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Ask the Financial Expert: What Our Investment Experts Are Watching in the Second Half of 2016

Ron Joelson •  May 27, 2016 | Your Finances, Ask the Expert

Each month, we book time with some of our company’s top financial brain power to answer questions about investing and your finances. This month we’re talking about what to expect in the economy during the second half of the year.

Ron Joelson

Ron Joelson is Northwestern Mutual's chief investment officer and oversees the company's general account, valued at approximately $200 billion as of June 2015.

Mark McLennon

Mark McLennon is vice president of Investment Products and Services (IPS) Business Development. He oversees the fee-based financial planning program and departmental growth initiatives.

Brent Schutte

Brent Schutte is chief investment strategist of Northwestern Mutual Wealth Management Company. He oversees the investment philosophy for individual retail investors and the investment strategy for more than $100 billion in assets under management as of February 2016.

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

The following is an excerpt from our Ask the Financial Expert podcast (listen to the entire podcast below):

Mark: We’re almost to the mid-year point. The first half of the year hasn’t been without some excitement. We’ve seen oil up, we’ve seen oil down. We saw markets take a dive in January and now some comeback. I'd like us to look forward: It seems like there's some good signs and some bad signs out there, Ron. Can you talk about that?

Ron: I think most of the good signs have come from the consumer. We’ve seen demand for labor increasing; wages have been up about 2.5 percent.

There’s been a decline in unemployment benefits; that’s been good news recently. So we're still seeing below 300,000 for claims. In fact, for the last 63 weeks we have had claims below 300,000. We haven't seen that kind of streak since 1973. So that’s all good news.

When you look at the core Consumer Price Index, inflation is actually a little bit good. Core CPI has been above 2.1 percent, which is above the Fed’s target. We want to see that. And we’ve had five consecutive months above 2 percent. I think that’s the longest streak we’ve seen in at least a few years. So, in general, there are a lot of good signs from the consumer, particularly recently.

Mark: That’s all good news. Why don’t we see the markets responding positively?

Ron: I think there are concerns that the Fed is now more likely to raise rates; and with the latest comments from the April meeting, that’s been a concern.

Brent: The past few weeks have been interesting. In this current market’s topsy-turvy, upside-down world, good data has met bad market performance. We think that’s what investors are going to have to deal with the rest of the year. The Federal Reserve will loom over the markets for the next three to nine months until we get some trend and actually see the Fed raising rates. We’re telling our investors to look through the next few months because sometimes it’s not going to make sense. But in the longer term the market and economy will match back up.

Mark: So what do you see with equities going forward?

Ron: I’m a little more bearish going forward because we’re seeing multiples [price-to-earnings ratios] at a peak, post-recession. So that means if we’re going to see progress in the equity market, it’s going to have to come from earnings. And one of my concerns is where earnings are right now.

We’re at the one-year anniversary of the all-time high in the S&P 500. Coincidentally, the high point in trailing S&P 500 earnings per share [a measure of earnings of the marketplace] was also set at the same time.

So, we’re seeing a pattern, and my concern is it looks like the remainder of 2016 company earnings will be lower than expectations. If you don’t think multiples are going to expand, then it’s going to be difficult for the equity markets for the remainder of 2016.

Brent: We do see kind of a back-and-forth market, but we still expect positive returns for the year, around 3 to 5 percent on the S&P 500. So we think there will probably be a continual tug of war between the markets and the Fed, with an overall market that ends up somewhat positive but not by much and maybe at similar levels to today.

Ron: Another consideration is interest rates. One of my concerns is in the second half of the year, with 80 percent of global bonds now yielding less than the U.S. 10-year. It seems to me we’re going to see a lot more foreign investors come in, and that could result in the yield curve flattening. So even if the Fed raises the short end, it could mean in the intermediate and long end [that it] flattens a bit in the U.S. just because of the relative attractiveness of U.S. investments.

Brent: We don't see a runaway interest curve. I guess the thing is that a lot of that foreign investment coming over is dependent upon lower interest rates in those economies. One of the surprises that could occur, in our estimation, is that you could get better GDP or economic growth out of the eurozone. We talked about the U.S. being somewhat disappointing the first quarter, but we did get a pretty robust (GDP) print for the eurozone of about 2.1 percent annualized. And then we found out that Japan actually had good GDP growth.

So all else being equal, if those economies did show some life, you would expect rates in those economies to potentially rise. And that could alleviate some downward pressure on treasuries and put some upward pressure on rates—if Ron’s inflation call toward the end of the year is somewhat correct, which we think it will be—this will also put some upward pressure on treasury yields.

Hear more from Ron, Brent and Mark in the “Ask the Financial Expert” podcast:

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. 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.

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