Northwestern Mutual

Market Commentary

For the week of Aug. 15, 2016

Sure, Michael Phelps set a record or two in Rio, but on Thursday investors achieved a milestone that hadn’t happened since the last day of the 20th century – they drove the Dow Jones Industrial Average, the S&P 500 and the Nasdaq to all-time highs on the same day.

Key Market Data

And while a lackluster retail sales report ended the week on a down note, all three of the major indexes are now comfortably up for the year and have among them hit 21 new highs since July 1 – after failing to register even one during the first half of the year. Alarmists noted that the last time the three indexes turned the trick on the same day was on the brink of the bust, but the numbers show just how different the story is this time. For instance, at the end of 1999, Nasdaq valuations were 59 times the past 12 months’ earnings, whereas they’re at 24 times today. The American Association of Individual Investors weekly survey of sentiment showed that 60% of individual investors were “bullish” at the end of 1999; last week it was a relatively tame 31%. The yield on the 10-year Treasury, meanwhile, fell for the week, finishing at 1.5%.

The price of oil rebounds again

There were a number of factors that helped drive stocks up last week. For starters, investors were pleased that earnings for major retailers weren’t as weak as expected, and the stocks of Macy’s, Kohl’s and J.C. Penney all soared. But the driving force was the rising price of oil – and the rising share prices of energy stocks. Not only did the price of a barrel of both United States and Brent crude climb to $44.49 and $46.97, respectively, after a recent slump, but the International Energy Agency said that it expected global inventories to level off by year’s end. In addition, Saudi Arabia’s Oil Minister Khalid Al-Falih said his nation would “take any action to help” the price of oil rebound. Some saw this as an indication that he might try to orchestrate a production cap, unworkable so far, at an informal meeting of oil producers scheduled for late September in Algeria. On the flip side, Saudi Arabia reportedly pumped a record 10.67 million barrels of oil a day in July to meet a summer surge in domestic demand.

The eurozone's GDP dips in Q2

Gross domestic product (GDP) for the eurozone came in at 0.3% in the second quarter compared to 0.6% over the first three months of the year. This strengthens the case for more stimulus from the European Central Bank, especially as the Brexit is expected to take a toll on growth over the second half of 2016. Speaking of the Brexit, a survey by the trade organization EEF found that Great Britain’s manufacturers may be getting ready to reduce investment after the referendum, with 55% of manufacturers accumulating cash on their balance sheets and 53% set to postpone or abandon any investment they can't finance with internal capital.

China's slowdown

A number of reports indicated that China’s slowdown continues despite government stimulus. For instance, China’s industrial production was up 6% in July from a year earlier after rising 6.2% the month before, while retail sales were up 10.2% compared to a year-over-year increase of 10.6% in June. In addition, China’s total trade in the seven months to July dropped 8.7% from a year ago to $2.03 trillion as both exports and imports declined. In other news last week, the People's Bank of China said it isn't planning any additional monetary easing and also rejected the idea of again lowering the capital reserve ratio for banks, saying that doing so would create expectations in the market of more depreciation in the value of the yuan.

The deficit widens, as forecast

The Treasury Department said the deficit was $112.8 billion in July, down from last July’s $149.2 billion but the highest monthly total since $192.6 in February. For the first 10 months of the fiscal year, the deficit was $513.7 billion compared to $465.5 a year earlier. The Congressional Budget Office estimates that the deficit, because of lower revenues, will total $590 billion compared to $439 billion last year.

Retail sales fall flat

As noted, retail sales were $457.7 billion in July, virtually unchanged from the month before, a disappointment as they’d been forecast to rise 0.4% (sales were up 2.3% over the last year). As a result, the odds of the Federal Reserve raising the benchmark rate at its September meeting fell to 12% compared to 18% right after the July jobs report, while the possibility of a hike in December is now at 47%.

In other news that may give the Fed pause, the Producer Price Index fell 0.4% in July from June and core prices, less food and energy, dipped 0.3% – both had been expected to rise. Over the past 12 months, the Producer Price Index (PPI) is down 0.2% while core prices are up 0.7%. The number of job openings rose 2% in June to 5.6 million from May’s 5.5 million, the Labor Department reported. Hiring was up 1.7% to 5.1 million and quits held steady at 2.9 million. The National Federation of Independent Business’ Small Business Optimism Index inched up to 94.6 in July from June’s 94.5. The government said that business inventories rose 0.2% in June from May, while wholesale inventories increased 0.3% from the month before. The University of Michigan’s Consumer Confidence Index climbed to 90.4 in August from 90 in July. And first-time jobless claims for the week ending Aug. 6 fell 1,000 to 266,000; the four-week moving average for the week ending July 30 rose 3,000 to 262,750.

A look ahead

This week’s releases will include the latest on the National Association of Home Builders’ Housing Market Index, housing starts and building permits, the Consumer Price Index, industrial production and capacity utilization, and the Conference Board’s Leading Index of Economic Indicators as well as the minutes of the Fed’s most recent meeting on July 26 and 27.