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Friday, September 30, 2016

Stocks Rally to Finish Week Positive

Charles Schwab: On the Market
Posted: 9/30/2016 4:15 PM ET

Stocks Rally to Finish Week Positive

Domestic equities finished solidly higher, amid some upbeat economic data and also receiving a boost from an unconfirmed report that Deutsche Bank is close to a settlement with the U.S. Department of Justice. Treasuries and gold were lower, the U.S. dollar was flat and crude oil prices were higher. In equity news, McCormick topped earnings expectations and raised its guidance and Salesforce.com urged regulators to look into Microsoft's deal to acquire LinkedIn.

The Dow Jones Industrial Average (DJIA) gained 165 points (0.9%) to 18,370, the S&P 500 Index increased 17 points (0.8%) to 2,151, and the Nasdaq Composite jumped 43 points (0.8%) to 5,312. In moderately-heavy volume, 966 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.41 to $48.24 per barrel, wholesale gasoline increased $0.02 to $1.46 per gallon and the Bloomberg gold spot price declined $3.17 to $1,317.20 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.49. Markets were higher for the week, as the DJIA gained 0.3%, the S&P 500 Index increased 0.2% and the Nasdaq Composite ticked 0.1% higher.

McCormick & Company Inc. (MKC $100) reported adjusted fiscal 3Q earnings-per-share (EPS) of $1.03, above the $0.94 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $4.3 billion, compared to the expected $4.4 billion. The company’s CEO said that consumer demand continued to grow in markets around the world in both consumer and industrial segments, with particular strength in the U.S. and China. As a result, the spice maker upped its full-year guidance. Shares finished higher.

Months after losing its bid to acquire LinkedIn Corp. (LNKD $191) to Dow member Microsoft Corp. (MSFT $58), Salesforce.com Inc. (CRM $71) is pushing U.S. and European anti-trust regulators to examine the deal, alleging that it threatens competition and privacy. The more than $26 billion tie-up has already passed the merit of U.S. regulators, but has yet to be officially submitted for European approval. MSFT said the deal has already cleared hurdles in the U.S., Brazil and Canada, and that it is “committed to working to bring price competition to a CRM market in which Salesforce is the dominant participant charging customers higher prices today.” CRM, MSFT and LNKD were modestly higher.

Upbeat reads for sentiment and manufacturing, income and spending report mixed

Personal income (chart) was 0.2% higher month-over-month (m/m) in August, matching the Bloomberg forecast and compared to July’s unrevised 0.4% increase. Personal spending came in flat last month, below expectations of a 0.2% increase and versus July's favorably revised 0.4% rise. The August savings rate as a percentage of disposable income was 5.7%. The PCE Deflator inched 0.1% higher, versus expectations of a 0.2% increase. Compared to last year, the deflator was 1.0% higher, above estimates of 0.8%. Excluding food and energy, the PCE Core Index moved 0.2% higher m/m, in line with expectations, and the index was up 1.7% y/y, slightly above estimates of a 1.6% rise.

Despite the unchanged spending reading in today’s report, in his latest Schwab Sector Views: Can Tech Gains Continue?, Schwab’s Director of Market and Sector Analysis, Brad Sorensen, CFA, notes that consumers may be loosening their pocketbooks a bit, with unemployment low and wages starting to tick higher. We continue to believe consumer demand for tech will stay solid. In fact, it may even be expanding. According to the Bureau of Economic Analysis, the real Personal Consumption Expenditure (PCE) annualized quarterly change as of June 30, 2016 was 32.3% for televisions, 24.6% for personal computers and 18.6% for tech games, toys and hobbies. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The Chicago Purchasing Managers Index (chart) moved further into expansion territory (above 50), after rising to 54.2 in September from 51.5 in August and versus expectations of an increase to 52.0. New orders rose slightly, whereas employment fell below 50 to its lowest level since June.

The final September University of Michigan Consumer Sentiment Index (chart) was revised to 91.2 from the preliminary level of 89.8, and compared to expectations of a slight rise to 90.0. The index was up compared to August’s level of 89.8, and the highest since June. The expectations component of the report moved above August’s level, while current conditions was adjusted higher, but below the prior month's level. The 1-year and 5-10 year inflation outlooks both inched higher to 2.4% and 2.6%, respectively, from the corresponding 2.3% and 2.5% readings in August.

Treasuries were modestly lower, with the yields on the 2-year and 10-year notes increasing 3 basis points (bps) to 0.76% and 1.59%, respectively, and the 30-year bond rate advancing 4 bps to 2.32%. Schwab's Chief Fixed Income Strategist, Kathy Jones points out in her article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, the end of the bull market doesn't mean a bear market is starting, as slow global growth, deflationary pressures abroad, a firm dollar and demographic trends are likely to keep yields low. Investors should focus less on short-term changes in the market and more on structuring a fixed income portfolio that can work for them over the long run. Read the whole article and other timely bond market commentary at www.schwab.com/onbonds. Follow Kathy on Twitter: @kathyjones.

European markets bounce back, Asia mostly higher

European equities finished mixed, paring early solid losses that stemmed from continued anxiety surrounding the banking sector amid capital concerns toward Deutsche Bank AG (DB $13), which rebounded after hitting a fresh all-time low, after a report surfaced that the German lender was near a settlement with the U.S. Department of Justice (DoJ). The DoJ was demanding a $14 billion fine in relation to DB's alleged practices leading up to the 2008 mortgage crisis. DB nor the DoJ have commented on the news. In economic news, U.K. consumer confidence improved at a better rate than forecasts, growth in housing prices in the country matched estimates, and 2Q GDP was revised a tick lower than the preliminary reading. Meanwhile retail sales in Germany nearly tripled expectations, and France reported upbeat reads on inflation and consumer spending. The euro and the British pound were higher versus the U.S. dollar, while bond yields in the region were mixed. With global market uncertainty/volatility elevated, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read these articles, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia took their cue from the U.S. markets yesterday to finish mostly lower, with European banking concerns driving sentiment, while the energy sector’s out-performance was able to mute some of the losses. Japanese equities fell amid some strength in the yen and a slew of disappointing economic data. Consumer price inflation in the island nation came in cooler than expected, the unemployment rate was slightly higher than forecasts, housing construction fell short of forecasts, and household spending tumbled. Australian securities declined despite an upbeat housing construction report, South Korean listings traded to the downside, and Indian stocks finished lower. Mainland Chinese issues bucked the regional trend, increasing modestly, after the Caixin/Markit Manufacturing PMI Index for September ticked higher to 50.1 from 50.0 in August, matching economists’ forecasts. The news didn’t filter over to trading in Hong Kong, however, where equities declined. Mainland Chinese markets will be closed next week for the golden week holiday break, while trading in Hong Kong will continue. For our latest analysis of the global economic front, see Schwab's Jeffrey Kleintop's, CFA, article, World Tour: An Around The World Look At the Economic Landscape, at www.schwab.com/oninternational.

Stocks manage weekly gains despite rough start

U.S. equities began the week on a sour note in a broad-based global equity decline with the capital concerns that have been swirling around Deutsche Bank (DB $14) possibly acting as the catalyst. Stocks bounced back on the heels of the first Presidential debate, while a strong performance from the energy sector aided in powering gains in the wake of a preliminary crude oil production cut agreement from OPEC. U.S. stocks were able to finish the week higher as the aforementioned DB concerns were alleviated some on the surfaced report of an unconfirmed settlement with the lender and U.S. Department of Justice. Additional support for stocks may have developed as reports on the services sector, consumer confidence and durable goods orders were mostly upbeat.

Though energy stocks were outperformers and financials were also in focus for the week, the information technology sector may have been overlooked a bit, but as Schwab's Brad Sorensen, CFA notes in his recent Schwab Sector Views, the past year has been a solid one for the sector, with tech outperforming the S&P 500® Index by more than 700 basis points. And while we can’t guarantee that level of outperformance over the next 12 months, we continue to believe that the outlook for the group is good and are keeping our outperform rating in place. Read the rest of the article, as well as Brad's views on all sectors at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The fourth quarter commences

When markets return to action on Monday, it will kick-off the beginning of the 4Q for stocks and the U.S. economic calendar will waste no time gearing up for action. As customary, Friday's release of the monthly non-farm payrolls report is likely to command attention and scrutiny as rate hike uncertainty persists and the Federal Reserve has only two remaining policy meetings this year. As noted in the recent Schwab Market Perspective: Crunch Time, the fourth quarter is likely to bring bouts of volatility, but we believe the bull market lives on. Earnings growth is on the cusp of turning positive and the economy appears resilient enough to allow the Fed to boost rates. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Additional reports of note for next week include the ISM manufacturing and non-manufacturing indexes and Markit's U.S. manufacturing and services PMI reads. Durable goods orders, construction spending, factory orders and vehicle sales will also be released.

International economic reports for next week include: Japan—3Q Tankan Business Survey, consumer confidence and Leading Index. China—manufacturing and non-manufacturing PMIs. Australia—retail sales and building approvals. From the U.K., Germany and France—Markit manufacturing and non-manufacturing PMIs and industrial and manufacturing production. In central bank action, the Reserve Bank of Australia will meet to discuss monetary policy and will deliver its cash rate target decision on Tuesday.

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