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Tuesday, January 05, 2016

Charles Schwab: On the Market
Posted: 1/5/2016 4:15 PM ET
Plenty of Work… Little Reward

After yesterday's sharp nosedive on global growth concerns and a flare-up in the Middle East, investors today were treated to a tumultuous session, as the clear uncertainty supplied the markets sizable swings back and forth across the flatline, only to finish mixed and nearly where they began. Treasuries were far less volatile, but finishing mixed amid the insecurity, while crude oil prices continued to descend, gold was modestly higher and the U.S. dollar jumped. News on the equity front was headlined by lackluster December sales figures from the automakers.

The Dow Jones Industrial Average (DJIA) rose 10 points (0.1%) to 17,159, the S&P 500 Index gained 4 points (0.2%) to 2,017, but the Nasdaq Composite fell 12 points (0.2%) to 4,891. In moderate volume, 864 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.79 to $35.97 per barrel, but wholesale gasoline lost $0.03 to $1.29 per gallon, while the Bloomberg gold spot price increased $4.00 to $1,078.61 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 99.37.

The major automakers reported U.S. December sales today, with Fiat Chrysler Automobiles NV's (FCAU $9) Chrysler brand posting adjusted sales growth of 4.5% year-over-year (y/y), compared to the 11.3% gain estimated by FactSet. The figures are being adjusted to account for two more selling days this year compared to the same period a year ago. Ford Motor Co. (F $14) posted an adjusted 0.7% y/y rise in sales, below the forecasted 4.9% gain, while General Motors Co's (GM $32) sales declined 1.8%, compared to the projected 3.8% growth. FCAU was slightly higher, while F and GM were both lower.

Eli Lilly and Co. (LLY $84) traded higher after the company reaffirmed its full-year 2015 guidance, but it issued a full-year 2016 outlook that missed expectations.

Smith & Wesson Holding Corp. (SWHC $26) rallied after the firearm manufacturer raised its 3Q and full-year guidance, due to a stronger-than-expected sell-through rate of its products and data for the month of December indicating "strong growth" versus the same period a year ago.

Treasuries mixed in midst of uneasy global markets

Treasuries finished higher, while the U.S. economic calendar was void of any major releases today. Bond yields declined yesterday courtesy of the global equity market selloff centered on Chinese growth concerns following another dose of disappointing manufacturing data, as well as elevated tensions in the Middle East that flared-up over the weekend. The yield on the 2-year note declined 2 basis points (bps) to 1.02%, the yield on the 10-year note was flat at 2.25%, while the 30-year bond rate gained 2 bps to 3.01%.

On the heels of the solid losses to start 2016, Schwab's Chief Investment Strategist, Liz Ann Sonders, offers some analysis in her recent article, Back to Zero: Market's Flat Return Masks Underlying Pressures, as you'll see highlighted in our soon-to-be-published 2016 outlook report, we believe 2016 is likely to bring similar action as in 2015—with bouts of extreme volatility and a greater frequency of pullbacks or corrections. 2015 just ended with a whimper and 2016 is beginning with a bang. We continue to believe risk is elevated and investors should maintain no more than a neutral allocation to U.S. equities. Read more at, and also follow Liz Ann on Twitter: @lizannsonders.

Tomorrow's domestic economic calendar will be robust, with ADP's private sector payroll report expected to show 198,000 jobs were gained in December, the trade balance forecasted to show the deficit widened slightly to $44.0 billion in November, and factory orders projected to show a 0.2% month-over-month dip. However, the headlining releases will likely be the ISM and Markit's services sector reads, expected to show expansion for the sector accelerated slightly in December, while the day will culminate with the Federal Reserve's December meeting minutes, after which the Central Bank hiked rates for the first time since before the financial crisis.

As noted in the Schwab Market Perspective: What Was, What Is, and What May Be, in contrast to a weakening manufacturing sector, the services side of the economy (representing 88% of U.S. activity) remained healthy throughout 2015 and looks to continue that performance entering 2016. Also, the Fed has bent over backwards to soothe concerns by noting its desire to move gradually, allowing for the economy and markets to adjust. Slow rate hiking cycles have typically been positive for stocks. Schwab's Liz Ann Sonders, notes in her article, Said the Fed to the Markets, "Take a Hike", a key determinant of the pace at which the Fed continues to raise rates is likely to center around the U.S. dollar, with continued strength likely slowing the pace, while any sustained countertrend moves in the dollar, commodity prices or inflation could trigger a faster pace. We believe this will remain a focus by investors in 2016; and is likely to contribute to some of the volatility we believe will persist across the equity and fixed income markets. Read more at, and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Europe recovers somewhat from yesterday's drop, Asia mostly lower in volatile action
European equities finished higher, recovering some of yesterday's selloff that was the worst start to a year ever for the Stoxx Europe 600 Index, per Bloomberg, as data caused a flare-up in Chinese economic growth concerns and tensions in the Middle East escalated. For a look at yesterday's global market drop, see our Schwab Center for Financial Research's article, Chinese Stock Market Selloff: What's New, What's Not at, and follow us on Twitter: @SchwabResearch. Stocks in the region may have found some support from a drop in the euro versus the U.S. dollar, as well as reports of a plethora of measures from Chinese authorities to try to stabilize the markets. Bond yields in the region traded lower, while economic reports showed German unemployment fell more than expected in December, and the eurozone consumer price inflation estimate rose by a smaller amount than anticipated for last month.

Stocks in Asia finished mostly to the downside in volatile action in the wake of yesterday's global selloff that came amid economic growth concerns following disappointing Chinese data and escalated tensions in the Middle East. Mainland Chinese and stocks in Hong Kong declined modestly, as the markets recovered somewhat on signs that Chinese authorities stepped in to try to stabilize the markets. China's central bank conducted the biggest liquidity injection into the markets since September, after it intervened to support the yuan, which has fallen sharply as of late to exacerbate sentiment. For more analysis on the currency markets, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Decoding Devaluations: What Do Currency Moves Mean for Your Money?, at, and follow Jeff on Twitter: @jeffreykleintop.

Also, Chinese state-controlled funds were said to have bought equities and the country's securities regulator signaled that a selling ban on major investors will remain beyond this week's expiration date, per Bloomberg, which cited people familiar with the matter. For a look at our latest outlook on China, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, Why China's Slowdown May Be a Good Thing at, and follow us on Twitter: @schwabresearch.

Japanese securities declined as well, extending yesterday's drop which was the worst start to a year since 2008, per Bloomberg, with the yen remaining near a two-month high following yesterday's rally on the uneasy global sentiment. Meanwhile, Australian equities fell markedly amid broad-based weakness, led by oil & gas issues as oil prices continued to slide despite the heightened geopolitical concerns. Rounding out the day, markets in India declined, while South Korean listings bucked the trend, finishing higher with the won showing some weakness.

Tomorrow's international economic calendar will be dominated by the Services and Composite PMIs from Markit across Europe, while investors will also get employment figures from Italy, PPI data from the eurozone and housing prices from the U.K.

Schwab Center for Financial Research - Market Analysis Group

©2016 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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