Stocks still in shaky territory

By the middle of last week, the S&P 500 was zeroing in on its nominal high and the Dow Jones Industrial Average (DJIA) had eased back over the 18,000-point plateau. But then, whether it was second (or third) thoughts about the Federal Reserve’s next steps, or fear of the impending vote on the “Brexit,” stocks beat a hasty retreat.

When the dust had cleared, the S&P 500 was down for the week while the DJIA advanced a mere 0.3 percent. Oil had a volatile week as well, with the price of both United States and Brent crude reaching a 2016 high on Wednesday before tumbling on Friday, helping to pull the major indexes down.

Meanwhile, the yield on the 10-year Treasury, a safe haven, dipped to 1.64 percent, its lowest level in three years, taking bank stocks down with it. The shift from risk wasn’t restricted to our shores; the yield on 10-year government issues in Japan, Germany and Great Britain hit new all-time lows, with Japan dipping further into negative territory and Germany moving to the brink with a yield of 0.01 percent. Earlier in the week, in a sign of the high demand, the $20 billion sale of 10-year Treasurys attracted a record 73.6 percent in indirect bidding.

Great Britain and the European Union

Voters will go to the polls to decide whether or not Great Britain remains in the European Union on June 23, a week from this Thursday. The latest polls showed the “leave” camp in the lead, possibly spurred by the recent report of the surge of 333,000 immigrants to Britain’s shores in 2015, a hot button for the “leave” camp despite the fact that foreign workers pay higher taxes.

Support Local Journalism

Donate

The Fed’s timetable

With the Brexit vote on the near horizon and May’s disappointing unemployment report still stinging — a mere 36,800 new jobs were created — no one is expecting the Fed to raise its rate when it meets this Tuesday and Wednesday. Investors will nonetheless tune in to hear what Chairwoman Janet Yellen has to say in her post-meeting press conference. Last Monday, Yellen spoke in Philadelphia at the World Affairs Council, and while she conceded that the jobs report was “concerning” she added, “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.” She indicated that while a June hike was unlikely, it could happen in July or September if “incoming data” remain “consistent.” Regarding the Fed’s timetable, she added, “There is, as I said about 18 times, no preset plan.” She also weighed in on the Brexit, saying, “The uncertainties are sizeable.”

China and overproduction

Last week, the U.S. and China held their annual Strategic and Economic Dialogue in Beijing. The two sides had a high-profile disagreement about China’s excess industrial capacity and its impact on global markets, leading to market gluts and depressed prices, for steel and aluminum among other products. Treasury Secretary Jacob Lew said, “Excess capacity has a distorting and damaging effect on global markets,” but his opposite number in China, Finance Minister Lou Jiwei, pushed back, saying that the West should stop complaining because China expanded its production during the Great Recession and boosted global growth with the West’s approval. “At that time, the whole world applauded and thanked China,” Lou said. “Now they’re saying that China has a production glut that is a drag upon the world. But what did they say at the time?” Even so, China restated a promise to cut steel capacity which hit an estimated 600 million tons last year, double the amount in 2007.

Dodd Frank in peril?

Representative Jim Hensarling (R, Texas), the chairman of the House Financial Services Committee, unveiled a House plan to undo the 2010 Dodd-Frank Act which was designed to increase oversight of the banking industry in the wake of the Great Recession. “Simply put, Dodd-Frank has failed,” he said, adding, “It’s time for a new legislative paradigm in banking and capital markets.” Representative Sherrod Brown (D, Ohio), the top democrat on the committee, said the new plan “underscores the collective amnesia of many in Congress and on Wall Street about how devastating the financial crisis was for an entire generation of working and middle-class Americans.”

The World Bank cuts its growth estimate

The World Bank downgraded its outlook for global growth in 2016 from 2.9 percent (its January forecast) to 2.4 percent, which it characterized as “insipid.” The bank also lowered its forecast for U.S. growth to 1.9 percent from 2.7 percent. Meanwhile, first-quarter gross domestic product (GDP) for both Japan and the eurozone came in slightly above previous estimates, with Japan at 1.9 percent compared to the original 1.7 percent, while the eurozone was 0.6 percent, up from 0.5 percent. The University of Michigan’s Current Conditions Index hit an 11-year high of 111.7 in June, but, overall, consumer sentiment fell to 94.3 from 94.7 in May. The Fed said that total household wealth reached a record of $88.1 trillion in the first quarter, with home values rising by $498 billion to offset a decline of $160 billion in the value of equities. The federal budget deficit rose by $53 billion in May and totaled $479 billion over the past year, 16 percent higher than it was for the same period from a year earlier. Lastly, first-time jobless claims for the week ending June 4 declined 4,000 to 264,000; the four-week moving average for the week ending May 28 was 269,500, down 7,500 from the week before.

A look ahead

In addition to the Fed’s meeting, this week we will see updates on small business optimism, retail sales, business inventories, the Producer and Consumer Price Indexes, industrial production and capacity utilization, the current account balance, building permits and housing starts.

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.