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Another volatile week for the markets

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

It was another volatile week for stocks, and little wonder, as it was punctuated by mixed earnings news, tumbling oil prices, the run-up to France’s presidential election and new questions about the Trump administration’s agenda after the president seemed to catch even his own team off guard by announcing a tax overhaul on Friday.

As President Trump nears the end of his 100 days in office, which is this coming Saturday, it looks as if he’s going to introduce both a revised health care plan and, as noted, a tax code overhaul. Few details have been offered about either plan, but on Friday, just days after Americans sent their checks to the IRS, Trump said there would be “a big announcement on Wednesday” and his tax plan would include a cut that was “Bigger, I believe, than any tax cut ever.” The president made the announcement from the desk of his Treasury Secretary, Steven Mnuchin, who, earlier that same day, had said a tax overhaul was “way too complicated” and unlikely to happen anytime soon. By Saturday, Mnuchin said the tax reform plan could produce some “short-term issues” for the budget, but it would lead to a much-simplified filing process that would help middle-class Americans “get more money in their pockets.”

There’s one immediate hurdle to any such plan working its way through Congress, however: a government shutdown. Congress gets back to work today after a two-week recess and needs to figure out how to fund the federal government for the rest of the fiscal year, with the money running out on Friday. Though the president said, “I think we’re in good shape” when it comes to funding, he ordered federal agencies to be ready for a shutdown.

The election in France

The French went to the polls yesterday to vote for a new president with four of the 11 candidates in a virtual dead heat and one-third of voters reportedly undecided. Marie Le Pen of the National Front and Emmanuel Macron, a former finance minister and founder of the En Marche party, were the top vote getters, so they’ll advance to a run-off on May 7 (a candidate needed more than 50 percent of the vote to win outright). Le Pen has said she’d hold a referendum on France’s membership in the European Union (EU) if elected, whereas Macron supports staying in the EU. However, even if Le Pen wins in May, a “Frexit” is far from a sure thing as it would have to win parliamentary approval and pass a Brexit-style national referendum.

A “snap” election in Great Britain

Speaking of Great Britain, despite having vowed not to hold an election any time soon, Prime Minister Theresa May announced a “snap” election on June 8 to help shore up parliamentary support as the Brexit negotiations get underway. Her Conservative Party is expected to add seats in the election, giving May a freer hand in the negotiations. May said she had “only recently and reluctantly come to this conclusion,” because “Division in Westminster [i.e., Parliament] will risk our ability to make a success of the Brexit, and it will cause damaging uncertainty and instability in the country.” Meanwhile, in a sign that the Brexit, and inflation, may be having an impact on Britain’s economy, retail sales fell 1.4 percent in the first quarter, the biggest drop in seven years.

China’s GDP rebounds

Stocks had a strong day on Monday after China announced better-than-expected first quarter growth, with gross domestic product (GDP) coming in at 6.9 percent, up from 6.8 percent over the last three months of 2016 and the fastest pace since the third quarter of. 2015. Much of the improvement was attributed to increased government spending and the contribution of the technology sector

The IMF ups its estimate for global growth

Citing a rebound in Emerging Markets, robust investor confidence in the United States, and a revival in global trade, the International Monetary Fund (IMF) upped its estimate for global growth in 2017 to 3.5 percent – growth was 3.1 percent in 2016. The IMF forecast that GDP in the U.S. would be 2.5 percent (after 1.6 percent last year), while developing nations would expand 4.5 percent (compared to 4.1 percent in 2016), and China’s GDP would be 6.7 percent (it was 6.6 percent in 2016).

Existing home sales surge

Analysts and investors have been waiting to see when the strong consumer confidence numbers will translate into positive economic news, especially after the weak retail sales report for March. Last week there were some signs of progress. First, the Conference Board’s Leading Economic Indicators Index (LEI) improved 0.4 percent in March, twice the estimate, and the Conference Board reported that “the gains among the indicators were very widespread.” The LEI is also up 4.9 percent on an annualized basis over the past six months. In addition, the National Association of Realtors reported that existing home sales rose 4.4 percent in March to 5.71 million units, the fastest pace in a decade, despite low inventory. In other economic news, the Federal Reserve reported that industrial production was up 0.5 percent March from February, mainly because utility output jumped 8.6 percent because of colder weather, the biggest such gain in the history of the index. Manufacturing output fell 0.4 percent and capacity utilization advanced 0.4 percent to 76.1 percent. The National Association of Home Builders/Wells Fargo Builder Confidence Index dipped to 68 in April from March’s reading of 71. Housing starts fell 6.8 percent in March from the month before to an annualized rate of 1.21 million, but were up 9.2 percent from March 2016. Building permits in March increased 3.6 percent from February to 1.26 million, up 17 percent from a year earlier. The International Energy Agency said that crude oil inventories were larger than normal for this time of year, sending U.S. crude back below $50 a barrel. And first-time jobless claims for the week ending April 15 rose 10,000 to 234,000; the four-week moving average fell 4,250 to 247,250.

A look ahead

Beyond the president’s plans for health care, taxes and funding the government, this will be a busy week for releases, including first-quarter earnings reports for 190 of the S&P 500. In addition, there will be updates on new and pending home sales, the S&P CoreLogic Case-Shiller Home Price Index, consumer confidence, wholesale and retail inventories, and orders for durable and capital goods. The government will also issue its advance estimate for first-quarter growth, expected to be 1.3 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.


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