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Tuesday, July 12, 2016

Stocks Strike Same Tune with New Records

Charles Schwab: On the Market
Posted: 7/12/2016 4:15 PM ET

Stocks Strike Same Tune with New Records

U.S. equities closed Tuesday's regular trading session with solid gains as the Dow and S&P 500 indexes set new intraday highs and record closes. The advance for stocks arose as 2Q earnings season unofficially commenced with Alcoa releasing results after yesterday's closing bell. In domestic economic news, a measure of unmet demand for labor showed fewer jobs were available than expected, wholesale inventories ticked higher and a gauge of small business optimism increased more than forecasted. Higher crude oil prices helped power gains for energy issues, while the U.S. dollar and gold were lower.

The Dow Jones Industrial Average (DJIA) rose 121 points (0.7%) to 18,348, the S&P 500 Index gained 15 points (0.7%) to 2,152, and the Nasdaq Composite added 34 points (0.7%) to 5,023. In moderate volume, 966 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil was $2.04 higher at $46.80 per barrel, wholesale gasoline added $0.05 to $1.43 per gallon and the Bloomberg gold spot price decreased $22.38 to $1,333.02 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 96.50.

Alcoa Inc. (AA $11) unofficially kicked off 2Q earnings season by posting earnings-per-share (EPS) ex-items of $0.15, above the $0.09 FactSet estimate, as revenues declined 10.2% year-over-year (y/y) to $5.3 billion, topping the expected $5.2 billion. The company forecasted improvement in the second-half of 2016 as new platforms ramp up, and a strong 2017. Shares closed higher.

Seagate Technology PLC. (STX $29) announced that it expects fiscal 4Q revenue of about $2.7 billion, above its prior forecast of $2.3 billion, driven primarily by better-than-expected demand for its hard disk drive product portfolio. STX said the evolution of mobile and cloud data driven environments continues to define itself as requiring significant amounts of mass storage. Additionally, the company said it plans to eliminate about 6,500 jobs by the end of fiscal 2017. STX finished sharply higher.

Sage Therapeutics Inc. (SAGE $46) jumped nearly 40% after announcing favorable results for a trial of its new drug to treat post-partum depression.

United Continental Holdings Inc. (UAL $46) moved nicely higher to help lift the airline sector, after the company offered a smaller-than-expected forecast for a drop in passenger revenue, a key measure used in the industry.

Small business optimism rises

The National Federation of Independent Business (NFIB) Small Business Optimism Index for June rose to 94.5 from May's 93.8 level, above the Bloomberg forecast of a slight improvement to 93.9.

Wholesale inventories (chart) ticked 0.1% higher month-over-month (m/m) in May, below forecasts calling for a 0.2% increase, and compared to April's upwardly revised 0.7% gain. Sales were up 0.5% m/m, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dipped to a 1.35 months level from the 1.36 posted in April.

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, showed 5.50 million jobs were available to be filled in May, down from April's 5.85 million level, which was the highest level on record, and versus forecasts of 5.65 million. The hiring rate remained at 3.5%, while the separation rate dipped to 3.4% from April's 3.5% pace.

Treasuries were lower, with the yield on the 2-year note rising 3 basis points (bps) to 0.69%, the yield on the 10-year note gaining 8 bps to 1.51%, and the 30-year bond rate increasing 9 bps to 2.23%. Bond yields are extended their recovery for a second day on the heels of Friday's market calming, stronger-than-expected June labor report, which helped ease concerns about global growth. Global bond yields have fallen as of late that has come courtesy of the U.K. Brexit fallout, which exacerbated global growth concerns, as well as dampened expectations for a Fed rate hike this year. Against this backdrop, read our article, Uncharted Waters: What Record-Low Yields Mean for Investors, at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will bring the release of the Federal Reserve's Beige Book, a tool summarizing economic activity across the nation used by the Federal Open Market Committee (FOMC) to prepare for its next two-day monetary policy meeting set to conclude on July 27. As noted in the recent Schwab Market Perspective: Looking Beyond Britain, while we agree that the July FOMC meeting is likely off the table for a move on rates, we aren’t dismissing the possibility of a hike later in the year. A lot can happen in a few months and if financial markets stabilize, the job market remains healthy, and inflation pressures rise the Fed could look to move toward a more “normal” rate, while also giving it some room to act if/when the U.S. economy begins showing recession risks. Read the whole article at www.schwab.com/marketinsight.

Additionally, tomorrow's docket will yield weekly MBA Mortgage Applications and the Import Price Index, forecasted to have risen 0.5% m/m during June, after registering a 1.4% increase in May.

Europe and Asia extend recent rallies

Most European equities finished higher for a fourth-straight session, with financials and oil & gas issues leading the way, as crude oil prices moved higher and as Italian banks rallied after the nation's largest lender announced measures to boost capital that were well received by analysts. Political uncertainty in the U.K. was cleared up following the appointment of Home Secretary Theresa May as Prime Minister. Also, bolstered expectations of aggressive stimulus measures out of Japan helped boost stocks, along with eased global growth concerns and the fallout from the U.K. Brexit vote. The euro was higher and the British pound rallied versus the U.S. dollar, while bond yields in the region were higher. In economic news, German consumer price inflation ticked higher in June, as expected. With volatility remaining elevated, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished nicely higher, extending their recent run as expectations for ramped up stimulus measures in Japan helped ease the recent flare-up in uneasy global sentiment, on the heels of Friday's upbeat U.S. labor report. Japanese equities rallied, with the yen continuing to drop as the nation's Prime Minister Abe late-yesterday said he wants "the swift formulation of comprehensive, bold economic measures," per Bloomberg. The comments come as Abe's ruling party had a convincing upper house election victory. Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global political landscape in her article, Performing Reformers: How Political Change Can Affect Stocks. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money. Read both articles at www.schwab.com/oninternational. Stocks trading in China rose, aided by a stronger-than-expected June foreign direct investment figure and reports that the country's pension funds may start deploying some of their $300 billion in assets. Indian securities advanced ahead of the release of inflation and manufacturing reports. After the market closed, India announced that its consumer price inflation came in slightly below forecasts for June and industrial production unexpectedly rose in May. Finally, stocks in Australia and South Korea ticked higher.

The international economic docket for tomorrow will deliver industrial production and capacity utilization from Japan, CPI from France and Italy, and industrial production from the Eurozone.

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