Vail Daily column: Financial markets remain volatile
About this report
This market report was prepared by Northwestern Mutual Wealth Management for use by local advisers Ken Armstrong, Shane Fleury and Steve Shanley. They can be reached at 970-328-7526.
Although we saw plenty of positive news about the American economy last week, including an upbeat assessment by the Fed and reports of rising consumer spending and confidence, nerves took hold. This led to a volatile and mostly downward run that closed out the worst month for the S&P 500 and the Dow since January of 2014, as they were off 3.1 and 3.7 percent, respectively. Meanwhile, investors continued to take refuge in bonds, with the yield on the 10-year Treasury falling to 1.68 percent – it began 2015 at 2.17 percent.
On Jan. 27, the Fed had its first meeting of the year and issued what many saw as its most positive assessment since the recession began, noting that “economic activity has been expanding at a solid pace,” while citing, “strong job gains.” Even so, the Fed said that it would remain patient when raising its benchmark rate because of the slow pace of inflation. It’s not expected to raise that rate until its June meeting at the earliest.
A few days later, there were signs that the economy ran into some headwinds when the government announced that fourth-quarter GDP was 2.6 percent, below the forecast of 3.1 percent and about half of the 5 percent rate in the third quarter. The silver lining was that consumer spending, boosted by job growth and cheap gas, rose 4.3 percent, the fastest clip since 2006. However, capital investment by businesses slowed and the trade gap widened because of the stronger dollar as imports outpaced exports, a trend not likely to end anytime soon. For all of 2014, GDP grew 2.4 percent, and it’s expected to expand around 3percent this year.
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At odds in Washington
President Obama backed down from the plan to eliminate the tax break for the 529 college savings program that he announced during his State of the Union address after pressure from both parties. He thought the program provided too much of a tax advantage for wealthier families and wanted to refocus on helping the middle class. In addition, the Senate passed the Keystone XL pipeline, as expected, which the president has pledged to veto. The field of potential GOP presidential candidates thinned as Mitt Romney announced that he would not run.
Greece keeps ‘em guessing
After a decisive win, the leftist – and anti-austerity – Syriza Party took power in Greece, quickly forming a ruling coalition with a far-right party and Alexis Tsipras as prime minister. The nation’s stock and bond markets reeled, while the new government kept the rest of the eurozone guessing, first objecting to new sanctions against Russia (the vote has to be unanimous) and then agreeing. Yanis Varoufakis, the new finance minister, who has referred to austerity as “fiscal waterboarding,” ended the week by saying he would not meet with the auditors of the troika (the ECB, IMF and European Commission), who he described as “anti-European.” The troika is not without leverage, however, the nation needs the next tranche of bailout money to keep the government running and pay its debt obligations.
Russia’s woes continue
Russia had another rough week. It faced a new round of sanctions, having its credit rating lowered to junk by Standard & Poor’s, and then unexpectedly cutting its benchmark rate from 17 percent to 15 percent as banks were being punished by the high rate of interest.
While fourth-quarter earnings reports have been by-and-large disappointing, Apple posted what The Wall Street Journal called a “quarter for the ages,” driven by sales in China. How good was it? According to S&P Capital IQ, Apple’s net profit of $18 billion for the quarter, which ended on Dec, 27, was more than 435 of the S&P’s 500 companies have made in total profits since 2009. One caveat was the increasingly strong dollar, which Apple said knocked four percentage points off revenue growth. Microsoft, Procter & Gamble and Caterpillar, three companies with large overseas interests, all blamed the strong dollar for a poor quarter.
Oil and other newsd
Though the price of a barrel of U.S. crude jumped 8.3 percent Jan. 30, the biggest one-day rise in almost three years, the low price of oil is taking its toll on energy companies. ConocoPhillips, the nation’s third largest oil and gas producer, lost money for the first time since 2008, and the current quarter is expected to be worse still for energy companies.
In other news, the Commerce Department said that orders for core capital goods fell 0.6 percent in December: the forecast was for a 0.5 percent gain. Overall, orders for capital goods dipped 3.4 percent, the fifth straight monthly drop. The S&P/Case-Shiller home price index for 20 metro areas was up just 4.3 percent in November from a year earlier, the lowest reading since October 2012. The Conference Board announced that consumer sentiment in January was at its highest point since 2007, and the Thomson Reuters/University of Michigan consumer confidence index hit its highest level since 2004. The Commerce Department said that sales of new single-family homes rose 11.6 percent in December from the month before, to their highest level since 2007. First-time jobless claims plummeted 43,000 to 265,000, the lowest level since April 2000, though the total was impacted by the Martin Luther King, Jr. holiday.
Finally, Yahoo announced a tax-free spinoff of its stake in Alibaba, the Chinese internet giant, which accounts for about $40 billion of the company’s total market value of $47 billion.
A look ahead
This week will be a big one for economic updates, including the latest on personal income and spending, consumer credit, reports on U.S. manufacturing and nonmanufacturing from Markit and the ISM, factory orders, construction spending, vehicle sales, nonfarm productivity and the trade balance. On Monday, President Obama will unveil his budget, and on Friday, the Labor Department will release the unemployment rate for January, expected to dip from 5.6% to 5.5%.
This commentary was prepared specifically for local wealth management advisers 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.