Northwestern Mutual

Financial Markets Commentary For the week of Dec. 12, 2016

Anyone for 20,000? After taking the previous week off, stocks resumed their post-election rampage, driven by the expectation that President-elect Donald Trump will boost the economy with federal spending, deregulation and tax cuts.

The Dow Jones Industrial Average set a record every day last week as it roared to 19,756.85, an especially impressive run as the index had fallen below 18,000 as recently as Nov. 4. As for the S&P 500, it reached a new high three times last week and the Nasdaq did so twice. Since the election, the Dow has set a new standard 14 times, the S&P 500 seven times and the Nasdaq five times. The yield on the 10-year Treasury, which has risen as investors have shifted into stocks, closed at 2.462% on Friday, an 18-month high, and it has gone up 38.1% over the past five weeks. That higher yield has helped bank stocks, however, and the S&P 500 financial sector climbed 4.8% last week and has advanced 19% since the election.

The Fed’s first, and last, rate hike of 2016

This coming week will be a litmus test for investor confidence as the Federal Reserve is widely expected to raise its benchmark rate for the first time since last December. A Fed rate hike could further propel bank stocks, and, given the recent stock market euphoria, may be taken in stride given what the incoming administration is expected to do to promote growth. Last week, there was still more positive news on that front when Gary Cohn, the president of Goldman Sachs, was reported to be the frontrunner for director of the National Economic Council. The Fed’s meeting on Tuesday and Wednesday will be followed by Chairwoman Janet Yellen’s press conference at which she will presumably explain her rationale for the Fed’s move.

Obamacare is at the top of the GOP’s agenda; no “trade war”

There’s been some questions as to how quickly the GOP will move to undo the Affordable Care Act given that there’s no alternative plan in place, but after meeting with Vice President-elect Mike Pence, Senate Majority Leader Mitch McConnell (R, Kentucky) said, “The Obamacare repeal resolution will be the first item up in the new year.” There was also some rare republican pushback against Trump’s agenda last week, specifically his proposal to impose a 35% import tariff on American companies that move jobs overseas, with House Majority Leader Kevin McCarthy (R, California) saying, “I don’t want to get into some kind of a trade war.”

Another boost for oil

The price of oil, which surged past the $50-a-barrel mark after the Organization of the Petroleum Exporting Countries (OPEC) announced that its members agreed to production cuts on Nov. 29, got yet another boost on Saturday when non-OPEC members agreed to reduce output as well. Meeting in Vienna, non-OPEC members including Sudan, Malaysia, Mexico and Russia said they would cut production by 558,000 barrels a day for six months beginning on Jan. 1 – OPEC members had previously agreed to lower production by 1.2 million barrels a day. United States crude rallied to close last week at $51.50 a barrel, while Brent settled at $54.23.

The eurozone, Brexit and ECB

Italy is still picking up the pieces after last week’s referendum, with Prime Minister Matteo Renzi stepped down after his constitutional overhaul was soundly rejected. He was asked by President Sergio Mattarella to stay on in a caretaker role until a new ruling coalition is in place. Some see the Five Star Movement, which is against membership in the European Union (EU), rising to power. Meanwhile, there will be elections in 2017 in Germany, France and the Netherlands, all of which have right-wing, populist parties whose leaders say they have been inspired by the success of Trump.

While British politicians have been maintaining that Great Britain will leave the EU on its own terms and continue to enjoy many of the benefits of membership, EU leaders feel otherwise. Last week Michel Barnier, one of the EU’s lead Brexit negotiators, said “cherry picking is not an option.” Prime Minister Theresa May’s Brexit plans have another hurdle to face; a court case that began last week to decide if she must have Parliament’s approval before moving ahead.

The European Central Bank (ECB) met on Thursday and, among other steps, said it will buy bonds past its original target date of March 2017 to the end of next year, but cut the amount it will purchase to €60 billion a month from the current €80 billion. The ECB’s President Mario Draghi tried to reassure investors that the bank is not pulling back its support of the economy, saying, “There is no tapering in sight. The ECB is going to stay in the markets.” He also said that, even though inflation finally seemed to be rising, “uncertainty prevails everywhere.” And he once again said that eurozone members should focus on structural reform, which Italy just failed to do.

In other news, the Institute of Supply Management’s Non-Manufacturing Index rose to a 12-month high of 57.2% in November from October’s reading of 54.8%. The government said that the trade gap was -$42.6 billion in October compared to -$36.2 billion in September. Factory orders climbed 2.7% in October from September, durable goods orders were up 4.6% and orders for nondefense capital goods, excluding aircraft, increased 0.2%. Wholesale inventories were off 0.4% in October from the month before. Not surprisingly, given the collective post-election sign of relief, the University of Michigan’s consumer confidence reading for early December jumped to 98 from November’s 93.8. And first-time jobless claims fell 10,000 for the week ending Dec. 3 to 258,000; the four-week moving average for the week ending Nov. 26 was up 1,000 to 252,500.

A look ahead

This week will revolve around the Fed’s two-day meeting and presumed rate hike, but there will also be economic updates on small business optimism, retail sales, the Producer and Consumer Price Indexes, industrial production, capacity utilization, business inventories and housing starts and building permits.