Northwestern Mutual

Financial Markets Commentary For the week of Nov. 07, 2016

Jimmy Carter. No, he’s not on Tuesday’s ballot, though some Americans probably wish he were.

But he was in office back in 1980, which was the last time the S&P 500 fell for nine days in a row (and a year when the federal funds rate was – brace yourself –20%). We’re in the midst of a similar streak right now because the race for president is suddenly seen as a tossup, whereas just two weeks ago Hillary Clinton seemed to have enough of a cushion that she was buying ad time in the red state stronghold of Texas, and investors don’t like uncertainty. Even a strong jobs report on Friday couldn’t end the streak, and we won’t know until late Tuesday or early Wednesday who will be moving into the White House next January and how investors will feel about it. It’s important to note, however, that back in 1980 the S&P 500 plummeted 9.4% over that nine-day stretch, according to S&P Global Market Intelligence, while this time around it fell a far less precipitous 3.1%. Meanwhile, and not surprisingly, the yield on the 10-year Treasury, which had recently reached a five-month high, retreated as investors sought the safety of bonds.

Amidst last week’s investor anxiety – and the VIX “fear gauge” rising 40% to its highest level since the Brexit referendum in June – there were two other stories that got short shrift: the Federal Reserve’s meeting on Tuesday and Wednesday and, as noted, the unemployment report issued on Friday. The Fed, as expected, decided not to act. In fact, only two committee members voted for a rate hike compared to three in September. The post-meeting release was slightly more positive than September’s, noting that the “case for an increase in the federal funds rate has continued to strengthen.” That sets up what would be the only rate hike of the year (the Fed had originally anticipated four) when the committee next meets on Dec. 13 and 14. The odds of a December hike are now around 75%, according the CME Group, assuming there’s no post-election upheaval.

The Fed’s case for a December hike was further bolstered when the Labor Department said that the unemployment rate ticked back down from 5% in September to 4.9% in October, matching its lowest level since February 2008, which was during the recession and at a time when far fewer jobs were being created. The government estimated that 161,000 new positions were added to the economy in October and, better yet, the year-over-year increase in wages was 2.8%, the best showing since June 2009. The labor force participation rate dipped to 62.8% in October from September’s 62.9%, but was still up from 62.5% a year earlier.

The BOE and the Brexit

The Fed was not the only central bank to convene last week, and the Bank of England (BOE) said it was no longer expecting to cut its interest rate again this year, though it warned that accelerating inflation may warrant tightening at some point. In a related story, the BOE’s Governor Mark Carney said he’d extend his tenure until June 2019, through the negotiations for the two-year Brexit, though he would not serve his full eight-year term. However, the road to leaving the European Union took a new twist on Thursday when Britain’s High Court ruled that Prime Minister Theresa May can’t take that step without Parliament’s consent. May has resisted getting Parliament involved in the negotiations and said she would appeal the ruling. She also got on the phone to Germany’s Chancellor Angela Merkel and France’s President François Hollande, among others, to assure them that her timetable for beginning Great Britain’s two-year exit next March was unchanged. In another piece of bad news for Britain, S&P Global Ratings said the pound’s sharp drop in value threatens its global reserve currency status.

Oil’s slippery slope

After the energy department reported a build-up in crude oil supplies and the Organization of the Petroleum Exporting Countries decided to let some members, including Iran and Nigeria, be exempt from planned supply cuts, the price of a barrel of oil tumbled last week after having recently climbed past the $50 mark. United States crude fell to $44.07 a barrel and Brent closed at $45.58.

In other news, personal income rose 0.3% in September from the month before, while Personal Consumption Expenditures (PCE) spending increased 0.5%; real PCE was up 0.3%, and the Core PCE Index, less food and energy, gained 0.1% from August and 1.7% over the past twelve months. The Institute for Supply Management (ISM) Manufacturing Index climbed to 51.9% in October from 51.5% in September; the ISM’s Nonmanufacturing Index fell to 54.8% in October from September’s 57.1% (any reading above 50% indicates expansion). CoreLogic reported that home prices, including distressed sales, were up 6.3% in September from a year earlier and improved 1.1% from August. The firm also said that home-equity wealth has doubled during the last five years to $13 trillion as the housing market has rebounded from the recession. According to WardsAuto, U.S. automakers sold 1.36 million vehicles in October, which added up to an annualized total of 17.90 million, the fastest such pace this year. Construction spending declined 0.4% in September from August. Nonfarm productivity rose 3.1% in the third quarter from a year earlier. Factory orders advanced 0.3% in September from August, while orders for durable goods were down 0.3% in September from the month before. The trade balance for September was -$36.4 billion compared to August’s -$40.5 billion. And first-time jobless claims for the week ending Oct. 29 were up 7,000 to 265,000; the four-week moving average for the week ending Oct. 22 climbed 4,750 to 257,750.

A look ahead

This week’s reports will include the latest on consumer credit, small business optimism, wholesale inventories and consumer sentiment, as well as more third-quarter earnings reports. Oh, and the next president of the U.S. will be elected.