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Vail Daily column: Jobs report slows stocks

This week’s report...

Is provided by Ken Armstrong, Shane Fleury and Steve Shanley, the Vail Valley representatives of Northwestern Mutual Wealth Management Company. To learn more, call 970-328-7526.

In a week when stocks soared, it took a glowing jobs report to slow things down. Investors see it as a sign that the Fed might act sooner, as in June, rather than later, as in waiting until September, to start raising its benchmark rate. Even so, both the S&P 500 and the Dow gained 3 percent last week, with the latter posting its biggest weekly gain since January 2013, up 3.8%. However, on Friday, as stocks fell, the yield on Treasuries surged, with the 10-year seeing its largest one-day jump since November 2013.

By almost every account, Friday’s jobs report was one of the most positive in years, not just because of the number of jobs added – 257,000, well above expectations – but also because of higher wages. Average hourly earnings rose 0.5 percent in January and 2.2 percent over the last year, low by historical standards, but comfortably above the current rate of inflation. The household survey rate ticked up to 5.7 percent from 5.6 percent, because 700,000 people joined the ranks of job-seekers, a sign of confidence in the economy’s recent revival. In addition, thanks to upward revisions for November and December, the average number of jobs created in the last three months was a robust 336,000, adding up to the best stretch since 1997.

The president’s budget

The president’s budget was released Feb. 2, a package adding up to $4 trillion for the 2016 fiscal year, including new services and tax credits for the middle class to be financed by higher taxes on corporations and wealthy Americans. Appearing on CNN, President Obama said of the budget, “I want to work with Congress to replace mindless austerity with smart investments that strengthen America.” Needless to say, any plan that includes tax hikes is unlikely to get anywhere in the GOP-controlled Congress. As if to underscore that point, last week the House voted once again to repeal the president’s healthcare law.

The Greeks on tour

The Greek drama riveted Europe as the nation’s new leaders toured European capitals in an effort to renegotiate the terms of their debt – all €240 billion of it. Yanis Varoufakis, the new finance minister, received a cold reception in Brussels, where the ECB announced that it was cutting off direct funding to Greek banks by no longer accepting Greek bonds as collateral for loans. The reception in Berlin was even chillier when Varoufakis met with Germany’s Finance Minister, Wolfgang Schäuble, widely seen as the architect of austerity, who gave no ground as the two exchanged barbed comments and couldn’t even agree to disagree. To make matters worse, S&P cut Greece’s credit rating further into the junk zone, down to B-.

At week’s end, however, the Greeks upped the ante when Economy Minister George Stathakis told The Wall Street Journal that his country might soon be broke because of lower tax receipts. “We will have liquidity problems in March if taxes don’t improve,” he said, “Then we’ll see how harsh Europe is.” Should Greece go broke, it’s likely to not only renege on its debt payments but also leave the eurozone, the dreaded “Grexit.” Eurozone officials have called a special meeting for Feb. 11 to discuss next steps. Back in Athens, Prime Minister Alexis Tsipras took a more conciliatory tack Feb. 8, but also said his country would not seek to extend the bailout program.

China’s PMI falls into the red

The Chinese government’s purchasing managers’ index fell to 49.8 in January from 50.1 in December, dropping below the 50-point mark that indicates expansion. The slide follows the biggest weekly stock market drop in a year and the release of fiscal data that showed the weakest revenue growth since 1991.

Australia joins the parade, the BOE stands pat

The Reserve Bank of Australia cut its benchmark rate to a new low of 2.25 percent, joining a dozen of its global counterparts who’ve loosened their policies over the past month to stave off deflation. The Bank of England bucked that trend, however, leaving its rate at a record low of 0.5 percent.

Car sales remain strong; the trade gap widens

Vehicle sales were up 13.7 percent in January from a year earlier, a slower pace than in December, one of the best months in years, but well above last January’s pace when sales were hindered by poor weather. For the month, 1.15 million vehicles were sold, an annual rate of 16.66 million, according to Autodata, making it the best January since 2006. As for the “Big Three,” GM’s sales climbed 18.3 percent, Ford’s were up 15.6 percent and Fiat Chrysler’s up 14.0 percent.

The trade deficit, which because of the stronger dollar is taking a bigger bite out of GDP growth, soared to $46.6 billion in December from $39.8 billion in November, well above the forecast of $38 billion. In other economic news, the ISM said its manufacturing index fell to 53.5 in January from 55.1 in December; the ISM’s services index rose to 56.7 in January from a downwardly revised 56.5 in December. The government announced that personal income was up 0.3 percent in December with core prices rising 1.3 percent from a year earlier; personal consumption expenditures decreased 0.3 percent. Construction spending rose 0.4 percent in December after having dropped 0.2 percent the month before, and factory orders fell 3.4 percent in December. Lastly, U.S. crude oil moved back above the $50 a barrel mark, rising 7.15 percent to $51.69, the biggest one-week gain since February 2011, as investors looked ahead to reduced production because of shutdowns.

The S&P settles

While not admitting guilt, Standard & Poors agreed to pay a settlement of $1.37 billion to the Justice Department for overselling mortgage investments prior to the 2008 crash.

A look ahead

In addition to Wednesday’s meeting to consider next steps for Greece, the coming week will include releases on small business optimism, wholesale and business inventories, retail sales and consumer confidence.

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.


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