Will the government run out of money?
The Northwestern Mutual Wealth Management Company – Vail Valley
No one, not even voting members, seems to know when the Federal Reserve will finally raise its benchmark rate. Yet last week investors seemed to brush all of those concerns aside, focusing instead on positive third-quarter earnings reports and driving stocks to their fourth straight week in the black. By week’s end, the S&P 500 had returned to positive territory for 2015 and the Nasdaq moved back over the 5,000-point mark.
Q3 earnings stoke stocks
Though the third quarter’s earnings are still projected to be down year-over-year for the first time since 2009, a number of high-profile companies outperformed last week including Amazon, Alphabet, eBay, GM, McDonald’s and Microsoft. As investors looked to those companies — Microsoft’s stock, for example, soared to a 15-year high — they took the stock indexes with them. Some big names underperformed with Morgan Stanley and Yahoo prominent among them, but those results did little to slow the late-week stock surge.
China acts and the European Central Bank (ECB) girds
China’s third-quarter GDP came in at 6.9 percent, the slowest pace since the first quarter of 2009. While that figure was slightly better than the forecast of 6.8 percent, China’s central bank nonetheless swung into action to pump money into the economy, cutting rates for the sixth time this year while permitting banks to lend more money by lowering the reserve requirement for the fourth time since last November. In an effort to boost household income and spending, the central bank also removed the cap on interest rates that banks can assess for deposits by consumers. The moves were welcomed by Wall Street on Friday, whereas in some quarters they were seen as evidence that earlier stimulus steps have fallen short. The ECB, though it didn’t pull the trigger, said that it was ready to act once more to combat low inflation and sluggish growth. ECB President Mario Draghi said his bank could take new steps such as extending its $1.2 trillion bond-buying program, and might even lower its benchmark rate, already in negative territory at -0.2 percent. “We are ready to act if needed,” he said, “and we are open to the full menu of monetary policy.”
The Fed convenes
The Federal Reserve will meet on Tuesday and Wednesday to set its benchmark rate. No one seems to think it will act, assuming that if the first rate hike since 2006 is going to happen at all in 2015, it will be at the last meeting of the year on Dec. 15 and 16.
A debt ceiling drama
Though he won’t be officially confirmed until this Thursday, Representative Paul Ryan (R, Wisconsin) has agreed to take over the job of Speaker of the House, having gained the endorsement of most of that body’s voting blocs without ceding any of that position’s power. John Boehner (R, Ohio), the man who holds the post until the end of next week, reportedly hopes to negotiate a debt-ceiling deal to keep the government running before he leaves office. First, he has to win over enough republicans in the House to pass a “clean” bill (that is, one without conditions) that raises the government’s borrowing limit above the current $18.1 trillion. That seems like a long shot based on the fact that last week the House passed a budget reconciliation plan that overturns the Affordable Health Care Act and Planned Parenthood, a bill which will certainly be vetoed by the president should it get through the Senate. In fact, the government postponed an auction of two-year Treasury’s scheduled for tomorrow for fear of exceeding the debt limit, presumably increasing the pressure on Congress to get a deal done.
A plan for Puerto Rico?
The White House came up with a plan to help Puerto Rico get out from under its $72 billion debt load. However, it was met with a chilly reception from both sides of the aisle in the Senate where the plan’s math and logic were challenged. The proposed plan, not officially a bailout, would restructure Puerto Rico’s debt and provide ongoing fiscal oversight.
Housing starts spike upwards
The Commerce Department said that housing starts were up 6.5 percent in September to a seasonally adjusted annual rate of 1.21 million, with a 17 percent rise in multifamily housing accounting for most of the increase. Building permits fell 5 percent to an annual rate of 1.1 million. The National Association of Home Builders/Wells Fargo Index of builder sentiment climbed to 64 in October from 61 last month, the highest reading since October 2005. Additionally, the National Association of Realtors reported that existing home sales increased 4.7 percent to an annual rate of 5.55 million in September as the median price was up 6.1 percent from a year ago. First-time jobless claims rose 3,000 to 259,000, the Labor Department announced. However, they were still near a 40-year low, and the four-week moving average dipped 2,000 to 263,250, its lowest point since December 1973.
A look ahead
This final week of October will be packed with key releases, not to mention the fact that the Fed will meet, there will be more third-quarter earnings news and the government may be unfunded come Nov. 3, assuming the Treasury department’s calculations are correct. The run of releases will include the latest on new and pending home sales, the S&P/Case-Shiller Home Price Index, durable and capital goods orders, consumer confidence, personal income and spending and the government’s first estimate for third-quarter GDP, which is expected to come in at 1.9 percent following a revised final reading of 3.9 percent for the second quarter.
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.
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