Northwestern Mutual

Financial Markets Commentary For the week of Nov. 21, 2016

The stock market’s post-election rally continued at the beginning of last week, with the Dow Jones Industrial Average reaching new highs on Monday and Tuesday to make it four record days in a row.

That streak ended on Wednesday and the index finished barely in the black for the week, gaining 0.1%, while the S&P 500 rose 0.8%. The Nasdaq, meanwhile, hit an intraday all-time high on Friday. The yield on bonds, however, continued to rise as investors anticipated that president-elect Trump would increase spending, cut taxes and undertake trade and regulatory reforms that would boost growth and inflation. According to The Wall Street Journal, the yield on the 10-year Treasury had its worst two-week stretch since 2001 on its way to closing at 2.337% on Friday, a 12-month low.

Yellen weighs in

Though the next president dominated last week’s headlines as he began to announce his cabinet, on Friday investors turned their attention to Capitol Hill for another reason: Janet Yellen, the chairwoman of the Federal Reserve, appeared before Congress’ Joint Economic Committee. Addressing whether or not the Fed was ready to raise its benchmark rate, Yellen said, “I do think the economy is making very good progress toward our goals.” She continued to say that the first increase since December of last year “could well become appropriate relatively soon.” According to the CME Group, the odds of a hike at the Fed’s December meeting are now better than 90%. She also weighed in more generally on the post-election stock rally and Trump’s plans, saying, “We don’t know what’s going to happen. There’s a great deal of uncertainty.” In addition, when asked about the possibility that the Dodd-Frank Act enacted after the financial crisis would be dismantled by the new president and Congress, Yellen said she would not want to see the “clock turned back” on improvements that have been put into place.

Italy's referendum, Germany's GDP

While the European Union (EU) is still pondering the impact of the Brexit and what Trump’s election may mean for trade, it has another referendum to worry about. On Dec. 4, Italians will vote on a plan to speed up the passage of bills and create more stability in a country notorious for its byzantine political processes. Italy’s Prime Minister Matteo Renzi has pushed for the referendum and pledged to step down if it’s not passed, adding to the eurozone’s turmoil as Italy also tries to address the ill health of its debt-ridden banks. In addition, a “no” vote could open the door for the Five Star Party, which wants to hold a referendum on Italy’s membership in the EU. There was some good news for Italy, however, as its economy expanded 0.3% in the third quarter, more than anticipated. But Germany’s gross domestic product (GDP) growth slowed to 0.2% in the same quarter, its lowest level in a year.

Japan's surprise

Japan’s GDP unexpectedly rose 2.2% in the third quarter on an annualized basis, more than tripling the rate of the second quarter, and a surprise given the fact that, according to The New York Times, it has averaged less than 1% growth over the last two decades. The increase was largely the result of a weaker yen leading to a 2% rise in exports; consumer spending, in contrast, rose a paltry 0.1% (actually above the forecast). Even so, it was the third straight quarter of growth for the world’s third largest economy.

Oil rebounds, again

The price of oil rebounded from its three-week losing streak, partly because the Organization of the Petroleum Exporting Countries may in fact curb production – though the prospects for its doing so seem to change on a near-daily basis. On Tuesday alone the price of a barrel of both United States and Brent crude jumped almost 6%, and by week’s end they were at $45.69 and $46.86, respectively.

Retail sales rise, Black Friday looms

As we head towards Black Friday’s hoped-for spending spree, the government reported that retail sales were up 0.8% in October from the month before (an upwardly revised gain of 1%) and were 4.3% higher than in October 2015. As for this coming long weekend of shopping, the National Retail Federation said it is expecting 137.4 million Americans to hit the streets or the internet, perhaps in their relief that the election is over and the world has not come to an end, compared to 135.8 million last year. In other economic news, the Conference Board said that its Leading Index of Economic Indicators for October was up 0.1% after rising 0.2% in September. Business inventories improved 0.1% in September from August. The Producer Price Index was flat in October from the month before and up 0.8% over the past year; Core Producer Price Index (CPI), less food and energy, fell 0.2% in October and rose 1.2% over the previous 12 months. The Consumer Price Index increased 0.4% in October and 1.6% from a year earlier; core CPI was up 0.1% month over month and 2.1% year over year. Industrial production was unchanged in October from September, though manufacturing climbed 0.2%; capacity utilization was 75.3%. Housing starts soared 25.5% in October from the month before to 1.3 million, while building permits inched up 0.3% to 1.2 million. And first-time jobless claims for the week ending Nov. 12 fell 19,000 to 235,000, their lowest level since 1973; the four-week moving average for the week ending Nov. 5 dipped 6,500 to 253,500.

A look ahead

This week’s updates will include the latest on existing and new home sales, orders for durable and capital goods, consumer sentiment, the advance trade balance, and wholesale and retail inventories. In addition, investors may get a preview of the Fed’s plans when the minutes of its November meeting are released. The stock and bond markets will be closed on Thursday and shut down early on Friday.

Have a healthy and happy Thanksgiving.