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Market Commentary

Financial Markets Commentary For the week of June 26, 2017

Key Market Data

06/16/2017 06/23/2017 One Week Change YTD One Year
S&P 500 Index 2,433.15 2,438.30 +0.21% +9.98% +17.81%
MSCI EAFE Index 1,892.93 1,889.23 -0.20% +14.51% +15.66%
Barclays Capital U.S. Aggregate Bond Index 2,029.48 2,032.99 +0.17% +2.86% +1.38%
10-year Treasury Note Rate 2.152% 2.143% -0.9 basis points -30.2 basis points +39.6 basis points

Sectors of the stock market – notably energy, tech and health care – fluctuated last week, but the major indexes remained at or near their all-time highs, with the S&P 500 and the Dow Jones Industrial Average both setting records on Monday.

The week’s biggest story happened in the halls of Congress where Senate Republicans unveiled the Better Care Reconciliation Act, their plan to replace Obamacare. Despite the initially lukewarm reception of the House’s plan by GOP senators – not to mention the complete disdain offered by Senate Democrats – the new plan is very similar. The Senate plan cuts Medicaid funding, shifts some responsibilities from the federal government to the states and ends the mandate that individuals have health insurance and that businesses provide insurance to their employees or face fines. The bill would also end the tax imposed by Obamacare on wealthier Americans to fund the plan. Unlike the House plan, the Senate version protects people with pre-existing conditions from paying higher premiums. The GOP hopes to vote on the bill before the July 4 recess, but five Republican senators have already said they won’t vote for it “as is,” and the GOP can only afford to lose two votes as every Democrat is expected to vote against it – if 50 of the 52 Republican senators say “yay,” Vice President Mike Pence can cast the tie-breaking vote.

The week in oil

Despite a slight rebound on Friday, oil had its worst week of the year as American drillers continued to more than make up for the Organization of the Petroleum Exporting Countries (OPEC) production cuts. The price of a barrel of crude dipped to its lowest level since last August, and United States crude, which tumbled 3.8% last week, officially entered a bear market, having now fallen 21% from its recent high in February. Not surprisingly, the S&P 500’s energy sector had its worst week of the year as well, declining 2.9%. Meanwhile Libya, the country which boasts Africa’s largest oil reserves and an OPEC member exempt from having to make cuts, is now producing up to 885,000 barrels of oil a day. This is triple what it was a year ago, despite war between the government and a variety of militias. Nigeria and Iran, likewise excluded from the OPEC agreement, have also recently increased production.

The Brexit begins

After a long build-up ending with a disastrous election, Great Britain’s Prime Minister Theresa May began negotiations to leave the European Union (EU) last week, and, as expected, there was scant progress. The EU is insisting that the issue of protecting the rights of the more than three million of its citizens living in Great Britain and some €60 billion in fees owed by Britain be addressed before the economic relationship is broached. Come March 29, 2019, Britain will be out of the EU regardless of whether or not an accord is reached.

MSCI welcomes China

In a step long sought by China to further legitimize the yuan as a global currency, MSCI said it would add China’s domestic stocks to its emerging market index in 2018. The 222 stocks from the Shanghai and Shenzhen will initially account for 0.73% of the MSCI’s Index, though the weighting could increase if China enacts further market reforms.

Stress tests passed – and reconsidered

The nation’s 34 largest banks easily passed the latest round of the Federal Reserve’s stress tests, designed to ensure that they have enough money on hand to weather a financial crisis. The tests are the result of the Dodd-Frank Act, which President Donald Trump wants to amend, and the fact that the banks had more than they needed may provide him some fodder. On Thursday, Jerome Powell, the Fed governor overseeing the tests, told the Senate Banking Committee, “It is important for us to look for ways to reduce unnecessary burden.” In addition, Treasury Secretary Steven Mnuchin, who once ran OneWest Bank, wants to lower the number of banks that take the tests to those with assets of $50 billion or more compared to the current yardstick of $10 billion or more.

A fall from grace at Uber

Uber’s high-profile and often controversial Chief Executive Officer Travis Kalanick was forced to resign his position last week as some of his company’s top investors decided that he and Uber were at the center of too many ethical and legal issues. Uber, a privately-owned company, has an estimated market value of $70 billion. At least 1,000 Uber employees reportedly signed a petition asking that Kalanick be retained by the company in some capacity.

New home sales soar

Thanks to high demand and low inventories, new and existing home sales soared in May. The government reported that new home sales rose 2.9% in May from April to an annualized rate of 610,000 and were up 8.9% from a year earlier. The median sales price was $345,800, the highest price since record-keeping began in 1963. The National Association of Realtors said that existing home sales increased 1.1% in May to an annualized rate of 5.62 million, up 2.7% from May of 2016. That median sales price also climbed to a new high of $252,800, while the median number of days a house was on the market fell to a new low of 27. In other news, the Conference Board’s Leading Economic Index rose 0.3% in May from April’s gain of 0.2%. IHS Markit said that its composite PMI index for the eurozone slipped to 55.7 in June from 56.8 in May. Nonetheless, growth for the second quarter is expected to hit 0.7%, which would be the best three months since the first quarter of 2015. And first-time jobless claims for the week ending June 17 were up 3,000 to 241,000; the four-week moving average added 1,500 to 244,750.

A look ahead

This week’s releases will include updates on orders for durable and capital goods, the S&P CoreLogic Case-Shiller Home Price Index, readings on consumer confidence from both the Conference Board and University of Michigan, wholesale and retail inventories, pending home sales and personal consumption expenditures. The government will also issue its latest estimate for first-quarter growth, expected to remain unchanged at 1.2%.