Northwestern Mutual

Financial Markets Commentary For the week of Apr. 03, 2017

It was a choppy week for stocks, but the major indexes all posted strong results for the first quarter, with the total return for the Dow Jones Industrial Average up 5.2%, while the S&P 500 added 6.1%, and the Nasdaq rose 10.1%.

The nature of the post-election stock-market surge has shifted somewhat, however. The “Trump rally” had been led by stocks likely to benefit from the new president’s plans for lower taxes and deregulation, notably banks and healthcare companies. But more recently, with the president’s proposed agenda running into roadblocks, including resistance from his own party, the gains are coming from stocks more likely to benefit from broader economic growth, such as technology. In fact, the S&P 500’s tech sector rose 12.6% in the first three months of 2017, Apple’s stock jumped 24.5% during its best quarter in five years, and the Nasdaq hit a new high of 5,914.34 on Thursday.

Last week there were more positive signs for the economy, with the government upping its estimate for fourth-quarter gross domestic product (GDP) from 1.9% to 2.1% as consumer spending was revised to 3.5% from 3%. In addition, the Conference Board’s Consumer Confidence Index for March climbed to 125.6, its highest level since late 2000. This is a key metric as confidence has historically been a leading indicator of spending and growth. And Thomson Reuters estimated that first-quarter earnings will come in at a lofty 10.1%. The market was also boosted by higher oil prices, with United States crude moving back above the $50-a-barrel mark after Kuwait backed a proposed plan by the Organization of the Petroleum Exporting Countries to extend the production cuts originally scheduled to end in June through the end of the year.

The Fed’s game plan?

According to The Wall Street Journal, the Federal Reserve is working on a plan that would include two more rate hikes this year, then perhaps a pause to see how the market responds before it begins selling off part of its $4.5 trillion portfolio of mortgage and Treasury securities, with rate increases recommencing in 2018. William Dudley, president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee, said that, assuming the economy continues to expand, two more rate hikes in 2017 “seems reasonable,” adding, “When we decide to begin to normalize the balance sheet, we might actually decide at the same time to take a little pause in terms of raising short-term interest rates.”

Tax reform

With the healthcare overhaul shelved, albeit perhaps only temporarily, President Donald Trump and Speaker of the House Paul Ryan (R, Wisconsin), have said they’d turn their attention to tax reform. That may prove to be just as challenging, however, as they have to come up with a tax plan that is deficit neutral, a proposition made more difficult by the failure of the American Health Care Act, which the Congressional Budget Office said would have resulted in savings of $337 billion over a 10-year period.

The Brexit officially begins

On Wednesday, Great Britain’s Prime Minister Theresa May officially began the Brexit by having a letter delivered to Donald Tusk, president of the European Council, invoking Article 50 of the Lisbon Treaty. In a speech that day, May said it was the first step toward a “truly global Britain, the best friend and neighbor to our European partners, but a country that reached beyond the borders of Europe, too.” But the pending divorce quickly turned contentious, with Tusk and Germany’s Chancellor Angela Merkel rejecting May’s demand that discussions about the withdrawal and new trade terms occur simultaneously, while also saying that Great Britain had to pay any outstanding membership debts before trade talks begin. Merkel said her first step was determining “how we will disentangle our interlinked relationship,” after which talks can commence about “our future relationship.” As The New York Times noted of the two-year Brexit process, “the only sure winners will be lawyers and trade negotiators.” Meanwhile, Scotland’s Parliament narrowly voted to move ahead with a second referendum for independence (the first was in 2014), even though May has rejected any such step until after the Brexit negotiations end in 2019. Nonetheless, Scotland’s First Minister Nicola Sturgeon said a referendum for Scotland was “an act of democratic self-determination,” the same argument Britain used for the Brexit. She added that Scotland would hold a referendum “when the time was right,” but before the Brexit is complete.

Inflation hits 2.1%

The Personal Consumption Expenditures Price (PCE) Index for February – the Fed’s preferred gauge of inflation – rose to 2.1% from a year earlier for the first time since 2012 (the Fed’s target is 2%). Core PCE, less food and energy, gained 1.8%. The Bureau of Economic Analysis said that personal income was up 0.4% in February from the month before, while spending rose 0.1%. In other economic news, the National Association of Realtors Pending Home Sales Index increased 5.5% in February to 112.3, its second highest point since 2006, and was up 2.4% year-over-year. The S&P CoreLogic Case-Shiller Home Price Indices climbed 5.9% in January from a year earlier, its best showing in almost three years. The government reported that both wholesale and retail inventories improved 0.4% in February from the month before. And first-time jobless claims for the week ending March 25 fell 3,000 to 258,000; the four-week moving average rose 7,750 to 254,250.

A look ahead

The coming week will provide plenty of economic fodder for investors, with updates on the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes, vehicle sales, construction spending, the trade balance, factory orders, orders for durable and capital goods, wholesale inventories, consumer credit and the unemployment rate for March. In addition, the Fed will release the minutes of its March session, at which it raised its benchmark rate. President Trump will also meet with a number of high-profile foreign leaders, including President Xi Jinping of China.