Northwestern Mutual

Financial Markets Commentary For the week of Oct. 31, 2016

Stocks meandered last week, largely driven by earnings news. The final results were mixed, with the Dow Jones industrial average just up and the Standard & Poor’s 500 index and Nasdaq losing ground – but not much.

Investors could hardly be blamed; however, if they were looking ahead to this week, when the Federal Reserve will meet, the Labor Department will release the jobs report for October, and the seemingly interminable and unquestionably contentious election season will enter its final full week. Meanwhile, investors moved away from bonds, pushing the yield on the 10-year Treasury to a five-month high.

Politics certainly took a toll on stocks on Friday when the report of the FBI’s new investigation of Hillary Clinton’s emails turned around what looked to be a positive week for the S&P 500. And this week, the assumption is that the Fed, poised to raise its benchmark interest rate for the first time this year, will hold off until its next meeting in December rather than add to the drama by acting less than a week before the election.

GDP hits a two-year high

There was some news last week that should make it easier for the Fed to pull the trigger before year’s end: the government’s first estimate for third-quarter gross domestic product (GDP) growth came in at 2.9%, the fastest clip in two years and better than twice the second quarter’s pace of 1.4%. On the plus side, while consumer spending fell from its torrid pace of 4.3% in the second quarter to 2.1%, spending on nonresidential structures such as office buildings, oil wells and warehouses rose 5.4% after falling 2.1% in the second, and spending on equipment, though still negative at -2.7%, registered its smallest dip of the year. In addition, while government spending has lagged, both candidates have pledged to spend when in office (though with very different priorities). As for the long view, since the recession ended in 2009, GDP has grown at just 2.1% a year; the last time it exceeded 3% in a calendar year was in 2005.

Earnings news

With about half of the S&P 500 having now reported third-quarter earnings, news continued to be the main stock market driver last week. Apple, the world’s largest company when measured by market value, did not impress investors despite the company’s forecast for a strong fourth quarter, as revenue and income fell from a year earlier. Other companies that fell short of expectations included Whirlpool, Sherwin-Williams, Under Armour, Amazon and McKesson, while Procter & Gamble Co., Merck, Boeing and Lockheed Martin outperformed. Two troubled companies, Volkswagen and Deutsche Bank, both had profitable quarters after having posted losses a year earlier. While energy companies hope the worst is over, they’re not there yet. Exxon Mobil, for example, reported a 38% decline in earnings from a year earlier, the eighth straight year-over-year quarterly dip, and both United States and Brent crude fell back below $50 a barrel last week.

Signs of economic life in the eurozone

In a positive sign for the eurozone, the region’s budget deficit narrowed to an eight-year low in the second quarter, dipping from 2.1% of GDP in the second quarter of 2015 all the way to 1.5%. In addition, the IHS/Markit Purchasing Managers’ Composite Index rose to 53.7 in October from 52.6 the month before, the best reading since early 2016. Furthermore, Germany’s IFO Business Climate Sentiment Survey climbed to 110.5 in October, its highest point since April 2014, and the economic sentiment indicator for the region also improved in October, rising to 106.3 from 104.9 in September.

A government for Spain

After 10 months in political limbo and the prospect of a third national election in less than a year, Spain’s caretaker Prime Minister Mariano Rajoy, the leader of the conservative People’s Party, was finally able to form a government when the Socialist Party decided to abstain from voting, allowing him to broker a ruling coalition. Better still, Spain’s GDP grew 0.7% in the third quarter, and the nation’s unemployment rate fell below 20% for the first time in six years.

Dwindling confidence

Two consumer sentiment polls headed south last week, reflecting the uncertainty over the coming elections. First, the Conference Board said its index fell to 98.6 in October from 103.5 in September, and then the University of Michigan’s revised reading for October came in at 87.2 compared to the preliminary figure of 87.9. In other news, the S&P CoreLogic Case-Shiller 20-city Home Price Index was up 5.1% in August from a year earlier. The National Association of Realtors Pending Home Sales Index increased 1.5% in September from August to 110.0, up 2% from September 2015. The Commerce Department said that sales of new single family homes rose 3.1% in September from August to 593,000, near to the nine-year high reached in July. Orders for durable goods fell 0.1% in September from August. And first-time jobless claims for the week ending Oct. 22 fell 3,000 to 258,000, the Labor Department reported, while the four-week moving average for the week ending Oct. 15 was up 1,000 to 253,000.

A look ahead

As noted, this will be a big week for news – economic and otherwise. The Fed will meet on Tuesday and Wednesday. The government will release the unemployment report for October on Friday, with the jobless rate expected to come in at 4.9%. And the electioneering will finally be all but over. There will also be a slew of economic updates, including the latest on personal income and spending, the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes, vehicle sales, nonfarm productivity, factory orders, construction spending, orders for durable and capital goods and the trade balance, as well as more third-quarter earnings reports. In addition, the Bank of England and the Bank of Japan will meet this week, with both expected to leave their interest rates and stimulus spending unchanged.