Bond yields continue to rise |

Bond yields continue to rise

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

The stock market’s post-election rally continued at the beginning of last week, with the Dow Jones Industrial Average reaching new highs on Monday and Tuesday to make it four record days in a row.

That streak ended on Wednesday and the index finished barely in the black for the week, gaining 0.1 percent, while the S&P 500 rose 0.8 percent. The Nasdaq, meanwhile, hit an intraday all-time high on Friday. The yield on bonds, however, continued to rise as investors anticipated that president-elect Trump would increase spending, cut taxes and undertake trade and regulatory reforms that would boost growth and inflation. According to The Wall Street Journal, the yield on the 10-year Treasury had its worst two-week stretch since 2001 on its way to closing at 2.337 percent on Friday, a 12-month low.

Yellen weighs in

Though the next president dominated last week’s headlines as he began to announce his cabinet, on Friday investors turned their attention to Capitol Hill for another reason: Janet Yellen, the chairwoman of the Federal Reserve, appeared before Congress’ Joint Economic Committee. Addressing whether or not the Fed was ready to raise its benchmark rate, Yellen said, “I do think the economy is making very good progress toward our goals.” She continued to say that the first increase since December of last year “could well become appropriate relatively soon.” According to the CME Group, the odds of a hike at the Fed’s December meeting are now better than 90 percent. She also weighed in more generally on the post-election stock rally and Trump’s plans, saying, “We don’t know what’s going to happen. There’s a great deal of uncertainty.” In addition, when asked about the possibility that the Dodd-Frank Act enacted after the financial crisis would be dismantled by the new president and Congress, Yellen said she would not want to see the “clock turned back” on improvements that have been put into place.

Italy’s referendum, Germany’s GDP

While the European Union (EU) is still pondering the impact of the Brexit and what Trump’s election may mean for trade, it has another referendum to worry about. On Dec. 4, Italians will vote on a plan to speed up the passage of bills and create more stability in a country notorious for its byzantine political processes. Italy’s Prime Minister Matteo Renzi has pushed for the referendum and pledged to step down if it’s not passed, adding to the eurozone’s turmoil as Italy also tries to address the ill health of its debt-ridden banks. In addition, a “no” vote could open the door for the Five Star Party, which wants to hold a referendum on Italy’s membership in the EU. There was some good news for Italy, however, as its economy expanded 0.3 percent in the third quarter, more than anticipated. But Germany’s gross domestic product (GDP) growth slowed to 0.2 percent in the same quarter, its lowest level in a year.

Japan’s surprise

Japan’s GDP unexpectedly rose 2.2 percent in the third quarter on an annualized basis, more than tripling the rate of the second quarter, and a surprise given the fact that, according to The New York Times, it has averaged less than 1 percent growth over the last two decades. The increase was largely the result of a weaker yen leading to a 2 percent rise in exports; consumer spending, in contrast, rose a paltry 0.1 percent (actually above the forecast). Even so, it was the third straight quarter of growth for the world’s third largest economy.

Oil rebounds, again

The price of oil rebounded from its three-week losing streak, partly because the Organization of the Petroleum Exporting Countries may in fact curb production – though the prospects for its doing so seem to change on a near-daily basis. On Tuesday alone the price of a barrel of both United States and Brent crude jumped almost 6 percent, and by week’s end they were at $45.69 and $46.86, respectively.

Retail sales rise

As we head towards Black Friday’s hoped-for spending spree, the government reported that retail sales were up 0.8 percent in October from the month before (an upwardly revised gain of 1 percent) and were 4.3 percent higher than in October 2015. As for this coming long weekend of shopping, the National Retail Federation said it is expecting 137.4 million Americans to hit the streets or the internet, perhaps in their relief that the election is over and the world has not come to an end, compared to 135.8 million last year. In other economic news, the Conference Board said that its Leading Index of Economic Indicators for October was up 0.1 percent after rising 0.2 percent in September. Business inventories improved 0.1 percent in September from August. The Producer Price Index was flat in October from the month before and up 0.8 percent over the past year; Core Producer Price Index (CPI), less food and energy, fell 0.2 percent in October and rose 1.2 percent over the previous 12 months. The Consumer Price Index increased 0.4 percent in October and 1.6 percent from a year earlier; core CPI was up 0.1 percent month over month and 2.1 percent year over year. Industrial production was unchanged in October from September, though manufacturing climbed 0.2 percent; capacity utilization was 75.3 percent. Housing starts soared 25.5 percent in October from the month before to 1.3 million, while building permits inched up 0.3 percent to 1.2 million. And first-time jobless claims for the week ending Nov. 12 fell 19,000 to 235,000, their lowest level since 1973; the four-week moving average for the week ending Nov. 5 dipped 6,500 to 253,500.

A look ahead

This week’s updates will include the latest on existing and new home sales, orders for durable and capital goods, consumer sentiment, the advance trade balance, and wholesale and retail inventories. In addition, investors may get a preview of the Fed’s plans when the minutes of its November meeting are released. The stock and bond markets will be closed on Thursday and shut down early on Friday.

Have a healthy and happy Thanksgiving.

This commentary was prepared specifically for local wealth management advisors 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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