Northwestern Mutual

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

Though the Nasdaq reached a new high on Tuesday, stocks closed out 2016 on a low note and the Dow Jones Industrial Average had its first week-over-week decline in almost two months.

However, thanks to the post-election stock market surge, the Dow posted its biggest year since 2013, and the S&P 500 and the Nasdaq turned in their best year-over-year performances since 2014. Now it will be a question of whether or not the Trump administration, taking over on Jan. 20, will make good on the promises that, along with the stronger economy, helped drive the stock market upswing. This includes cutting taxes, trade deregulation and spending federal dollars to boost gross domestic product growth, steps that should be made easier by the GOP’s control of Congress.

The strong year for stocks would have been hard to envision after the first week of 2016 when concerns about a slowdown in China, the tumbling price of oil and the Federal Reserve’s first rate hike since 2006 drove the Dow down more than 1,000 points (6.2%) in the first five days of trading. The Dow fell as far as 15,560.18 in early February, the same day that United States crude bottomed out at $26.21 a barrel – its lowest level since 2003 – and the index remained in the red for the year until mid-March. In late June, the British voted to leave the European Union, sending the Dow plummeting 600 points in one day. From that point on, stocks settled into a holding pattern as investors awaited the outcome of the highly contentious election. But once the verdict was in, stocks began their steady ascent, registering new all-time highs again and again. By year’s end the Dow, which had flirted with 20,000 (compared to its recession low of 6,547 in March 2009), was up 16.5%, the S&P 500 11.96% and the Nasdaq 8.97%. The Russell 2000 Small Cap Index outdid them all, rising 21.31%.

The yield on Treasurys fell as stocks soared, and they finished the year up a modest 0.8%. In fact, the yield on the 10-year Treasury dipped to 1.366% after the Brexit, its lowest level ever, before rebounding by year’s end to 2.446% (it began 2016 at 2.273%). During the fourth quarter the yield rose 0.841 percentage points, the largest quarterly gain since 1994, according to The Wall Street Journal.

As for the price of oil, after bouncing back from its early year low, U.S. crude closed at $53.72 a barrel, up 45% in 2016. This marks its best year since 2009 and one that helped make the S&P 500’s energy sector its top performer, advancing 24%. Brent crude fared even better in 2016, climbing 52% to finish the year at $56.82.

Congress convenes

It’s back to work for Congress today and, even before President-elect Donald Trump has assumed office, the Republicans have said they’ll devote the first hundred days to undoing legislation enacted by the outgoing President Barack Obama, starting with the party’s bête noire, the Affordable Care Act.

Strong reports for manufacturing in Europe and China

Stocks in Europe began the year on a strong note yesterday after IHS Markit's Manufacturing Purchasing Managers’ Index (PMI) for the eurozone for December came in at 54.9, its best reading since April 2011. And China's official manufacturing PMI was 51.4 in December, up for the fifth month straight, though growth slowed more than expected as the PMI dipped from November’s 51.7.

Consumer confidence soars again

The week before last, the University of Michigan’s Consumer Confidence Index hit its highest level in December since 2004, and last week the Conference Board more than followed suit as its index rose from 109.4 in November to 113.7 in December, the highest reading since 114 in August 2001.

In other economic news, the S&P CoreLogic Case-Shiller Home Price Index of 20 metropolitan areas gained 5.10% in October from a year earlier, compared to an increase of 5.03% in September; prices were up 0.6% from September. The National Association of Realtors Pending Home Sales Index fell 2.5% from October to 107.3% in November, though the index was up 1.4% from November 2015. In its advance trade balance report for November, the government said that exports fell $1.2 billion while imports increased $2.2 billion, and the trade gap widened $3.4 billion to -$65.3 billion compared to -$61.9 million in October (the final figure for November will be released on Friday). The government also reported that wholesale inventories were up 0.9% in November from the October’s revised -0.1%; retail inventories improved 1% in November after having dipped 0.4% the month before. The MNI Chicago Business Barometer fell from 57.6 in November to 54.6 in December, but the barometer averaged 54.3 for the final quarter of 2016, the highest such reading in two years. First-time jobless claims for the week ending Dec. 24 declined 10,000 to 265,000 – that makes 95 weeks below 300,000, the best run since 1970. The four-week moving average for the week ending Dec. 17 fell 750 to 263,000. And Dealogic said there was a total of $3.7 trillion in global mergers and acquisitions in 2016, down 15% from the record of $4.4 trillion in 2015, but still the third best year ever for deals.

A look ahead

The first week of the new year, once again shortened by a holiday closure, will feature updates on the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes, vehicle sales, factory orders, orders for durable and capital goods, and construction spending. The Fed will publish the minutes of its meeting held on Dec. 13 and 14, at which committee members unanimously voted to raise the benchmark rate. And on Friday, the Labor Department will release the unemployment rate for December, expected to tick up from November’s 4.6% to 4.7%, with an estimated 170,000 new jobs created.