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MARKET COMMENTARY: April 14th

 


The major stock indexes were essentially unchanged last week despite several dramatic events: a visit by China’s President Xi Jinping; the confirmation of a new Supreme Court justice; the jobs report; and, overshadowing all of the other stories, the United States launching a missile strike in Syria to retaliate for that nation’s use of chemical weapons against civilians.

When it comes to the economy, the week’s headline was that only 98,000 new jobs were created in March – the forecast was for 175,000 – though the household employment rate fell from February’s 4.7% to 4.5%, its lowest level since May 2007. Neither politicians nor investors were pushing the panic button after the report for a number of reasons. First, the number of jobs created in March was seen as being impacted by warmer-thanusual weather in January and February, which meant more hirings in construction earlier in the year. Next, the average for the first quarter was 178,000 new jobs a month, about the same pace as in 2016. In addition, wages were up a solid 2.7% over the past year, and the labor force participation rate was unchanged at 63%. And, above all, the jobless rate fell despite the fact that more people were looking for work, a sign that enough positions are being created to accommodate job seekers. Taken together, the numbers are unlikely to deter the Federal Reserve from moving ahead with its plans to raise its rate two more times in 2017.

The Fed’s March meeting; Lacker’s resignation

The Fed released the minutes of its mid-March meeting, which showed that it was getting ready to reduce its $4.5 trillion portfolio of mortgage and Treasury securities, a strategy that had been telegraphed in remarks made by William Dudley, president of the Federal Reserve Bank of New York. Though the Fed did not announce a timetable, the minutes noted that most committee members “judged that a change in the committee’s reinvestment policy would likely be appropriate later this year,” assuming the economy continues to expand. While saying that the economy was “at or near maximum employment,” the Fed remained cautious about its other mandate – inflation. It reported, “the committee has not yet achieved its objective for headline inflation on a sustained basis.”

The minutes cautioned that the stock market was “quite high relative to standard valuation measures,” and that the market could inhibit growth “if, for example, financial markets were to experience a significant correction.” Further, committee members again offered a caveat based on the unfolding plans of the Trump administration, saying, “there was significant uncertainty about the effects of possible changes in fiscal or other government policies.” The Fed was also in the news when Jeffrey Lacker, president of the Federal Reserve Bank of Richmond since 2004, resigned, saying he had violated the Fed’s rules by talking with a financial analyst in 2012 about what he described in his letter of resignation as “important nonpublic detail.”

Around the Eurozone

In an indication that its economy is rebounding, eurozone unemployment fell to 9.5% in February, the lowest level since May 2009 (it was at 12% in 2013). And, meeting in Malta, Greece, its creditors reportedly made headway on a deal to release the next round of bailout money, €7 billion ($7.5 billion), which Greece needs in July. The next step will be for the creditors to return for Athens to work out the fine print, which will reportedly include cuts in spending and reduced pension payments.

China’s foreign reserves

In a sign that China’s government is taking a break from selling off its foreign exchange reserves to prop up the value of the renminbi, that nation’s reserves were up in March for the second month in a row after seven months of outflows, closing the quarter at $3.009 trillion.

A changing of the guard as car sales slip

By one measure, the list of the nation’s “Big Three” automakers changed last week when Tesla surpassed Ford in total market value. Tesla’s stock soared after the maker of electric cars announced that sales were up a whopping 69% in the first quarter from a year earlier. Meanwhile, auto sales for the industry as a whole in March fell 1.6% from a year ago to an annualized rate of 16.6 million, according to Autodata.

The drop came amid concerns that sales were being sustained by an overreliance on incentives as inventories are at their highest level during any economic expansion since 1989. In other economic news, the number of U.S. oil rigs climbed by 137 in the first quarter, the steepest quarterly rise in nearly six years, according to Commerzbank. The number of working rigs has now more than doubled from the 2016 low of 316. The Fed reported that consumer credit was up 6.2% in January to inch pass the $1 trillion mark. The Institute for Supply Management’s (ISM) Manufacturing Index fell to 57.2% in March from 57.7% in February (any reading above 50% indicates expansion). The ISM’s Non-Manufacturing Index dipped from 57.6% in February to 55.2% in March. Construction spending was up 0.8% in February from the month before to $917.3 billion. The trade balance was -$43.6 billion in March compared to a revised -$48.2 billion in February. Factory orders rose 1% in February from March, while orders ex-transportation increased 0.4%. Orders for durable goods improved 1.8% in February from the month before, while orders ex-transportation climbed 0.5%. Orders for nondefense capital goods excluding aircraft fell 0.1%. And first-time jobless claims for the week ending April 1 dropped 25,000 to 234,000; the four-week moving average declined 4,500 to 250,000.

A look ahead

This week’s releases will include the latest on small business optimism, the Producer and Consumer Price Index, business inventories, consumer sentiment and retail sales.

 


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 benefits) 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 (fiduciary and fee-based financial 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 specific 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 specific investment. Diversification and strategic asset allocation do not assure 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. 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 inflation 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 financial 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 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 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 eurozone, officially called the euro area, is a monetary union of 19 of the 28 European Union (EU) member states which have adopted the euro as their common currency and sole legal tender. The other nine members of the European Union continue to use their own national currencies. The renminbi is the official currency of the People’s Republic of China. Autodata Solutions, Inc. is an automotive software and data provider that provides automotive content, research, and technology implementation services to most of the auto manufacturers who distribute vehicles in North America, helping them develop, market and sell their products. The Institute for Supply Management is a not-for-profit U.S. association for the benefit of the purchasing and supply management profession, particularly in the areas of education and research. The ISM Manufacturing Index, released monthly by the Institute for Supply Management, tracks the amount of manufacturing activity that occurred in the previous month by surveying more than 300 manufacturing firms and monitoring employment, production inventories, new orders and supplier devices. The ISM Non-Manufacturing Index is based on a sample survey of purchasing and supply executives, weighted according to industry contribution to GDP. The Index is calculated using 50% as the centerline between positive and negative expectations; the figure is reported in headlines as the percent change. The Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. 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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