Volatility holds interest rates stable | VailDaily.com

Volatility holds interest rates stable

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

Stocks closed out a rough month on a high note with the S&P 500 and the Dow Jones Industrial Average (DJIA) both gaining 2.5 percent on Friday, partly because the Bank of Japan, in an effort to spur lending, said it was going to charge a negative interest rate of 0.1 percent on some of the cash reserves it holds for banks.

On the same day, Brent crude, volatile all week, rose 2.5 percent, and United States gross domestic product (GDP) growth for the fourth quarter came in at 0.7 percent. This is hardly robust but nonetheless slightly above the expected 0.5 percent — some analysts had forecast a contraction. However, in a sign that investors are far from confident, the yield on the 10-year Treasury, which often rises along with stocks, fell to 1.92 percent, its lowest level since April, and not without reason as, during a volatile and high-volume month, the DJIA and the S&P 500 fell 5 percent while the Nasdaq lost 8 percent.

In deciding to charge a negative interest rate, the Bank of Japan followed in the footsteps of the European Central Bank and Sweden, Denmark and Switzerland, adopting a stimulus strategy that until recently had been all but untried. The vote was a close 5-4 and the central bank noted that it was not acting because of Japan's economy, which it said "has continued to recover modestly," but because of outside influences — the slowdown in China and the precipitous decline in oil prices. The bank also cut its forecast for core CPI in 2016 from 1.4 percent to 0.8 percent and now projects it will hit its 2 percent inflation target during the first half of fiscal 2017.

Fed stands pat, for now

Japan's move came in the same week that the Federal Reserve met and, as anticipated, did not raise its benchmark rate, though the bank indicated it remained on track to do so again in the near future pending economic good health, possibly as soon as its next meeting in March. The Fed's post-meeting statement noted the recent stock market turmoil and slower growth, but in recent speeches both its Vice Chairman Stanley Fischer and William Dudley, president of the Federal Reserve Bank of New York, have said they don't think economic conditions have changed much since the Fed decided to hike its benchmark rate in December, the first increase since 2006.

Oil's ups and downs

Recommended Stories For You

As for oil, an ongoing saga of late, its ups and downs drove the market for most of last week as did reports that the head of Russia's oil monopoly Gazprom would meet with representatives of Organization of the Petroleum Exporting Countries to discuss cutting production (and with good reason: tumbling oil prices took enough of a toll on Russia's economy for GDP to have declined 3.7 percent last year). By week's end, both the price of a barrel of U.S. and Brent had bounced back, for the moment, closing at $33.62 and $34.74, respectively. For the month of January, U.S. crude tumbled 9 percent, but rebounded from the 12-year low of $26.25 it hit on Jan. 20.

GDP growth

The first of three readings for fourth-quarter growth came in at 0.7 percent because of the stronger dollar, as well as reduced business investment and smaller inventories. This came after a 2 percent expansion in the third quarter and 3.9 percent in the second. The bright spot was consumer spending which increased 2.2 percent in the fourth quarter and 3.1 percent for 2015, the biggest year-over-year increase since 2005. For all of 2015, GDP expanded 2.4 percent, the same as in 2014 and more or less where it's expected to finish in 2016 as well.

Great Britain and the European Union

After meeting with EU officials in Brussels about the terms over which Great Britain would stay in the EU, Britain's Prime Minister David Cameron, who has pledged to bring his country's membership to a national referendum, said, "There's a proposal on the table. It's not good enough; it needs more work, but we are making progress."

Complications for China and Japan

As if China and Japan didn't have enough to worry about, two prominent economic officials stepped down under clouds last week. In China, where there's already skepticism over the accuracy of official economic data, Wang Baoan, the director of the National Bureau of Statistics, was arrested for unspecified "serious violations" — he had been on the job for less than a year. Plus in Japan, Akira Amari, one of the architects of Prime Minister Shinzo Abe's economic revitalization plan, resigned after he reportedly accepted a payoff from a construction company in return for political favors.

In other economic news, the Commerce Department said that new home sales, driven by unseasonably warm weather, rose 10.8 percent in December to a seasonally adjusted annual rate of 544,000, the highest total since February 2015. For 2015, sales advanced 14.5 percent from the year before to 501,000. The National Association of Realtor's Pending Home Sales Index improved 0.1 percent to 106.8 in December and it was up 4.2 percent from a year earlier. The S&P/Case-Shiller Home Price Index for 20 major metro markets increased 5.8 percent in November from November 2014 after an increase of 5.5 percent the month before. The Commerce Department reported that orders for durable goods fell 5.1 percent in December from the previous month compared to a drop of 0.5 percent in November, mainly because the demand for commercial aircraft plummeted 29.4 percent, though, excluding transportation, orders still fell 1.2 percent. Orders for non-defense capital goods were down 4.3 percent. First-time jobless claims dipped 16,000 to 278,000 for the week ending Jan. 23; the four-week average fell 2,250 to 283,000 for the week ending Jan. 14. In addition, the Conference Board's Consumer Sentiment Index hit 98.1 in January, a three-month high. 

A look ahead

The first week of February will be a busy one when it comes to economic updates, with the long list including the latest on personal income and spending, the Institute for Supply Management's Manufacturing Index and Non-Manufacturing Index, construction spending, vehicle sales, nonfarm productivity, factory orders, consumer credit and the trade balance. On Friday, the Labor Department will release the jobless rate for January, expected to remain unchanged at 5 percent.

This commentary was prepared specifically for your wealth management advisor 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.