Northwestern Mutual

Financial Markets Commentary For the week of Nov. 28, 2016

President-elect Donald Trump won’t take office until Jan. 20, but based on the stock market’s recent run, the confidence that he’ll take dramatic steps to overhaul the economy with federal spending, deregulation and corporate tax cuts has apparently turned into iron-clad conviction.

In a holiday-shortened week, the Dow Jones Industrial Average managed to set a record each and every day as it raced past the 19,000-point mark, an especially impressive run as the index had fallen below 18,000 during the first week of November. The S&P 500 also achieved four new highs last week, as did the Russell 2000 Index of small-cap companies, which has now done so on every day of trading since Nov. 14. The Nasdaq, the laggard by comparison, only set a record on three of four days. Meanwhile, the demand for bonds continued to fall, with the yield on the two-year hitting a six-year peak of 1.09% on Tuesday on its way to finishing the week at 1.11%. As for the yield on the 10-year Treasury, it ended its two-week stretch of double-digit increases, but still hovers near a 15-month high at 2.36%.

The holiday sales season kicks off

Though the final receipts won’t be official for some time, the early returns show that online retailers continued to increase their share of the Thanksgiving and Black Friday retail haul at the expense of brick-and-mortar stores. According to RetailNext, internet sales were up more than 10% from the year before on both Thursday and Friday, passing the $3 billion mark for the first time, while net sales at walk-in stores declined 5% from a year ago.

Merkel’s hat is in the ring, again

German Chancellor Angela Merkel informed her Christian Democratic Union Party that she will indeed run for a fourth term next year. Merkel said she’ll be trying to maintain stability in Germany when Europe is facing a long list of challenges that includes the falling euro, the Brexit, the ongoing migrant crisis, the aftermath of Trump’s election and continued provocations from Russia. The election will be tougher than those in the past because, as she put it, “we are facing a strong polarization.” Merkel was first elected to office in 2005.

Great Britain’s budget and the Brexit

Britain unveiled a new budget that attempts to both address the Brexit and the welfare of the working classes, those who Prime Minister Theresa May has described as “just about managing” and who voted in large numbers for the Brexit. Philip Hammond, the chancellor of the Exchequer since July, said that he’s no longer aiming for his predecessor’s goal of balancing the budget by 2020. He also lowered growth forecasts and said that inflation will increase because of the weaker pound. “Our task now is to prepare our economy to be resilient as we exit the EU [European Union],” he said, adding that, because of inflation, real earnings growth will “fall close to zero next year.” There were also two very different takes on the course of the Brexit last week. Germany’s Finance Minister Wolfgang Schäuble said that Britain should be prepared for its financial services to shift to Frankfurt and other European financial hubs. Then The Sunday Times reported that Mark Carney, the head of the Bank of England, is hoping to negotiate open access to the EU’s markets for British businesses for two years after the Brexit is completed.

Oil up in the air

Last week’s stock market surge came despite the fact that the price of a barrel of oil tumbled late in the week because investors don’t think the Organization of the Petroleum Exporting Countries (OPEC) will be able to work out a deal to limit production. On Sunday, there was further evidence that a production cap will be a tough sell when Libya said it will not lower its output for “the foreseeable future.” OPEC is reportedly trying to work out a deal that will exempt both Libya and Nigeria from cuts.

The new commerce secretary?

As he continues to put together his team, Trump is expected to announce this week that billionaire Wilbur Ross will be the new Secretary of Commerce, replacing Penny Pritzker. Ross, who heads the private equity firm WL Ross & Company, was an economic adviser and fundraiser for Trump during his campaign. He earned the nickname “king of bankruptcy” for his moves in the steel industry, and is seen a hard-liner on trade who has spoken about raising tariffs on imports from China in particular. Like Trump, he also favors corporate tax cuts.

Mixed news for home sales

In economic news, the National Association of Realtors reported that existing home sales rose 2% in October from the month before to an annualized rate of 5.60 million and was up 5.9% from a year earlier, the fastest year-over-year pace since February 2007. However, the Census Bureau said that new home sales fell unexpectedly 1.9% in October from September to an annualized rate of 563,000. The Commerce Department announced that orders for durable goods surged 4.8% in October from September’s revised increase of 0.4%, while orders for capital non-defense goods, excluding aircraft, were up 0.4% after having dipped a revised 1.4% in September. The University of Michigan’s Consumer Confidence Index for November was 93.8 compared to the preliminary reading of 91.6. And first-time jobless claims for the week ending Nov. 19 were up 18,000 to 251,000; the four-week moving average for the week ending Nov. 12 fell 2,000 to the same 251,000.

A look ahead

This week’s flurry of releases will more than make up for the paucity of news during the Thanksgiving slowdown. There will be updates on the S&P CoreLogic Case-Shiller Home Price Index, personal consumption expenditures, pending home sales, the Federal Reserve’s Beige Book, construction spending, the Institute for Supply Management Manufacturing Index and vehicle sales. In addition, the government will offer its second estimate for third-quarter growth, expected to be revised to 3.1% from the initial reading of 2.9%, as well as the unemployment rate for November, forecast to remain unchanged at 4.9%.