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MARKET COMMENTARY: May 22nd


In a week during which it was hard to find a headline that didn’t have the word “Comey” or “ransomware” in it, the S&P 500 fell for the first time in a month – if only slightly.

The decline had little to do with the firing of the FBI’s director, however, or the week-ending cyberattack on millions of computers, and was largely the result of weak first-quarter earnings news from major retail stores such as Macy’s, Kohl’s and Nordstrom. Even so, the three major indexes remained near their all-time highs, and the Nasdaq set a record three times last week.

Overall, first-quarter earnings for S&P 500 companies have been robust, with FactSet estimating that they’ll be up 14% from a year earlier, which would be the best quarterly showing since 2011 (90% of the S&P 500 companies have reported so far). In addition, retail sales for April rose a solid 0.4% from an upwardly revised gain of 0.1% in March, also good news, and sales were up 4.5% from a year earlier. But the numbers showed that nonstore retail sales, which includes online shopping, gained 1.4% while sales at department stores were up only 0.2%. Worse still, over the past year, non-store sales jumped 11.9% while department store sales decreased 3.7%, which helps explain Friday’s sell-off of brick-and-mortar store shares.

A second quarter rebound?

The Federal Reserve Bank of Atlanta is estimating that second-quarter growth will be 3.6% compared to the initial reading of 0.7% for the first quarter, continuing what has come to be the norm since the Great Recession ended: a feeble first quarter followed by a second-quarter rebound.

That positive outlook was echoed last week by the University of Michigan’s Consumer Sentiment Index for May which was 97.7, near the 13-year high hit in January. Given the retail report and April’s jobless rate of 4.4%, it’s not surprising that the CME Group says there’s a 78.5% chance that the Fed will raise its benchmark rate when it meets in June

The group of 7 meets in Italy

At the Group of 7 (G7) meeting of finance ministers and central bankers in Italy, the United States was reportedly told by fellow members that it must continue to cooperate with global economic policy.

According to French Finance Minister Michel Sapin, the other six G7 members said explicitly, and sometimes very directly, to the representatives of the U.S. administration that “It is absolutely necessary to continue with the same spirit of international cooperation.” In response, Treasury Secretary Steven Mnuchin said, “We do not want to be protectionist but we reserve our right to be protectionist to the extent that we believe trade is not free and fair.” In the closing communique, members pledged to use every means possible to boost global economic growth and also said they’d increase their collective effort to combat cyberwarfare after the attack at week’s end that infected computers in as many as 100 countries. The communique did not, however, explicitly promote free trade or reject protectionism, as some members had hoped.

China’s New Silk Road

While the U.S. is taking a more protective stance on trade, China is trying to establish itself as a leader in global cooperation. At a summit of his own on Sunday, China’s President Xi Jinping pledged $124 billion for the “New Silk Road” plan to foster global free trade while abandoning traditional rivalries and politics. At the opening of the two-day meeting, Xi said, “We should build an open platform of cooperation and uphold and grow an open world economy.” First unveiled in 2013 and officially the “Belt and Road” initiative, the plan was designed to boost global growth with infrastructure investment around the world. All rhetoric aside, China and the U.S. did agree to a trade deal last week, though it avoided some of the more contentious products such as steel.

Oil, Russia, and OPEC

It may be wishful thinking, but Russia’s Energy Minister Alexander Novak said he thinks that there will be a supply and demand balance for oil by late 2017 or early 2018 if the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC nations renew their production cuts due to expire in June “or maybe further than that.”

Last week, the price of Brent crude moved back above the $50-a-barrel mark, but it remains down 11% for the year to date, according to The Wall Street Journal. OPEC has also recently raised the topic of bigger cuts or enticing new oil producers to join in, including Egypt and Turkmenistan. Later this month, OPEC members are expected to agree to extend the cut of 1.8 million barrels a day through the end of the year.

Time for the EPC to normalize?

Bundesbank President Jens Weidmann said on Saturday that in the wake of Emmanuel Macron’s victory in France and some positive signs of economic growth, the European Central Bank (ECB) could soon begin to normalize its policies. “The strengthening economic development in the eurozone and the robust outlook make a normalization conceivable,” he said, adding, “The election victory of Macron gives a chance that the eurozone economy gets an additional momentum.”

In other economic news, the Consumer Price Index (CPI) was up 0.2% in April from March and 2.2% from a year ago. Core CPI, less food and energy, rose 0.1% from March but only 1.9% over the last year, its slowest pace since October 2015. The Producer Price Index climbed 0.5% in April and 2.5% over the past year; core PPI gained 0.4% from March and 1.9% yearon-year. The National Federation of Independent Business Index dipped 0.2 points in April to 104.5, still near a record high, though future expectations tumbled after Congress failed on its first attempt to undo Obamacare, a priority for small business owners. Business inventories increased 0.2% in March from February, and wholesale inventories also rose 0.2%. Lastly, first-time jobless claims for the week ending May 6 fell 2,000 to 236,000; the four-week moving average rose 500 to 243,000.

A look ahead

This week’s releases will include updates on housing starts, industrial production, leading economic indicators and consumer comfort.


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. The Nasdaq Composite Index is the market capitalization-weighted index of approximately 3,000 common equities listed on the Nasdaq stock exchange. 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. FactSet Research Systems Inc., trading as FactSet, is a multinational financial data and software company headquartered in Norwalk, CT, United States. The company provides financial information and analytic software for investment professionals. 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 University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. At least 500 telephone interviews are conducted each month of a United States sample. Fifty core questions are asked. The Group of 7 is a group consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the U.S. The European Union (EU) is also represented within the G7. The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries. The eurozone, officially 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. The European Central Bank (ECB) is the institution of the EU which administers the monetary policy of the 17 EU eurozone member states. 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. Core CPI is a method for measuring core inflation. It is the CPI excluding energy and food prices. There are many other methods for calculating core inflation, but this is the most popular measurement. This method has become the most widely used because food and energy prices can be very volatile, and this wide amount of movement would unfairly bias the measure of inflation. The Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. Core PPI is a subset of the total PPI that excludes the highly volatile food and energy prices. Preliminary PPI data and a final revision from the previous four months are released by the Bureau of Labor statistics during the second week of each month.

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