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Saturday, January 09, 2016

Charles Schwab: On the Market
Posted: 1/8/2016 4:15 PM ET
Stocks Close Lower to End Dismal First Week of 2016

U.S. stocks closed the trading session solidly lower in some choppy action, erasing early gains that developed on the heels of a stronger-than-expected December labor report and as some relative stability evolved in Chinese equity markets. Gold and crude oil prices edged lower, Treasuries were mostly higher and the U.S. dollar advanced. Domestic equity news was limited, while additional releases from the economic calendar showed reads on consumer credit and wholesale inventories were below expectations.

The Dow Jones Industrial Average (DJIA) fell 168 points (1.0%) to 16,346, the S&P 500 Index shed 21 points (1.1%) to 1,922 and the Nasdaq Composite dropped 46 points (1.0%) to 4,644. In heavy volume, 1.1 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.11 to $33.16 per barrel, wholesale gasoline declined $0.02 to $1.13 per gallon and the Bloomberg gold spot price decreased $5.18 to $1,103.79 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.2% to 98.43. Markets were sharply lower for the week, as the DJIA dropped 6.2%, the S&P 500 Index tumbled 6.0%, and the Nasdaq Composite Index plummeted 7.3%.

Gap Inc. (GPS $23) announced a 5.0% year-over-year (y/y) decline in December same-store sales, larger than the expected 3.4% decrease. Sales at its flagship stores were down 2.0%, while its Banana Republic sales fell 9.0% and Old Navy registered a 7.0% fall. Shares finished sharply lower.

American Eagle Outfitters Inc. (AEO $13) reported that 4Q same-store sales to date have increased 4.0% y/y, with the FactSet estimate calling for a 4.9% increase. AEO maintained its earnings-per-share (EPS) guidance, while noting that despite a very challenging macro-environment, it had a solid holiday season. AEO traded sharply lower.

December labor report tops forecasts

Nonfarm payrolls (chart) rose by 292,000 jobs month-over-month (m/m) in December, compared to the Bloomberg forecast of a 200,000 increase. The initial rise of 211,000 seen in November was revised to a gain of 252,000, and the combined net upward revision to job gains for November and October was 50,000. Excluding government hiring and firing, private sector payrolls increased by 275,000, versus the forecasted gain of 201,000, after expanding by an upwardly revised 240,000 in November, from the 197,000 rise that was initially reported. The unemployment rate remained at 5.0%, as expected, while average hourly earnings were flat m/m, versus projections of a 0.2% gain, and November's 0.2% rise was unadjusted. Finally, average weekly hours remained at November's unrevised 34.5 hours level, matching expectations.

Today's report adds credence to the Federal Reserve's decision last month to raise rates for the first time in nearly a decade. But, the U.S. economy is not firing on all cylinders and today's disappointing wage growth suggests inflation remains subdued. Schwab's Chief Investment Strategist, Liz Ann Sonders notes in our 2016 Schwab Market Outlook, the path of future rate hikes continues to point to slow and gradual—which likely would be a positive for risk assets such as stocks. Inflation and the U.S. dollar are both key for Federal Reserve policy, and a faster pace of rate increases suggests the Fed is acting to combat an inflation problem or an overheating economy (or both). Neither scenario is good for the stock market.

Read more under the "White Papers" tab at, and be sure to check out Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Cautionary Note, for an opportunity to avoid decisions that may be costly. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Wholesale inventories (chart) declined 0.3% m/m in November, compared to the forecast of a 0.1% dip and October's downwardly revised 0.3% decrease. Sales fell 1.0% m/m, compared to the flat reading that was expected, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—ticked higher to 1.32 months from October's 1.31 level.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $14.0 billion during November, shy of the $18.0 billion forecast of economists polled by Bloomberg, while October's figure was revised slightly lower to $15.6 billion from the originally reported $16.0 billion increase. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, increased $8.3 billion, while revolving debt, which includes credit cards, rose by $5.7 billion.

Treasuries were higher, with the yield on the 2-year note decreasing 1 basis point (bp) to 0.94%, the yield on the 10-year note losing 4 bps to 2.11% and the 30-year bond rate declining 2 bps to 2.90%..

European equities lower, Asia mixed as China bounces after fall

European equities traded lower with oil & gas issues weighing on the markets as crude oil prices turned lower after hitting 12-year lows yesterday. The euro pared a solid loss versus the U.S. dollar and stocks gave up a brief boost that stemmed from the upbeat U.S. employment report, while shrugging off a bounce in China as authorities took measures to help stabilize its markets and currency. China held off on further reducing its yuan reference rate and suspended circuit breakers, which have helped drive this week's rout for the global markets. Bond yields in the region lost ground, while economic data was mixed. German industrial production unexpectedly declined, while the nation's trade surplus narrowed by a smaller amount than anticipated. French industrial production fell more than expected and the U.K. trade deficit shrunk by a smaller amount than forecasted.

Stocks in Asia finished mixed amid the unnerved global sentiment, while Chinese stocks gained ground after being routed this week amid measures to help stabilize the markets. China's Shanghai Composite Index rose and the Hong Kong Hang Seng Index advanced with the country's decision to suspend its circuit breakers—which was attributed to some of the week's volatility—helping provide some relief, along with some stability in the yuan as the central bank held off on continuing to set a lower reference rate for the currency. Meanwhile, reports that state-controlled funds bought equities added some support. Chinese stocks were halted twice this week for downside volatility due to the newly implemented circuit breakers and the tumble in the yuan exacerbated economic concerns, leading to a sharp drop for the markets. Schwab's Chief Fixed Income Strategist, Kathy Jones, discusses Why the Chinese Currency Decline is Rattling Markets, at Also, follow Kathy on Twitter: @kathyjones. Securities in South Korea and India gained ground, however, Japanese equities moved lower, posting the worst first week of the year since 1997, per Bloomberg. Also, Australian stocks decreased with weakness in technology and financials more than offsetting rebounds for basic materials and oil & gas listings.

Global markets routed by heightened China and geopolitical concerns

U.S. stocks posted one of the worst starts to a year amid a global market rout that came courtesy of ramped up China concerns and flared-up geopolitical tensions. China's economic growth fears gained traction following another dose of disappointing manufacturing data and the continued tumble in the nation's currency. The selloff was exacerbated by China's newly implemented—and swiftly suspended—circuit breakers, which halted its markets for downside volatility twice this week. For a look at the turmoil in the Chinese markets, see our article from the Schwab Center for Financial Research, Chinese Stock Market Selloff: What's New, What's Not at, and follow us on Twitter: @schwabresearch.

Basic materials and energy stocks posted the biggest drops on the week, headlined by the continued drop in crude oil prices, which fell to 12-year lows. Meanwhile, geopolitical worries were fueled by escalated Middle East tensions as Saudi Arabia severed diplomatic ties with Iran followed by North Korea's claim that it successfully tested a hydrogen bomb. A ripple effect was felt through the global technology sector amid reports of iPhone production cuts from Dow member Apple Inc. (AAPL $98). Finally, a robust domestic economic calendar did little to take command some of the global market's attention, with a second-straight monthly contraction for the ISM Manufacturing Index being met with continued expansion from its non-manufacturing counterpart. Also, the stronger-than-expected December nonfarm payroll report included a disappointing read on wage growth.

Consumer comes into next week's picture

Next week's U.S. economic calendar will be headlined by a couple key reads on the all-important consumer, with Friday's releases of December retail sales and the preliminary January University of Michigan Consumer Sentiment Index. As noted in the Schwab Market Perspective: Questions for the New Year , Wall Street analysts’ forecasts for 2016 are relatively muted, but the start of the year has been anything but. However, we caution against extrapolating the tough start to the rest of the year. The consumer has tailwinds of lower oil prices, increased minimum wages and signs of business' planning to raise compensation. We believe this combination could lead to upside surprises from consumer spending, helping to support the service side of the economy (88% of the U.S. economy), and help offset the drag from the manufacturing sector. Read more at, and follow us on Twitter: @schwabresearch.

Other key domestic reports slated for next week include: the NFIB Small Business Optimism Index, JOLTS Job Openings, the Fed's Beige Book, the Import Price Index, the Producer Price Index, and industrial production and capacity utilization.

International reports due out next week: Australia—employment change. China—CPI and PPI, foreign direct investment, aggregate financing, new yuan loans, and trade balance. India—trade balance, CPI, and industrial production. Japan—machine orders. Eurozone—investor confidence, industrial production, new car registrations, ECB meeting minutes, trade balance, and German GDP. U.K.—industrial production, and the Bank of England monetary policy decision.

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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