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Friday, May 27, 2016

Stocks Manage Strong Weekly Gains

Charles Schwab: On the Market
Posted: 5/27/2016 4:15 PM ET

Stocks Manage Strong Weekly Gains

U.S. stocks finished the trading session higher to add to a solid weekly advance ahead of the extended Memorial Day weekend, which will have all U.S. markets closed on Monday. Treasuries were lower as yields ticked higher following an afternoon speech from Fed Chair Janet Yellen, where she hinted at the possibility of an interest rate increase in the coming months. In economic news, 1Q GDP was revised higher by a slightly smaller-than-expected amount and consumer sentiment was adjusted lower. Gold and crude oil prices declined and the U.S. dollar gained ground.

The Dow Jones Industrial Average (DJIA) increased 45 points (0.2%) to 17,872, the S&P 500 Index added 9 points (0.4%) to 2,099, and the Nasdaq Composite advanced 32 points (0.6%) to 4,934. In moderate volume, 825 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude declined $0.15 to $49.33 per barrel, wholesale gasoline was $0.01 higher at $1.64 per gallon, and the Bloomberg gold spot price declined $9.47 to $1,210.33 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 95.77. Markets were nicely higher for the week, as the DJIA ascended 2.1%, the S&P 500 Index rallied 2.3% and the Nasdaq Composite surged 3.4%.

Big Lots Inc. (BIG $51) reported 1Q earnings-per-share (EPS) ex-items of $0.82, well above the $0.70 FactSet estimate, as revenues rose 2.5% year-over-year (y/y) to $1.3 billion, roughly in line with expectations. 1Q same-store sales grew 3.0% y/y, north of the estimated 2.2% gain. BIG raised its full-year profit outlook. Shares rallied.

Ulta Salon, Cosmetics & Fragrance Inc. (ULTA $233) reported 1Q EPS of $1.45, well above the expected $1.29, with revenues growing 23.7% y/y to $1.1 billion, north of the projected $1.0 billion. 1Q same-store sales rose 15.2% y/y, above the estimated 14.8% gain. ULTA raised its full-year guidance. Shares moved decisively higher.

Thermo Fisher Scientific Inc. (TMO $152) announced an agreement to acquire electron microscopy company FEI Co. (FEIC $108) for $107.50 per share in cash, representing a purchase price of about $4.2 billion. TMO was modestly higher, while FEIC finished sharply higher.

First revision of 1Q GDP slightly misses forecasts, consumer sentiment revised lower

The second look (of three) at 1Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 0.8%, revised upward from the 0.5% expansion reported in the first report. This compared to the Bloomberg forecast of a revised 0.9% pace of growth. 4Q GDP expanded by an unrevised 1.4% rate. The upward revision came as private inventory investment, residential fixed investment and exports were adjusted higher, while imports were revised lower. However, Personal consumption was unrevised at a 1.9% gain, with expectations calling for an upwardly revised 2.1% pace of growth. Personal consumption grew by an unrevised 2.4% in 4Q.

On inflation, the GDP Price Index was revised to a 0.6% gain, versus forecasts of an unrevised 0.7% increase, while the core PCE Index, which excludes food and energy, was unadjusted at a 2.1% rise, in line with expectations.

The final May University of Michigan Consumer Sentiment Index (chart) was revised to 94.7 from the preliminary level of 95.8, and compared to expectations of 95.4, as a downward adjustment for the expectations component of the report overshadowed an upward revision to the current conditions portion. However, the index was up compared to April's level of 89.0, and sits at the highest level since June 2015. The 1-year inflation outlook declined to 2.4%, from April's 2.8% rate. The 5-10 year inflation forecast remained at April's 2.5% level.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at the consumer in his latest Schwab Sector Views: What is the State of U.S. Consumer Spending? at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

In an afternoon speech, Federal Reserve Chairwoman Janet Yellen reiterated that it's appropriate for the Central Bank to gradually and cautiously increase the overnight interest rate and that in the coming months such a move would possibly be appropriate. Meanwhile, bond yields have rallied as of late amid resurfaced Fed rate hike expectations courtesy of hawkish commentary from Central Bank officials, stronger-than-expected economic data—including continued signs of budding inflation—and the April monetary policy meeting minutes which kept the possibility of a June rate hike on the table. For our latest analysis on a potential Fed rate hike, see our article, What If the Fed Raises Interest Rates?, at www.schwab.com/insights. Be sure to follow Schwab on Twitter: @schwabresearch.

Treasuries were lower, with the yield on the 2-year note ticking 4 basis points (bps) higher to 0.91%, the yield on the 10-year note increasing 2 bps to 1.85% and the 30-year bond rate adding 1 bp to 2.65%.

Please Note: All U.S. markets will be closed on Monday in observance of the Memorial Day holiday.

Europe extends weekly rally, Asia modestly higher to close out the week 

European equities finished modestly higher to extend a strong rally that took the Stoxx Europe 600 Index 3.4% higher for the week—its best since February per Bloomberg—and allowed it to post its third-straight weekly gain. However, the energy sector slipped as crude prices moved lower, while the G-7 meeting in Japan delivered little in the way of new agreements. Traders appeared to tread with some caution ahead of today's speech from U.S. Fed Chairwoman Janet Yellen. The euro and British pound were lower versus the U.S. dollar, while bond yields in the region were mixed. European stocks rallied this week on relatively favorable economic data, eased concerns about the potential for the U.K. to vote next month to leave the European Union (EU)—known as a Brexit—and as the global markets seemed to come to grips with the heightened expectations of a summer rate hike in the U.S. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article,Brexit: 5 Things Investors Need to Know, and how Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Read both articles at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Asian stocks finished mostly to the upside, though conviction may have been limited by caution ahead of today's speech from U.S. Fed Chair Yellen, while the G-7 meeting in Japan of world leaders delivered no new major developments. The communique from the meeting noted risks to growth, and stressed the need for monetary/fiscal and structural policy to play a role, while it reiterated a commitment to avoid competitive currency devaluations. Japanese equities added to a modest weekly gain, amid some choppiness in the yen following a report on the nation's consumer price inflation, which showed core inflation declined by a slightly smaller amount than expected in April. Also, reports of a potential sales-tax hike delay buoyed sentiment. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis of Japan in his latest article, Japan: Another Recession Coming?, at www.schwab.com/oninternational.

Mainland Chinese stocks dipped and those trading in Hong Kong advanced following a report that showed the country's industrial profits rose in April, but at a smaller rate than the growth registered in March. Australian securities were led higher by technology, financials and oil & gas issues, while basic materials listings weakened slightly. Indian equities gained ground amid this week's improved global sentiment and as some key earnings reports in the nation topped expectations and stocks trading in South Korea finished higher.

Stocks rally on the week

U.S. stocks participated in a global rally, as technology issues continued their upward momentum, healthcare stocks rose solidly and financials remained in rally mode. Some upbeat economic data, highlighted by a jump in domestic new home sales to the highest level in over eight years, helped the markets come to terms with heightened Fed rate hike expectations. Also, the rally in crude oil persisted, with WTI prices breaching the $50 per barrel mark during the week for the first time since last fall. Moreover, growing confidence that the U.K. will stay in the EU aided the mood and for analysis on the issue read the article,Brexit: Will the UK Leave the EU? at www.schwab.com/insights.

As noted in the Schwab Market Perspective: Stocks Stuck in the Muck, with the summer season approaching, a breakout for U.S. stocks doesn’t appear imminent. But there is hope for the second half of the year, and investors should be aware of the less-told story. A continued sluggish U.S. economy has kept stocks in a trading range for two years, but there could be a bounce in the second half of the year. Now that the market and the Fed are basically on the same page, the beginning-of-year turmoil which accompanied the initial rate hike may not be repeated. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Flood of data set to add to Fed focus

Next week's holiday-shortened U.S. economic calendar will bring a plethora of key data for the markets to digest in their pursuit to determine if a summer Fed rate hike is in the offing. The ISM and Markit's Manufacturing and Services Purchasing Managers Indexes (PMIs), personal income and spending, the Fed's Beige Book, factory orders and the trade balance highlight the docket, but the headlining report will likely be Friday's May nonfarm payroll report. Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Sympathy for the Devil in the Details of Wage Growth, sluggish wage growth may be a relatively poor indicator of labor market slack. In fact, correcting for worker composition changes, wages are consistent with a strong labor market that is drawing low-wage workers into full-time employment. It also may help to explain why the Fed appears itchier than ever to raise rates again. Read more at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.

International reports slated for next week include: Australia—building approvals, 1Q GDP, trade balance and retail sales. China—PMIs. India—1Q GDP and PMIs. Japan—retail sales, industrial production, overall household spending and 1Q capital spending. Eurozone—European Central Bank monetary policy decision, Consumer Price Index, retail sales, lending figures and PMIs, along with German unemployment change. U.K.—PMIs.

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