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MARKET COMMENTARY: Mar. 17th

 


All three major indexes including the S&P 500 lost ground last week for the first time since January. Stocks were buffeted by tumbling oil prices and the impact – for better or for worse – of the GOP’s new healthcare plan.

But on Friday, a strong jobs report helped stocks finish the week on a high note and all but guaranteed a rate hike by the Federal Reserve when it meets this week. The yield on bonds advanced off the prospect of a Fed rate hike, with the yield on the 10-year Treasury closing the week at 2.575%.

Early last week, the Republicans unveiled their plan to replace the Affordable Care Act, called the American Health Care Act. The new plan, which relies on tax credits rather than mandates, was the subject of intense debate on Capitol Hill among those Democrats who thought it went too far and those Republicans who didn’t think it went far enough. (The Congressional Budget Office is scheduled to release a report today about its costs and coverage). The American Medical Association and the American Hospital Association came out against the bill in its current form, and governors from both sides of the aisle were concerned about the plan’s rollback of Medicaid assistance. Nonetheless, the plan worked its way through some congressional committees and will come before the House Budget Committee on Wednesday, after which it will head to the House for what promises to be a long debate.

Oil falls back below $50 a barrel

The price of oil began to rebound last November after the Organization of the Petroleum Exporting Countries (OPEC) announced its intention to cut production at the beginning of 2017 – and it has made good on its pledge.

However, last week the price of a barrel of United States crude fell back below $50 for the first time since November. This came after the U.S. Energy Information Administration announced that current stockpiles were much larger than forecast, rising 8.2 million barrels and bringing down the stocks of energy companies with it. The New York Times quoted Harold Hamm, CEO of Continental Resources, a major oil producer. Hamm said domestic oil production was increasing so fast that it could “kill the market.” U.S. crude finished the week at $48.49 a barrel, while Brent closed at $51.37.

Jobs and the Fed

Friday’s unemployment report was the last major economic release before the Fed’s two-day meeting this week (followed by Chairwoman Janet Yellen’s press conference). The assumption was that the Fed would raise its rate barring any bad news. The report was anything but, with 235,000 jobs created in February – President Donald Trump’s first full month in office – while the jobless rate fell to 4.7% from 4.8%. Better still, wages were up 2.8% from a year earlier, and the participation rate ticked up to 63% from 62.9%. Given Yellen’s remarks of the week before last, which set the stage for a hike, one is now all but certain (the CME Group puts the odds at 89%).

Around the Eurozone

Driven by domestic spending, eurozone gross domestic product (GDP) rose 0.4% in the fourth quarter from a year earlier. Meanwhile, in a positive sign for the region’s economy, investor confidence climbed from 17.4 in February to 20.7 in March, its highest point since August 2007, before the financial crisis began.

Trade wars? 

With populist candidates running in France, Germany and the Netherlands, Mario Draghi, the president of the European Central Bank, addressed the trend after the bank’s meeting on Thursday (at which there were no policy changes). He said, “Open trade has been the pillar of world prosperity for many, many years.” The Organization for Economic Cooperation and Development also weighed in on protectionism last week, saying that global GDP will be 3.3% this year compared to 3% in 2016, but cited the risk of new trade barriers as a major variable

China’s PPI surges

China’s Producer Price Index (PPI) surged 7.8% in February from a year earlier, according to China’s National Bureau of Statistics, the fastest pace since September 2008, which lifted the outlook for global reflation. It was the sixth straight monthly increase for the index.

U.S. Net Worth rises

Given the stock market’s recent run, it’s hardly surprising that the Fed reported that household net worth increased to $92.8 trillion in the fourth quarter, with the value of equities up $728 million and real estate improving $557 billion. In other economic news, factory orders rose 1.2% in January from the month before; factory orders less transportation increased 0.3%. Orders for durable goods climbed 2% in January; orders excluding transportation were flat. And orders for capital goods excluding aircraft dipped 0.1%. The U.S. trade gap for January was -$48.5 billion, up from -$44.3 in December as imports rose $5.3 billion from the month before, while exports increased $1.1 billion. CoreLogic reported that home prices, including distresses sales, were up 6.9% in January from a year earlier and gained 0.7% from December. In yet another sign of rising consumer sentiment, Bloomberg’s Consumer Comfort Index hit 50.6 in early March, its highest level since March 2007. And first-time jobless claims for the week ending March 4 rose 20,000 to 243,000; the four-week moving average climbed 2,250 to 236,500.

A look ahead

This week’s releases will include the latest on small business optimism, the Consumer Price Index, retail sales, business inventories, housing starts, industrial production and consumer sentiment. All of those reports, however, will be overshadowed by the Fed’s meeting on Tuesday and Wednesday and what is expected to be its first rate hike of 2017.

 


Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities, and life insurance with long-term care bene ts) and its subsidiaries. Northwestern Mutual Investment Services, LLC, (securities), subsidiary of NM, broker-dealer, registered investment adviser, member FINRA and SIPC. Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI ( duciary and fee-based  nancial planning services), subsidiary of NM, limited purpose federal savings bank. The opinions expressed are those of Northwestern Mutual as of the date stated on this report 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 speci c investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poor’s. Please remember that 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 speci c investment. Diversi cation and strategic asset allocation do not assure pro t 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  xed 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. When interest rates are at low levels, there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates and are not obligated to return the investor’s principal. Additionally, 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 in ation risk before investing in a particular bond or bond fund. All index references and performance calculations are based on information provided through Bloomberg. Bloomberg is a provider of real-time and archived  nancial and market data, pricing, trading, analytics and news. 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 o ers sector indices on the S&P 500 based upon the Global Industry Classi cation Standard (GICS®). This standard is jointly maintained by Standard & Poor’s and MSCI. Each stock is classi ed 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 classi cations. The 10 sectors are Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities. The MSCI EAFE Index measure international equity performance. It comprises the MSCI country indices that represent developed markets outside North America: Europe, Australasia and the Far East.
Barclays Capital U.S. Aggregate Bond Index is a benchmark index composed of U.S. securities in Treasury, Government-Related, Corporate, and Securitized sectors. It includes securities that are of investment-grade quality or better, have at least one year to maturity and have an outstanding par value of at least $250 million. The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt. The gross domestic product (GDP) is the amount of goods and services produced in a year, in a country. The European Central Bank (ECB) is the institution of the European Union (EU) which administers the monetary policy of the 17 EU eurozone member states. The eurozone, o cially called the euro area, is a monetary union of 19 of the 28 EU member states which have adopted the euro as their common currency and sole legal tender. The other nine members of the EU continue to use their own national currencies. CME Group Inc. is an American futures company and one of the largest options and futures exchanges. It owns and operates large derivatives and futures exchanges in Chicago and New York City, as well as online trading platforms. The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and uni es the petroleum policies of its member countries. The Organization for Economic Cooperation and Development (OECD) is an international economic organization of 34 countries founded in 1961 to stimulate economic progress and world trade. The National Bureau of Statistics of the People’s Republic of China or NBS is an agency directly under the State Council of the People’s Republic of China charged with the collection and publication of statistics related to the economy, population and society of the People’s Republic of China at national and local levels. The Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. CoreLogic is a leading provider of consumer,  nancial and property information, analytics and services to business and government. The Bloomberg Consumer Comfort Index measures Americans perceptions on three variables: state of the economy, personal  nances and whether it’s a good time to buy goods or service. The U.S. Department of Labor Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

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