Northwestern Mutual

Financial Markets Commentary For the week of Dec. 27, 2016

Trading volumes dwindled to yearly lows as investors headed home for the holidays.

Alternatively, the Dow Jones Industrial Average finished up for the seventh week in a row, nearly hitting 20,000 and finishing at a lofty 19,993.81. The S&P 500 and the Nasdaq also rose, while the yield on the 10-year Treasury fell back from last week’s two-year high to close at 2.5%.

There wasn’t a lot of economic news last week, but the government’s final revision for third-quarter gross domestic product (GDP) came in at 3.5% compared to the previous estimate of 3.2%, above expectations and the highest quarterly figure in two years. Despite the final number being far stronger than the 0.8% increase in the first quarter and 1.4% in the second, the celebration was muted for a number of reasons. First, both consumer spending and business investment, the main reasons for the upswing, are expected to have slowed down in the current quarter, for which growth is estimated to come in at only 1.5%. Furthermore, for all of 2016, GDP is forecast to be that same 1.5%, which would make it the weakest yearly performance since -2.8% in 2009. As for 2017, President-elect Donald Trump has said he’ll aim for 4%, but the current estimates are in the 2.5% range, pending any major policy changes and new federal spending once he takes office.

A calmer market

Not only have the major stock indexes continued to climb since the election in November, but volatility has fallen sharply. Last Wednesday, in fact, the Chicago Board Options Exchange’s Volatility Index® fell to its lowest level since July 2014.

Around the eurozone

The health of Italy’s debt-ridden banks is one of the ongoing threats to the eurozone’s economic well-being, and on Friday Italy’s government announced a plan to use taxpayer money to bail out that nation’s third largest (and Europe’s oldest) bank, Monte dei Paschi. In addition, Christine Lagarde, the head of the International Monetary Fund (IMF), was convicted last week of misusing public funds when she was France’s finance minister almost a decade ago, though she wasn’t fined or sentenced. After the verdict, the IMF’s directors issued a statement saying they had “full confidence in the managing director’s ability to continue to effectively carry out her duties.”

A mega-fine and another mega-merger

After months of negotiations, Deutsche Bank agreed to pay the Justice Department $7.2 billion for its actions involving the sale of mortgage-backed securities before the financial crisis. In addition, Credit Suisse reportedly reached a deal on a $5.3 billion settlement, and the government also filed a suit against Barclay’s Bank over mortgage securities fraud – Barclay’s said it will fight the case to court. The Deutsche Bank fine is the third largest behind the $16.7 billion paid by Bank of America in 2014 and the $9 billion paid by JPMorgan Chase in 2013. And in a deal that the companies involved referred to as “a merger of equals,” two of the world’s biggest industrial gas suppliers, Germany’s Linde and America’s Praxair, have announced a plan to join forces to create a business with a $60 billion market capitalization.

The rig count keeps climbing

With the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members ready to reduce oil production in January, United States energy companies increased the number of active oil rigs for the seventh week in a row, up to 510 for the week ending Dec. 16, according to Baker Hughes; in May, the total had fallen to 316.

Consumer confidence hits a 12-year high

In yet another sign of post-election relief, the University of Michigan’s Consumer Confidence Index rose from 93.5 in November to 98.2 in December, the highest reading since January 2004. In other economic news, the National Association of Realtors reported that existing home sales increased 0.7% in November from October to a seasonally adjusted annual rate of 5.61 million, the fastest pace since February 2007 and up 15.4% from November 2015. The median sales price was $234,900, compared to 6.6% from a year earlier, the 57 consecutive month of year-over-year gains. The government said that new home sales improved 5.2% in November from October to a seasonally adjusted annual rate of 592,000. Over the first 11 months of the year, sales were up 12.7% from the same period in 2015, while the median sales price in November was $305,400 compared to $317,000 in November 2015.

Orders for durable goods were off 4.6% in November from October’s gain of 4.8%, ending a four-month streak of increases, while orders for durable goods excluding transportation gained 0.5% from the month before. Orders for non-capital goods orders excluding aircraft rose 0.9% in November from October. Consumer spending increased 0.2% in November from an upwardly revised 0.4% in October; adjusted for inflation, spending was up 0.1% month over month. Personal income was flat in November compared to the month before. The Personal Consumption Expenditures (PCE) Index was also unchanged in November from October when it climbed 0.3%; over the last 12 months, PCE is up 1.4%. Core PCE, less food and energy, was also unchanged from the month before and up 1.6% for the last year. Lastly, first-time jobless claims for the week ending Dec. 17 jumped 21,000 to 275,000; the four-week moving average for the week ending Dec. 10 was up 6,000 to 263,750.

A look ahead

This coming week will be another short one and, if history’s any guide, another very quiet one trading-wise. The stock market will also be closed on Monday, Jan. 2, in observance of New Year’s Day. The week’s releases will include updates on the S&P CoreLogic Case-Shiller Home Price Index, consumer confidence, pending home sales, wholesale and retail inventories, and the advance trade balance.

Have a happy and healthy New Year.