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Friday, December 09, 2016

Stocks Extending Weekly Rally

Charles Schwab: On the Market
Posted: 12/9/2016 1:15 PM ET

Stocks Extending Weekly Rally

U.S. stocks are tacking onto a strong weekly rally with healthcare issues leading the way, aided by upbeat Alzheimer's treatment trial results from Biogen, while domestic consumer sentiment jumped and China posted another favorable economic report. European equities extended a winning streak to five sessions, bolstered by yesterday's changes to the European Central Bank's asset purchase program. Crude oil is extending a rebound, while Treasury yields and the U.S. dollar are continuing to climb. Gold is lower. Restoration Hardware issued disappointing guidance and Dow member Coca-Cola announced a CEO successor.

At 12:53 p.m. ET, the Dow Jones Industrial Average, the S&P 500 Index and the Nasdaq Composite are advancing 0.4%. WTI crude oil is increasing $0.59 to $51.43 per barrel and Brent crude oil is gaining $0.29 to $54.18 per barrel, while wholesale gasoline is flat at $1.51 per gallon. Elsewhere, gold is trading $10.68 lower to $1,160.09 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is up 0.6% at 101.67.

Restoration Hardware Holdings Inc. (RH $33) reported 3Q earnings-per-share (EPS) ex-items of $0.20, above the $0.16 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $549 million, topping the expected $528 million. 3Q same-store sales declined 6.0% y/y, versus the projected 12.8% drop. The company said November results were below expectations, largely attributed to consumer softness related to the U.S. election and its Fall Source Books getting into homes later than planned. As such, RH issued 4Q EPS and revenue guidance that came in short of estimates, while it lowered its full-year outlook, pointing out that its strategic investments and changes to its business model are temporarily depressing financial results in the short term. Shares are falling sharply.

Broadcom Limited (AVGO $179) posted fiscal 4Q EPS ex-items of $3.47, north of the forecasted $3.38, with revenues rising 125% y/y to $4.2 billion, in the wake of the acquisition of Broadcom Corp by Avago Technologies, versus the estimated $4.1 billion. The semiconductor device supplier issued 1Q revenue guidance that topped expectations, while announcing that it will pay out a quarterly dividend of $1.02 per share, double its previous payout. AVGO is trading solidly higher.

Dow member Coca-Cola Co. (KO $42) announced that President and Chief Operating Officer James Quincey will succeed Muhtar Kent as Chief Executive Officer, effective May 1, 2017. Shares are nicely higher.

Biogen Inc. (BIIB $300) is gaining solid ground after announcing favorable results from an early trial of its experimental Alzheimer's treatment.

With the year coming to a close, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at 2016 performance and what is expected in 2017 for the major market sectors in his latest Schwab Sector Views: Entering 2017 the Same Way as 2016. Brad notes that this was one of the toughest years to predict in recent memory. And we aren't changing our recommendations as we enter 2017. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Consumer sentiment jumps

The preliminary University of Michigan Consumer Sentiment Index (chart) this month rose to 98.0—the highest since January 2015—from the prior month's 93.8 level, and compared to the Bloomberg expectations of an increase to 94.5. The current economic conditions and outlook components of the survey both improved solidly month-over-month (m/m). The 1-year inflation estimate dipped from 2.4% to 2.3%, and 5-10 year inflation outlook slipped to 2.5% from 2.6%.

Wholesale inventories (chart) declined 0.4% m/m in October, matching the decline in September and forecasts. Sales jumped 1.4% m/m, versus the expected 0.7% increase and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—fell to 1.30 months from September's 1.32 months level.

Treasuries are lower in afternoon action, with the yield on the 2-year note rising 2 basis points (bps) to 1.13%, while the yields on the 10-year note and the 30-year bond are gaining 6 bps to 2.47% and 3.16%, respectively.

With bond yields having spiked since the surprise presidential election and amid elevated December rate hike expectations, which have been bolstered by some mostly stronger-than-expected economic data, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, Bond Market Outlook: Higher Rates and Known Unknowns. Also, Schwab's Fixed Income Director, Collin Martin, CFA, offers a look at corporate bonds amid the rising yield environment for next year in his article, Corporate Bonds: Income May Drive Potential Returns in 2017. Read both articles at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Schwab's Chief Investment Strategist Liz Ann Sonders delivers a look at earnings and the economy in her latest article, You've Got to Earn It: Valuations Aided by Improving "E," where she points out that economic and earnings momentum has picked up—and not just post-election, with the latter expected to grow by more than 12% in 2017. She concludes that valuations are reasonable considering inflation; but that also represents a risk factor next year. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Europe extends winning streak

European equities swept the week with five-straight winning sessions, as the markets continued to warm up to yesterday's monetary policy decision from the European Central Bank (ECB). The ECB extended its asset purchase program by nine-months and opened up the types of securities it was able to buy, though it reduced the amount that it will purchase on a monthly basis from April to December 2017. ECB President Mario Draghi also went out of his way to insist that this move was not a taper and emphasized that the program could be increased in size and/or duration, if the economic outlook deteriorated. Most sectors gained ground, led by healthcare issues, but financials were bogged down by resurfacing pressure on the Italian banking sector, which had rebounded along with Italy's markets from the political uncertainty that was bolstered by the failed Italian referendum over the weekend, the first step of several that could pave the way for an Italian exit from the European Union (EU). Schwab's Director of International Research, Michelle Gibley, CFA, discusses the uncertain political front in the region in her latest article, Europe Votes: Could More Countries Reject the EU? Read more at www.schwab.com/oninternational.

German exports rose by a smaller amount than expected in October, though they rebounded from September's drop, while the U.K. trade deficit narrowed much more than expected in October. The euro saw pressure and the British pound was little changed versus the U.S. dollar, while bond yields in the region were mixed. For analysis of the plethora of global developments that are likely to preserve volatility, see the video from Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

The U.K. FTSE 100 Index and Spain's IBEX 35 Index were up 0.3%, France's CAC-40 Index gained 0.6%, Germany's DAX Index rose 0.2%, and Switzerland's Swiss Market Index rallied 1.8%, while Italy's FTSE MIB Index dropped 0.7%.