Read More. (PDF) - Northwestern Mutual

NORTHWESTERN MUTUAL WEALTH MANAGEMENT COMPANY
MARKET COMMENTARY
FOR THE WEEK OF DECEMBER 22, 2014
For what seemed like the umpteenth
time since the Great Recession began, the Federal Reserve came to the
rescue, not only halting the stock market’s recent slide, but also sending
the Dow and the S&P 500 roaring back to the brink of their record highs.
Rising concern about the tumbling price of oil, a boon for
consumers but a bane for energy companies and oil-dependent
economies, was the reason for the recent stock market dive,
but after its two-day meeting last week the Fed’s assurance
that it would not rush to raise its benchmark rate sent the
indexes soaring – on Wednesday and Thursday, for instance,
the Dow gained 609.88 points, and the S&P 500 twice had its
biggest day of the year.
Key Market Data
At its last meeting of 2014, some analysts thought the Fed
might advance its timetable for raising its rate because of the
recent economic upswing, but the committee said it would
“be patient” while focusing on inflation, which remains well
below the 2% target. At her post-meeting press conference,
Chairwoman Janet Yellen said the rate would not be raised
at the January or March meetings, making April the earliest
possible date. The Fed did drop the use of a “considerable time,”
which had come to be seen as meaning six months, to describe
how soon it would act, but Ms. Yellen said that didn’t “represent
a change in our policy intentions,” adding that the wording was
dropped because it was linked to the bond-buying program
that ended in October.
Trending
61-1200
The ruble on the run
The words and actions of Russia’s central bank, meanwhile,
did little to allay recent fears about the plunge of the nation’s
Week ending…
12/12/2014
12/19/2014
Change
S&P 500 Index
2,002.33
2,070.65
+3.41%
MSCI EAFE Index
1,767.09
1,782.04
+0.85%
BarCap U.S. Aggregate
Bond Index
1,916.65
1,911.42
-0.27%
10-Year Treasury
Note Rate
2.102%
2.178%
+7.6
basis pts.
• The Dow rebounds, gaining 3.03%.
• Russia raises its benchmark rate to 17%.
• Industrial production jumps 1.3%.
currency, the ruble. Sanctions and low oil prices have wreaked
havoc with the Russian economy, and last week, in the middle
of the night, the central bank raised its rate all the way from
10.5% to 17% in an effort to calm nerves. It didn’t work, as
Russians raced to buy big-ticket items before the ruble
fell any further. A three-hour speech by President
Vladimir Putin temporarily relieved the panic as
he said the price of oil would bounce back,
while noting that the West, as usual,
was to blame for Russia’s woes.
Typically defiant, he said,
“I would not call
the
MARKET COMMENTARY FOR THE WEEK OF DECEMBER 22, 2014
situation a crisis,” adding, “You may call it whatever you
want.” On the same day, the United States and the eurozone
introduced new economic sanctions to put further pressure on
Mr. Putin over his nation’s role in the Ukraine conflict.
Rogue nations in the news
Two countries that our government has long black-listed,
Cuba and North Korea, were in the news last week. First,
President Obama signaled an end to the American policy of
isolating Cuba, which he said had failed to work in any case,
though some members of Congress pledged to resist the
rapprochement. Then he pledged to retaliate against North
Korea for its cyber-attack on Sony, which came in response
to a movie that included a scene in which that country’s
leader was killed. Mr. Obama said Sony had made a “mistake”
by withdrawing the movie and appealed to China for help in
containing North Korea.
The bailout officially ends
The government announced that it will end its bailout of U.S.
businesses that came during the financial crisis by selling its
last shares. The 2008 bailout program, much criticized at the
time, has since come to be seen as critical to the survival of
GM, Chrysler, Citigroup and Bank of America, among other
companies, and the investment even turned a profit for
taxpayers, with the $426 billion package returning $441.7
billion.
China’s revision
China revised its estimate of the size of its economy in 2013
by 3.4% and economists said the increase, which brought
the total to 58.8 trillion yuan ($9.6 trillion), pushed forward
the date at which China will surpass the U.S. as the world’s
largest economy, which had been estimated to occur in about
a decade. At the same time, efforts by China’s government
to revive the housing market continue to fall short, and in
November prices of newly constructed homes fell in 67 of the
70 cities tracked from the month before. The IMF estimates
that construction and real estate activities add up to 12.8% of
China’s GDP.
2
U.S. manufacturing soars
Manufacturing had its biggest gain in nine months in November
as factory production rose 1.1%, the Fed reported. Overall,
industrial production was up 1.3%, the best month since May
2010, while capacity utilization hit 80.1%, its highest level since
December 2007.
In other economic news, the Commerce Department said that
housing starts fell 1.6% in November from October to an annual
rate of 1.03 million, while building permits were off 5.2% to an
annual rate of 1.03 million. The Labor Department reported
that the consumer price index was down 0.3% in November as
gas costs plunged 10.5%, the biggest drop in almost six years.
Core CPI, less food and energy, rose 0.1%; over the last year, CPI
is up 1.3% and core CPI 1.7%. First-time jobless claims declined
6,000 to 289,000, and the four-week moving average fell
750 to 298,750. And the Conference Board said its index of
leading indicators was up 0.6% in November, the same rate as
in October.
A look ahead
This week’s releases will include the latest on new and existing
home sales, orders for durable and capital goods, consumer
confidence, and personal consumption expenditures. The
government will also issue its second revision for third-quarter
GDP, which has already been raised to 3.9% from 3.5% and
is expected to surpass the 4% mark. Lastly, note that on
Wednesday the stock market will close at noon and the bond
market will close at 1 p.m.; both will reopen on Friday.
Happy holidays from all of us at Northwestern Mutual.
MARKET COMMENTARY FOR THE WEEK OF DECEMBER 22, 2014
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee,
WI (NM) (life and disability insurance, annuities) and its subsidiaries. Northwestern Mutual Wealth Management
Company®, Milwaukee, WI, (investment management, trust services, and fee-based financial planning) subsidiary
of NM, limited purpose federal savings bank. Northwestern Mutual Investment Services, LLC, (securities)
subsidiary of NM, broker-dealer, registered investment adviser, member FINRA and SIPC.
The opinions expressed are those of Northwestern Mutual as of the date stated on this report and are subject
to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute
investment advice and is not intended as an endorsement of any specific investment or security. Information and
opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar,
FactSet and Standard & Poors.
Please remember that all investments carry some level of risk, including the potential loss of principal invested.
Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past
performance, are not a guarantee of future performance and are not indicative of any specific investment.
Diversification and strategic asset allocation do not assure profit or protect against loss. Although stocks have
historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider
their ability to invest during volatile periods in the market. The securities of small capitalization companies are
subject to higher volatility than larger, more established companies and may be less liquid. With fixed income
securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates
fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true
for bond mutual funds. When interest rates are at low levels there is risk that a sustained rise in interest rates may
cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer
of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held
in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates
(also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not
usually have maturity dates, and are not obligated to return the investor’s principal. Additionally, high yield bonds
and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and
bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation
risk before investing in a particular bond or bond fund.
All index references and performance calculations are based on information provided through Bloomberg.
Bloomberg is a provider of real-time and archived financial and market data, pricing, trading, analytics and news.
61-1200 Not Available for field order.
Standard and Poor’s 500 Index® (S&P 500®) is a capitalization-weighted index of 500 stocks. The index is designed
to measure performance of the broad domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
Standard & Poor’s offers sector indices on the S&P 500 based upon the Global Industry Classification Standard
(GICS®). This standard is jointly maintained by Standard & Poor’s and MSCI. Each stock is classified into one
of 10 sectors, 24 industry groups, 67 industries and 147 sub-industries according to their largest source of
revenue. Standard & Poor’s and MSCI jointly determine all classifications. The 10 sectors are Consumer
Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials,
Telecommunication Services and Utilities.
The MSCI EAFE Index measure international equity performance. It comprises the MSCI country indices that
represent developed markets outside of North America: Europe, Australasia and the Far East.
Barclays Capital US Aggregate Bond Index is a benchmark index composed of US securities in Treasury,
Government-Related, Corporate, and Securitized sectors. It includes securities that are of investment-grade quality
or better, have at least one year to maturity, and have an outstanding par value of at least $250 million.
The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.
NYMEX Crude Future is the futures price on a barrel of oil on the New York Mercantile Exchange.
The Institute for Supply Management is a not-for-profit U.S. association for the benefit of the purchasing and supply
management profession, particularly in the areas of education and research.
The U.S. Department of Labor Consumer Price Indexes (CPI) program produces monthly data on changes in the
prices paid by urban consumers for a representative basket of goods and services.
The Conference Board Leading Economic Index is intended to forecast future economic activity and is calculated by
The Conference Board, a non-governmental organization, which determines the value of the index from the values
of 10 key variables. These variables have historically turned downward before a recession and upward before an
expansion.