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Stocks weather jumpy conditions

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

During the first three months of 2016, the price of crude oil soared and sank more than once. China continued its ham-fisted efforts to engineer a “soft landing.” Concern arose about a new American recession triggered by a global slowdown and the strength of the dollar. Terrorists attacked Brussels. In addition, Federal Reserve committee members publicly debated when they would, or would not, raise their benchmark rate, all against the backdrop of a raucous presidential campaign.

Little wonder, then, that the Dow Jones Industrial Average (DJIA) and S&P 500 were at one point down at least 10 percent each. However, last week stocks closed out the first quarter with a strong performance, buoyed by the Fed’s commitment to proceed with caution when it came to raising its benchmark rate along with encouraging reports on jobs and manufacturing, The DJIA and S&P 500 bounced back from their February lows to finish in the black for the quarter as both hit their highs for the year. At the same time, the yield on the 10-year Treasury fell to 1.793 percent last week as some investors hedged their bets by moving into bonds.

Yellen speaks

Last week’s rally began in earnest on Wednesday after the Fed’s Chairwoman Janet Yellen spoke at the New York Economic Club and told investors just what they wanted to hear: that the economy was on solid ground, but that the Fed would nonetheless err on the side of caution when it came to raising its rate this year. Yellen said the economy proved to be remarkably resistant and said, “I consider it appropriate for the committee to proceed cautiously in adjusting policy.” She also said the return to the Fed’s target of 2 percent inflation could take longer than expected “and might require a more accommodative stance of monetary policy.”

More jobs, manufacturing rebound

On Friday, there was plenty of evidence to support Yellen’s assessment of the American economy. First, the Labor Department announced that 215,000 jobs had been added in March —that makes 2.8 million over the past year — and even though the household survey rate inched up from 4.9 percent to 5 percent, it was for the best possible reason: more people were looking for jobs. Furthermore, the labor force participation rate ticked up from 62.9 percent to 63 percent, its highest level in two years. On the same day, the Institute for Supply Management (ISM) reported that its Manufacturing Index rose to 51.8 in March, the first increase in five months and up from February’s 49.5 (any reading above 50 indicates expansion). The ISM’s New Orders Index jumped to 58.3 from February’s reading of 51.5.

Crude oil tumbles

The price of crude tumbled late last week after Mohammed bin Salman, Saudi Arabia’s Deputy Crown Prince, said that his nation would only freeze production if other countries, including Iran, agree. However, Iran is considered unlikely to do so having only recently been freed from economic sanctions. U.S. crude fell 4 percent to $36.79 on Friday and was off 6.8 percent for the week.

Puerto Rico balks

The House plan to help Puerto Rico get out from under its $72 billion debt load in exchange for increased oversight was not warmly received by Puerto Rico, with Governor Alejandro García Padilla saying it was “shameful and degrading,” while Eduardo Bhatia, the president of Puerto Rico’s Senate, said it evoked “the worst colonial subjugations.”

China gains ground

There were two upbeat reports about China’s economy last week, indicating its fiscal and stimulus policies may start having a positive effect. First, the profit of China’s major industrial firms climbed 4.8 percent in the first two months of this year compared with a year earlier, reversing a decline at the end of 2015. Among industrial companies with annual revenue of more than ¥20 million yuan, profit totaled ¥780.7 billion in January and February, the National Bureau of Statistics said. In addition, China’s official factory gauge showed improving conditions for the first time in eight months, rising to 50.2 in March, its highest level since November 2014.

New stimulus for Japan?

A day after parliament passed a record budget for the fiscal year starting April 1, Japan’s Prime Minister Shinzo Abe said he was considering a new economic stimulus package prior to this summer’s elections.

In other economic news, the government reported personal consumption expenditures (PCE) rose 0.1 percent in February, and January’s reading of 0.5 percent was revised down to 0.1 percent. Adjusted for inflation, spending climbed 0.2 percent. Core PCE, less food and energy, was up 0.1 percent month over month; for the past year, it rose 1.7 percent. Personal income increased 0.2 percent from the month before. On the housing front, the National Association of Realtors Pending Home Sales Index rose 3.5 percent in February to 109.1, a seven-month high, and was up 0.7 percent from a year earlier. The Standard & Poor’s/Case-Shiller Home Price Index of 20 cities improved 5.7 percent from a year earlier in January. The Commerce Department reported that construction spending was off 0.5 percent in February after a 2.1 percent gain in January. The University of Michigan said that Consumer Confidence declined from 91.7 in February to 91 in March, its lowest level since October. However, the Conference Board’s Consumer Confidence reading for March was 96.2 after 94 in February. Lastly, the Labor Department reported that first-time jobless claims were up 11,000 to 276,000 for the week ending March 26; for the week ending March 19, the four-week moving average rose 3,500 to 263,250.

A look ahead

This week’s releases will include the latest on factory orders, durable and capital goods, the trade balance, wholesale inventories, consumer credit and the ISM’s Non-Manufacturing Index. In addition, the Fed will release the minutes of its meeting of March 15 and 16.

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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