Northwestern Mutual

Financial Markets Commentary For the week of Dec. 19, 2016

The Dow Jones Industrial Average made a run at 20,000 early last week before the Federal Reserve’s decision to raise its benchmark rate for the first time this year, but its momentum slowed just short of the mark.

While the S&P 500 and Nasdaq were down for the week, if only just, the Dow managed to finish in the black for the sixth week straight and has now risen 8.2% since the election and 13.9% for the year, according to The Wall Street Journal. The recent stock market run has not been confined to our shores, with both the Stoxx 600 Europe Index and Japan’s Nikkei ending the week at 2016 highs. Investors also continued their post-election flight from Treasurys, with the yield on the 10-year Treasury closing at 2.60%, its highest level since 2014.

Going into last week’s meeting, the Fed had increased its rate only once in the past decade, in December of last year. The committee voted unanimously to raise the rate to a range of 0.5% to 0.75%, still very low by historical standards. At her post-meeting press conference, the Fed’s Chairwoman Janet Yellen said, “My colleagues and I are recognizing the considerable progress the economy has made. We expect the economy will continue to perform well.” Less expected was the Fed’s projection of three rate increases in 2017, though it made a similar forecast last year but didn’t follow through. The Fed expects its rate to hit 2.1% at the end of 2018 (in September it had forecast 1.8%; last December, it said 3.3%). Yellen declined more than once to speculate on how the new president’s policies might impact the economy, saying, “We’re operating under a cloud of uncertainty at the moment.” Her term ends in February of 2018 and President-elect Donald Trump has said he wants a Republican at the helm. The Fed’s move helped push up the stocks of banks, which would profit from higher interest rates and further strengthened the dollar.

A “hawk” for budget director

Trump nominated Representative Mark Mulvaney (R, South Carolina) as his budget director. Mulvaney, a deficit hawk, said he’d work to “restore budgetary and fiscal sanity after eight years of an out-of-control, tax-and-spend financial agenda.”

Back at work

The price of oil and the stocks of energy companies have been on the rise since the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members came together on production cuts for the first half of 2016. American drillers have responded by increasing production, with 624 rigs in action last week, the most since April 2014, according to Baker Hughes.

Brexit bumps

In the latest sign that the Brexit isn’t going to be easy, Britain’s Prime Minister Theresa May was asked to leave a European Union (EU) dinner meeting in Brussels where ministers had gathered to discuss next steps. There was also a leaked story that one of her aides said it could take a decade to work out a new trade deal, assuming one could be worked out at all, a far cry from the two-year timetable May’s government has suggested. In addition, the Scottish government, strongly against the Brexit, said it will issue its proposal for remaining part of the EU this week to avoid what Michael Russell, the minister who will negotiate the exit terms, called a “national disaster.” The Bank of England also met last week but, unlike the Fed, it left its benchmark interest rate at 0.25% and made no changes to its asset purchase program.

A leader in Italy, for now

Italy’s Parliament put in place an interim government with Paolo Gentiloni as prime minister. Most of his ministers are from his predecessor Matteo Renzi’s Democratic Party, as is Gentiloni. However, no one knows how long he will be in charge, especially as the opposition leaders have called for new elections.

Housing starts tumble

The Commerce Department said that housing starts fell 18.7% in November to 1.090 million, with single-family starts down 4.1% to 828,000. Building permits were also off month over month, falling 4.7% to 1.201 million in November. In other news, the government said that retail sales rose 0.1% in November from the month before to $465.5 billion, 3.8% higher than November 2015. Industrial production fell 0.4% in November from October, with manufacturing off 0.1%. Capacity utilization decreased to 75% from October’s 75.4%. The National Federation of Independent Business Optimism Index for small businesses jumped from 94.8 in October to 98.4 in November, its highest reading since 2014. November’s Producer Price Index (PPI) was up 0.4% from October and 1.3% over the last year. Core PPI, less food and energy, increased the same 0.4% from the month before and 1.6% over the previous 12 months. The Consumer Price Index (CPI) was up 0.2% in November from October and 1.7% for the year; Core CPI climbed 0.2% month over month and 2.1% year over year. Business inventories fell 0.2% in October from November. The National Association of Home Builders/Wells Fargo Index of builder confidence rose to 70 in December, its highest level since 2005. First-time jobless claims for the week ending Dec. 10 fell 4,000 to 254,000; the four-week moving average for the week ending Dec. 3 was up 5,250 to 257,750. Lastly, the Fed reported that the net worth of United States households and nonprofits rose to a new record of $90.2 trillion during the third quarter of 2016, with the total value of stocks surging $494 billion while real estate was up $554 billion.

A look ahead

Amidst the last-minute shopping, this week’s updates will include the latest on new and existing home sales, final gross domestic product estimate for third-quarter growth (expected to be 3.3%), orders for durable and capital goods, personal consumption expenditures and consumer confidence.

Happy holidays from Northwestern Mutual.