Northwestern Mutual

Financial Markets Commentary For the week of Jun. 12, 2017

Whatever the distraction of choice may have been last week – James Comey before Congress, the election in Britain or LeBron James versus the Golden State Warriors – investors were all but unfazed, with the Dow Jones Industrial Average reaching a new high on Friday, while the Nasdaq turned the trick on Thursday.

Even though the Nasdaq pulled back on Friday, it remains up 15% for the year as tech stocks, particularly those of Alphabet, Amazon, Apple, Facebook and Microsoft, have led the market surge in 2017. In fact, according to The Wall Street Journal, those five stocks have accounted for 41% of the S&P 500’s advance in total market cap this year.

May miscalculates

In a shocking upset, the “snap” election that Britain’s Prime Minister Theresa May called three years early so she could strengthen her hand going into the Brexit negotiations, misfired badly, leaving her Conservative Party without its parliamentary majority. May was widely decried for being uninspiring on the stump during the campaign and was also seen as the target of young Brits still peeved about the Brexit. She has resisted calls to step down and is working to form a ruling coalition by partnering with Northern Ireland’s Democratic Unionist Party. However, that would give her a slim three-seat majority in Parliament to work with and, presumably, far less political capital when the Brexit negotiations begin on June 19.

The debt ceiling looms

Because of lower tax receipts, Treasury Secretary Steven Mnuchin has asked Congress to raise the debt ceiling with “no strings attached” before the summer recess begins. Within the administration, there are said to be differences of opinion as to the nature of the deal, with the Budget Director Mick Mulvaney reportedly looking to attach spending cuts to any increase. The issue of raising the debt ceiling was a fraught one when Barrack Obama was in office, and the two parties went to the edge of the “fiscal cliff” more than once.

Undoing Dodd-Frank

As expected, the House passed a bill to undo some of the regulations to limit risky investments by banks put in place by the Dodd-Frank Act after the Great Recession. The new bill, the Financial Choice Act, passed by a margin of 233 to 186. Its fate in the Senate remains uncertain.

Oil’s fall continues

Despite the recent move by the Organization of the Petroleum Exporting Countries (OPEC) and fellow oil producers such as Russia to reduce output through March 2018, the price of oil continued its recent fall last week. This came in a week when the number of active American oil rigs climbed yet again and the Energy Department said that United States output would pass 10 million barrels a day for the first time in 2018, breaking the record set back in 1970. In another sign of just how weak the market is, investors were seemingly unperturbed by the fact that Qatar, a major producer of natural gas and a member of OPEC, was isolated by five fellow Arab nations for being a sponsor of terrorism and a supporter of Iran. Vacationing Americans will benefit this summer, however, as GasBuddy said the price at the pump will be at its lowest level since 2005. And, according to AAA, the price of gas fell last week to a national average of $2.34 a gallon (the high was $4.11 a gallon in 2008).

Statehood for Puerto Rico?

On Sunday, Puerto Ricans voted overwhelmingly to become the 51st state, but there was a catch as those not in favor boycotted the vote – only 23% of registered voters cast ballots. The vote is also complicated by the fact that Puerto Rico is currently burdened with $74 billion in debt and that statehood would have to be approved by the president and Congress, seen as unlikely.

The ECB stands pat while GDP rises

Even though President Mario Draghi said threats to the eurozone’s recovery have lessened, the European Central Bank (ECB) left its stimulus intact. Draghi also said the bank will extend its bond buying through the end of the year and beyond, “if necessary.” When asked when the ECB was going to start scaling back its quantitative stimulus, he said, “It was not discussed.” This came during a week when first-quarter gross domestic product (GDP) for the eurozone was revised up to 0.6% from 0.5%

Thanks to the stock market’s recent rise, the total net worth of U.S. households climbed to a record $94.8 trillion in the first quarter of 2017. In other news, the Labor Department said that job openings were up 4.5% in April to six million, the highest total since the government began keeping track in December 2000. The Institute of Supply Management reported that its Non-Manufacturing Index fell to 56.9% in May from April’s reading of 57.5%. Nonfarm productivity was flat in the first quarter compared to a preliminary estimate of -0.6%. Factory orders were down 0.2% in April from the month before, which was revised up to 1.0% from the original 0.2%. Orders for durable goods fell 0.8% in April from March; orders ex-transportation were off 0.5%. Orders for nondefense capital goods excluding aircraft were up 0.1%. Wholesale inventories declined 0.5% in April from March. And first-time jobless claims for the week ending June 3 fell 10,000 to 245,000; the four-week moving average was up 2,250 to 242,000.

Lunch with the “Oracle of Omaha”

What’s the price of lunch with Warren Buffett? This year, the tab would be $2,679,001, the final bid in the eBay auction to benefit a non-profit. Lunch with Buffett has been on the block since 2000 when the winner paid $25,000; the highest price to date was $3,456,789 in 2012.

A look ahead

This week’s updates will include the latest on small business optimism, the Producer Price Index, Consumer Price Index, retail sales, business inventories, industrial production and capacity utilization, housing starts, building permits and consumer confidence. And the Federal Reserve will meet on Tuesday and Wednesday, a meeting at which the Fed is widely expected to raise its benchmark rate.