U.S. stocks continue recent surge
July 18, 2016
In a jarring week that included yet a another terrorist attack in France, an attempted coup in Turkey and the killing of three police officers in Baton Rouge, American stock indexes continued their recent surge. In fact, both the Dow Jones Industrial Average (DJIA) and S&P 500 reached new highs on four of the five trading days, and the Nasdaq climbed back past the 5,000-point mark.
The bounce wasn't limited to United States indexes. Japan's Nikkei posted its best week in over six years, rising 9.2 percent, and Europe's Stoxx 600 added 3.2 percent. As for perceived safe havens, the yield on U.S. Treasurys rebounded from recent record lows, but Germany's 10-year bond sold at auction with a negative yield of -0.5 percent, a first (though it had traded with negative yields in June).
There are any number of explanations offered for the recent stock market upswing: the Brexit being less disruptive than feared, plenty of new evidence of a healthy U.S. economy, the Federal Reserve's rate-hike plans remaining on hold, the prospect of new fiscal stimulus in Japan after Prime Minister Shinzo Abe's party widened its control of Parliament in the recent election, and promising second-quarter earnings reports from companies such as JPMorgan Chase and Citigroup.
As Great Britain turns
Great Britain wasn't expected to have a new prime minister until September, but when one of the two candidates withdrew from the race, events proceeded at a dizzying pace. By Wednesday, David Cameron had moved out of 10 Downing Street and Theresa May was curtseying to Queen Elizabeth and taking over as her nation's second female prime minister. She then proceeded to overhaul the cabinet, naming Boris Johnson, who had led the Brexit campaign, as Foreign Secretary; dismissing Justice Minister Michael Gove, a divisive Brexiteer who had hoped to be prime minister; and replacing George Osborne as chancellor of the Exchequer with Philip Hammond. May, who had been the home secretary and in the "remain" camp, said she will follow through with the Brexit and focus on issues that were hot buttons for "leave" voters, such as immigration and the wealth gap. She said, "Brexit means Brexit, and we're going to make a success of it," adding, "there will be no attempt to remain inside the EU (European Union)." Meanwhile, the Bank of England (BOE) left its benchmark rate unchanged at 0.5 percent, though there's an expectation that it may act later this summer. The BOE's statement noted, "The overall resilience of the U.K. (United Kingdom) financial system, and the flexibility of the regulatory framework, had allowed the impact of the referendum result to be dampened rather than amplified."
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Uncertainty stemming from Britain's decision to leave the EU prompted the Organization for Economic Cooperation and Development to suspend publication of its monthly economic indicators until September. While Britain indicated it wouldn't initiate Article 50, which officially begins the up-to-two-year process of withdrawal from the EU, until late 2016 or early 2017, the EU was pushing Britain to act sooner rather than later, with its Economic and Financial Affairs Commissioner Pierre Moscovici saying, "The 'leave' vote has surprised the markets and the longer the uncertainty lasts, the costlier it becomes."
China reported that its gross domestic product (GDP) growth during the second quarter was up 6.7 percent from a year earlier, the same pace as in the first quarter. However, there was skepticism about the actual figure because of China's opacity when it comes to economic statistics, the impact of easier access to credit, and the level of government spending involved – it was up 20 percent in June from a year earlier).
Retail sales, inflation and industrial output all rise
As noted, there were a number of signs last week that signaled the good health of the American economy. For example, the Commerce Department reported that retail sales improved a solid 0.6 percent in June from the month before, compared to an increase of 0.2 percent in May, and were up 2.7 percent from a year earlier. Strong consumer spending is expected to drive up second-quarter GDP, with the Federal Reserve Bank of Atlanta now putting it at 2.3 percent compared to 1.1 percent for the first three months of 2016. In a sign that inflation is strengthening, the Consumer Price Index (CPI) was up 0.2 percent in June from the month before; its fourth consecutive month-over-month increase. Over the past year, CPI has been 1 percent. Core CPI, excluding food and energy, rose the same 0.2 percent from May and was up 2.3 percent over the previous year. The Producer Price Index (PPI) gained 0.5 percent in June and 0.3 percent for the last year; core PPI improved 0.4 percent month over month and 1.3 percent over the last year. The Fed said that industrial production climbed 0.6 percent in June from May; its strongest month this year, coming after a decline of 0.3 percent in May. Factory output rose 0.4 percent and capacity utilization was up to 75.4 percent from 74.9 percent in May. In other news, the University of Michigan said that its Consumer Confidence Index fell to 89.5 in July from May's 93.5. Wholesale inventories increased 0.1 percent in May from April. And first-time jobless claims for the week ending July 9 were unchanged at 254,000; the four-week moving average for the week ending July 2 fell 5,750 to 264,750.
The cost of health care
The U.S. government said that per capita spending on health care passed the $10,000 mark for the first time this year, mostly because of Medicare; by 2025, health care spending will total 20 percent of the economy compared to 17.8 percent in 2015.
A look ahead
This week's releases will revolve around the housing market, with updates from the National Association of Home Builders, the latest on housing starts and building permits and a report on existing home sales. Other news will include the Conference Board's Leading Index, consumer comfort and more second-quarter earnings releases.
This commentary was prepared specifically for your wealth management advisor by Northwestern Mutual Wealth Management Company®.
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