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Market Commentary

Financial Markets Commentary For the week of August 14, 2017

Key Market Data

08/04/2017 08/11/2017 One Week Change YTD One Year
S&P 500 Index 2,476.83 2,441.32 -1.43% +10.40% +14.02%
MSCI EAFE Index 1,947.62 1,916.65 -1.59% +16.50% +15.87%
Barclays Capital U.S. Aggregate Bond Index 2,033.38 2,038.35 +0.24% +3.14% +0.27%
10-year Treasury Note Rate 2.263% 2.190% -7.3 basis points -25.5 basis points +63.0 basis points

For months, market watchers have wondered what, if anything, would slow the seemingly inexorable rise of stocks. Now we know: a war of words between two world leaders who have nuclear warheads.

It was supposed to be a quiet week in Washington, with President Donald Trump and Congress on vacation. But the major indexes fell over the second half of last week when a frustrated President Trump reacted to the provocations of North Korea’s leader Kim Jong-un by telling reporters the United States was ready to unleash “fire and fury” on their nation if it continued its belligerence. North Korea responded by threatening Guam, after which the president ramped up his saber-rattling tweeting on Friday that the U.S. was “locked and loaded” should North Korea “act unwisely.” As a result of the first exchanges, stocks fell on Thursday. The Dow Jones Industrial Average and S&P 500 were on their way to posting their worst week since late March, a week during which the House failed to bring its health care plan to a vote and there was also a terrorist attack in London. The Chicago Board Options Exchange Volatility Index (VIX) jumped 44.4% on Thursday and reached its highest level since Election Day. Asian and European stocks also finished down for the week, and investors turned to some of the safe havens they look to when they’re on edge, bonds and gold. Still, stocks rebounded somewhat on Friday and, on a percentage basis, the weekly decline was a slip but far from a plummet, with the Dow down 1.1% and the S&P 500 off 1.4%. Furthermore, the three major American indexes remain well up for the year, and both the Dow and S&P 500 hit new highs as recently as last Monday, with the Dow turning the trick 10 days in a row. And the VIX, though it was up 55% for the week, remained not that far from its recent historically low levels. In sum, for investors the war of words was – for now – concerning, but not alarming.

There were other factors that impacted the stock market’s performance last week. They included weak inflation readings that led some investors to believe the Federal Reserve was unlikely to raise its benchmark rate when it meets in September, and some poor second-quarter results from retailers such as Macy’s, Kohl’s and J.C. Penney in what has otherwise been a bounce-back season for earnings.

Inflation remains stalled

The Fed has two mandates, jobs and inflation. While the jobless rate has steadily declined from a recession high of 10% in 2009 to the most recent reading of 4.3% in July, inflation has continued to fall short of the Fed’s goal of 2%. The most recent evidence shows few signs of progress. First, the Producer Price Index (PPI) for July came in down 0.1% from the month before and up 1.9% over the past year. Core PPI, less food and energy, fell the same 0.1% from June and rose 1.8% for the year. And the Consumer Price Index (CPI) rose 0.1% in July from the month before (an increase of 0.2% had been forecast) and was up 1.7% over the past year. Core CPI posted the exact same figures, up 0.1% month over month and 1.7% year over year. As a result, after the second report, the CME Group’s forecast for the Fed making another rate hike this year fell to 38%, down from 47% the day before.

Productivity, better, but …

Another issue that has vexed the Fed during the recovery – and Chairwoman Janet Yellen opined on it when she visited Capitol Hill last month to talk to lawmakers – is low productivity, which impacts wages, spending and economic growth. So, it was good news that productivity was up in the second quarter, rising 0.9% compared to the first three months of the year when it only rose 0.1%, and up 1.2% from the second quarter of 2016. Nonetheless, the pace remained well below historic norms, including the post-World War II average of 2.1% a year, not to mention the fact that in 2016 productivity had its first calendar-year decline since 1982, down 0.1%.

China’s on the move

China increased its foreign reserves for the sixth month in a row in July, adding $23.9 billion for a total of $3.081 trillion, the People’s Bank of China reported. China also announced that its trade surplus widened for the fifth month straight in July, with exports up 7.2% (in dollar terms).

Lots of jobs, not enough qualified applicants

Two of last week’s reports underscored a recent job-market trend: plenty of jobs, but not enough qualified applicants. First, the government said that the number of job openings rose from 5.702 million in May to 6.163 million in June, the highest total since record-keeping began in 2000, with the number of openings up 11% from a year earlier. Then the National Federation of Independent Businesses (NFIB) Small Business Optimism Index improved 1.6 points in July from the month before to 105.2. The index has been steadily climbing since the election, having hit a post-recession high of 105.9 in January, and in July, 7 of the 10 index components were up. But, while 60% of small business owners said they were hiring or trying to hire in July, 87% of that group said they were having a tough time finding qualified applicants. In addition, 19% of the respondents cited a lack of strong applicants as their single most important business problem, and 35% of owners reported having openings they could not fill, the highest level since November 2001 and the second highest percentage ever recorded by the NFIB.

In other news, the Federal Reserve Bank of New York announced that U.S. household debt reached $12.7 trillion the first quarter, a new high, surpassing the previous peak set in 2008, before the housing market collapse. And first-time jobless claims for the week ending Aug. 5 climbed 3,000 to 244,000, while the four-week moving average declined 1,000 to 241,000.

A look ahead

This week’s releases will include updates on retail sales, business inventories, housing starts, building permits, industrial production, capacity utilization, the Conference Board’s leading economic indicators and consumer confidence. The Fed will also release the minutes of its July meeting.