percent, but only because 444,000 people had joined the labor force (those working and those looking for work), a positive sign from the Fed’s standpoint. In fact, over the past year, 3 million people have joined those ranks, the highest yearly gain since 2000 (during the boom). And the labor force participation rate has risen over the last year from 62.5 percent to 62.9 percent, still well below the 66 percent it was at before the recession, but a marked improvement

In yet another good sign, the four-week moving average for first-time jobless claims for the week ending Sept, 24 was 253,500, its lowest level since 1973.

A harder Brexit?

On Oct. 2, Britain’s Prime Minister Theresa May finally announced that the up-to-two-year process of withdrawing from the European Union (EU) – the Brexit – would begin in early 2017, but she also took a firm stand on controlling the flow of immigrants in and out of her country, a key criterion for EU membership. Over the following week, European leaders pushed back – and pointedly – which contributed to the pound’s drop on Friday (including a 6 percent dip in less than three minutes that was blamed on electronic trading). France’s President François Hollande took a hard line, saying, “The UK wants to leave but pay nothing. That’s not possible. There needs to be a threat, there needs to be a risk, there needs to be a price.” And Germany’s Chancellor Angela Merkel said that restricting the free movement of people would pose “a systematic challenge for the entire European Union.” It didn’t help when Boris Johnson, Britain’s controversial foreign secretary told The Sun, “Our policy is having our cake and eating it too.” Earlier in the week, Philip Hammond, chancellor of the Exchequer, had presciently warned his countrymen to expect “turbulence” because of the Brexit, and said the government would take “whatever steps are necessary” to protect the economy.

Oil’s rise and fall

The price of a barrel of both United States and Brent crude finally made it past the $50 mark last week in the wake of the recent announcement by the Organization of the Petroleum Exporting Countries (OPEC) that it planned to limit production, but that climb was reversed on Friday when Russia’s Oil Minister Alexander Novak said that his meeting with OPEC in Istanbul next week “will just be consultations.” U.S. crude dipped to $49.81 on Friday (though it gained 3.3 percent for the week) – according to The Wall Street Journal, the last time it closed the week over $50 a barrel was back in July 2015.

The IMF on trade and Lew on China

In its World Economic Report, the International Monetary Fund (IMF) warned that slowing economic growth could lead to an anti-trade backlash, noting, “It is vitally important to defend the prospects for increasing trade integration. Turning back the clock on trade can only deepen and prolong the world economy’s current doldrums.” The IMF forecast growth in emerging countries at 4.1 percent in 2016, but only 1.6 percent in developed countries and also for U.S. gross domestic product (it had been put at 2.1 percent in July). Then, at the semiannual meeting of the IMF and World Bank in Washington, D.C., China came in for some heat regarding its rising debt load and failure to implement economic overhauls. Treasury Secretary Jacob Lew said, “When you don’t have market forces driving investment, when you don’t have bad investments allowed to fail, you end up with resources allocated in a way that ultimately chokes the future of economic growth.”

In other news, Autodata reported that vehicle sales fell 0.5 percent in September from a year earlier to a seasonally adjusted annual rate of 17.76 million with 1.44 million vehicles sold last month. Construction spending dipped 0.7 percent in August from the month before. CoreLogic said that home prices, including distressed sales, were up 6.2 percent in August from a year earlier, the 55th consecutive year-over-year gain. The trade balance was $40.7 billion in August compared to $39.5 billion in July. Factory orders increased 0.2 percent in August from the month before; orders for durable goods climbed 0.1 percent. Wholesale inventories declined 0.2 percent in August from July. And first-time jobless claims for the week ending Oct.1 fell 5,000 to 249,000, while, as noted, the four-week moving average for the week ending Sept.24 dropped 2,500 to 253,500.

Finally, Mylan will pay a $465 million fine after settling with the Justice Department for overcharging Medicaid and Medicare for its EpiPen.

A look ahead

This week’s reports will include the latest on small business optimism, advance retail sales, the Producer Price Index, consumer confidence and business inventories, as well as the minutes of the Fed’s meeting on Sept. 20 and 21. The coming week is the start of the third-quarter earnings season, with FactSet estimating that earnings will fall 2 percent from a year earlier.

This commentary was prepared specifically for local wealth management advisers 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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