U.S. Economic growth remains worrying
The Northwestern Mutual Wealth Management Company — Vail Valley
A strong month for stocks closed with a soft week as investors weighed the Federal Reserve’s latest decision to stand pat. Last week also brought mixed earnings reports and some downright disappointing news about United States economic growth.
Overall, in a month when the Brexit might have sent stocks plummeting, the Dow Jones Industrial Average rose 2.8 percent while reaching a new high seven times; the S&P 500 climbed 3.6 percent and matched the Dow with seven record closes; and the Nasdaq, though still short of its all-time mark, soared 6.6 percent. The yield on the 10-year Treasury fell last week to finish July at 1.458 percent, roughly where it began the month.
As expected, the Fed didn’t raise its benchmark rate on Wednesday. The committee was much more upbeat than it had been in June in the wake of that month’s meager job growth, noting that “near-term risks to the economic outlook have diminished,” and that “the labor market strengthened and that economic activity has been expanding at a moderate rate.” Unlike last month’s vote, this one was not unanimous. Esther George, the president of the Federal Reserve Bank of Kansas City, voted to raise the rate by a quarter-point, and there’s still no consensus on Wall Street about whether or not the Fed will raise its rate this year.
In its statement, the Fed’s generally positive report included the caveat that “business fixed investment has been soft.” On Friday, investors found out just how soft, as weak investment by businesses during the second quarter resulted in gross domestic product (GDP) growth of just 1.2 percent, about half of what had been expected. In addition, first-quarter GDP was revised down to 0.8 percent from 1.1 percent, and it was the third quarter in a row with growth under 2 percent. There was one bright spot, however, as consumer spending rose to 4.2 percent from the previous quarter’s 1.6 percent.
The Nasdaq was the main beneficiary of last week’s earnings news, thanks to strong reports for Alphabet and Facebook that sent their shares northward. Apple’s earnings fell but beat the forecast, and Amazon posted record earnings for the second quarter straight, with profits rising more than 800 percent from a year earlier. As of today, earnings for S&P 500 companies, more than half of which have reported, are expected to drop 3.8 percent from a year earlier according to FactSet –hardly good news, but better than the estimate of -5.3 percent at the end of June.
Oil reverses course
Earnings for oil companies were down across the board, with Exxon Mobil reporting its smallest quarterly profit since 1999 and Chevron its biggest drop in earnings since 2001. In June, the price of oil had rebounded back past the $50-a-barrel mark and seemed to be holding firm, but since then it has reversed course. On Friday U.S. crude finished the week at $41.60, while Brent fell to $42.46.
Japan’s latest steps
At midweek, Japan’s Prime Minister Shinzo Abe announced an injection of more than 28 trillion yen ($265 billion) to stimulate Japan’s faltering economy, but on Friday the Bank of Japan (BOJ) disappointed investors by leaving its rate unchanged at -0.1 percent and by not taking any substantive new stimulus steps. Instead, the BOJ said it would conduct a “comprehensive assessment” of its approach and deliver a review at its next meeting on Sept. 21. After the meeting, the bank’s Governor Haruhiko Kuroda said, “We’ve been pursuing an aggressive monetary policy for three years, and it’s a natural time for a review,” adding, “I wouldn’t say everything has gone badly, but I also wouldn’t say everything has worked well.”
Great Britain’s economy did better than expected in the second quarter, up 0.6 percent. This was the last report from before the Brexit, and GDP is forecast to fall over the last six months of the year, sending the nation back into a recession (commonly defined as two consecutive quarters of GDP contraction). Not surprisingly, manufacturing confidence in July tumbled to -47, according to the Confederation of British Industry, its lowest level since 2009 when Great Britain was in the midst of its last recession.
Around the eurozone
As for the eurozone, the preliminary estimate for second-quarter growth was 0.3 percent, while the unemployment rate for June was unchanged at 10.1 percent. Inflation, meanwhile, unexpectedly ticked up 0.2 percent in July from the month before. Economic confidence rose in July to 104.6 from June’s reading of 104.4 in a sign that the Brexit might not be as calamitous as first thought.
In other news, the government said that new home sales in June increased 3.5 percent from May to 592,000, the best pace since 2008, and were up 25.4 percent from a year earlier. The Pending Home Sales Index rose 0.2 percent to 111 in June from 110.8 in May. The S&P CoreLogic Case-Shiller Home Price Composite Index for 20 metro areas improved 0.9 percent in May (before seasonal adjustments) and climbed 5.2 percent from May 2015. The final University of Michigan Consumer Sentiment Index for July was at 90.0, up from the preliminary 89.5, but down from June’s final reading of 93.5. And first-time jobless claims for the week ending July 23 increased 14,000 to 266,000; the four-week moving average for the week ending July 16 dipped 1,000 to 256,500.
A look ahead
In the wake of the economy’s subpar growth in the second quarter, investors will weigh a number of reports this week that should give them a heads-up for third-quarter GDP, including the latest on construction spending; personal income, spending and credit; vehicle sales; orders for durable and capital goods; the trade balance; and the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes. On Friday, the unemployment report for July will be released, with the jobless rate forecast to fall from 4.9 percent to 4.8 percent.
This commentary was prepared specifically for local wealth management advisors by Northwestern Mutual Wealth Management Company.
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