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Stocks dip on news from Washington

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

Stocks and bonds seemed like a sideshow to last week’s main event: the rise and fall of the American Health Care Act (AHCA), which, in the end, never even came to a vote in the House.

Still, the weeklong uncertainty about the AHCA led investors to worry about the fate of some of the other items on President Donald Trump’s agenda, such as tax reform and infrastructure spending. This sent stocks to their worst week since November, before the election. In fact, on Tuesday, the S&P 500 fell more than 1 percent for the first time in 161 days, the longest such streak since 1985. Bond yields — not surprisingly — also fell last week as some investors shifted to safety.

The AHCA’s chances for passage in the House — not to mention the Senate — were hurt after the Congressional Budget Office said that it would leave 24 million Americans without healthcare coverage. But the bill was undone by the inability of Republicans to agree on the details (and the fact that, as the president noted, no Democrats were going to vote for the bill). In an effort to assure passage, Trump agreed to changes to the bill from the far-right Freedom Caucus that left GOP moderates unhappy and the Freedom Caucus still asking for more.

With the bill shelved and the Affordable Care Act intact, the question now is whether the president and Speaker of the House Paul Ryan (R, Wisconsin) can move past the setback to tackle taxes and spending because, as an editorial in The Wall Street Journal noted on Saturday, the failure of the bill to survive the House reveals that Trump “doesn’t have a reliable governing coalition.” Nonetheless, on Friday, only hours after Ryan had pulled the bill, Trump had already turned his attention toward taxes, telling reporters, “We are going, right now, for tax reform.” He also predicted that Obamacare will “explode” and that Democrats will come to him looking to make a deal. Ryan, speaking of the impact of the defeat on the GOP’s legislative agenda, said, “This does make tax reform more difficult, but doesn’t make it impossible.”

Keystone back on track

While the AHCA hung in the balance, the president made good on one of his other campaign promises by greenlighting the Keystone XL pipeline – long a GOP goal – which had been turned down by President Obama in 2015 for environmental reasons. The pipeline will run from oil fields in Canada and North Dakota to Nebraska where it will join existing pipelines to carry oil to the Gulf Coast. The president called it the beginning of a “new era” for infrastructure and energy projects designed to create jobs and generate tax revenues, adding, “It’s going to be an incredible pipeline; greatest technology known to man.” Though approving the project by issuing a presidential permit to TransCanada, work will not begin on the pipeline until it is also cleared by the state of Nebraska.

Oil producers, production cuts

In another story about oil, the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members including Russia, who have reduced production by about 1.8 million barrels a day since January, met in Kuwait yesterday and recommended renewing the plan beyond its original ending date in June to the end of 2017. The agreement has helped push the price of Brent crude back over $50 a barrel, but it has also encouraged American drillers to open more wells which has sent the price of United States crude below $50 a barrel.

The EU’s not-so-happy birthday

The European Union (EU) celebrated its 60th birthday in Rome over the weekend, but there was a pall over the party as one of its more prominent members, Great Britain, was absent. Furthermore, the future of the alliance and the euro are both seen as tenuous with a number of populist parties pushing to leave the EU. As for Great Britain, having been given the go-ahead by Parliament, Prime Minister Theresa May said that she’ll officially begin her country’s negotiations for leaving the EU this Wednesday by triggering Article 50, starting what’s expected to be a two-year extrication process. David Davis, who will be her lead negotiator, said his goal was “a deal that works for every nation and region of the UK and indeed for all Europe – a new, positive partnership between the UK and our friends and allies in the European Union.”

Home sales

In other economic news, the National Association of Realtors said existing home sales fell 3.7 percent in February from the month before to an annualized rate of 5.48 million. However, January’s 5.69 million was the highest reading since February 2007, and sales in February were up 5.4 percent from a year earlier. The number of homes on the market in February rose 4.2 percent to 1.75 million, but was still close to December’s all-time low of 1.65 million and was down 6.4 percent from a year earlier. New home sales, which account for about 10 percent of the market, climbed 6.1 percent to an annualized rate of 592,000, the best showing since July 2016. Thanks to orders for aircraft, which jumped 47.6 percent, durable goods orders rose 1.7 percent in February from the month before from an upwardly revised 2.3 percent gain in January; durable orders less defense were up 2.1 percent, while demand in the category that excludes transportation improved 0.4 percent. Orders for non-defense capital goods, excluding aircraft, fell 0.1 percent in February after a 0.1 percent gain in January. IHS Markit’s U.S. Purchasing Managers’ Index (PMI) for Manufacturing for March was 53.4, a five-month low, after 54.2 in February, while the composite PMI dipped to a six-month low of 53.2 from 54.1 in February (any reading about 50 indicates expansion). And first-time jobless claims for the week ending March 18 were up 15,000 to 258,000; the less-volatile four-week moving average increased 1,000 to 240,000.

A look ahead

This week’s releases will include the latest on wholesale and retail inventories, the S&P CoreLogic Case-Shiller Home Price Index, pending home sales and consumer confidence. The government will also issue its revised projection of fourth-quarter gross domestic product, expected to be raised from 1.9 percent to 2.0 percent.

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.

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The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.


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