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Friday, October 21, 2016

Stocks Finish Friday Flat, While Wielding Weekly Gains

Charles Schwab: On the Market
Posted: 10/21/2016 4:15 PM ET

Stocks Finish Friday Flat, While Wielding Weekly Gains

U.S. stocks finished the regular trading session near the unchanged mark as corporate earnings reports were in focus with the domestic economic front void of any major releases. Technology issues moved higher as Dow member Microsoft easily bested expectations, while fellow Dow component General Electric reported revenues that fell short of forecasts. Global monetary policy and political uncertainty continued to elicit concerns. Treasuries were mixed, while gold, the U.S. dollar and crude oil prices gained ground.

The Dow Jones Industrial Average (DJIA) lost 17 points (0.1%) to 18,146, the S&P 500 Index was unchanged at 2,141 and the Nasdaq Composite gained 16 points (0.3%) to 5,257. In moderate volume, 851 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.22 to $50.85 per barrel, wholesale gasoline gained $0.04 to $1.53 per gallon and the Bloomberg gold spot price added $1.27 to $1,267.03 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 98.66. Markets were mostly higher for the week, as the DJIA gained nearly 0.1%, the S&P 500 Index increased 0.4% and the Nasdaq Composite was 0.8% higher.

Dow member Microsoft Corp. (MSFT $60) reported fiscal 1Q earnings-per-share (EPS) ex-items of $0.76, above the $0.68 FactSet estimate, as revenues rose 3.1% year-over-year (y/y) to $22.3 billion, versus the expected $21.7 billion. The company said its 1Q results showed continued demand for its cloud-based services. MSFT rallied.

Dow component General Electric Co. (GE $29) posted 3Q profits ex-items of $0.32 per share, north of the estimated $0.30, with revenues increasing 4.0% y/y to $29.3 billion, below the forecasted $29.6 billion. GE noted a more challenging environment for oil & gas and related markets, while it narrowed its full-year operating earnings guidance and boosted its share buyback program by $4.0 billion. Shares closed lower.

Dow member McDonald's Corp. (MCD $114) announced 3Q EPS of $1.50, exceeding the projected $1.48, as revenues declined 3.0% y/y to $6.4 billion, topping the expected $6.3 billion. 3Q worldwide same-store sales grew 3.5% y/y, compared to the expected 1.3% gain, with U.S. sales also exceeding forecasts. MCD is traded nicely higher.

Honeywell International Inc. (HON $109) reported 3Q profits ex-items of $1.67 per share, north of the anticipated $1.60, with revenues increasing 2.0% y/y to $9.8 billion, roughly in line with forecasts. HON issued 4Q EPS guidance with a midpoint above estimates, while it reaffirmed its full-year outlook. Shares rose.

British American Tobacco PLC. (BTI $113) offered a non-binding proposal to acquire the approximate 58.0% of Reynolds American Inc. (RAI $54) that it does not currently own for about $47.0 billion. RAI acknowledged receiving the proposal and said its board will evaluate the offer and respond accordingly. BTI saw solid pressure, while RAI jumped.

Treasuries mixed to close out a busy week 

Treasuries finished mixed, while the economic calendar  was void of any major reports Friday. The yield on the 2-year note ticked 1 basis point (bp) higher at 0.83%, while the yields on the 10-year note and the 30-year bond dipped 2 bps to 1.74% and 2.49%, respectively. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her latest article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

This week, bond yields are modestly giving back some of a recent jump and the U.S. dollar continues to rally as the global markets grapple with Fed rate hike uncertainty and festering political uncertainty as the November U.S. Presidential election looms. This week's economic front was relatively positive, with industrial production ticking higher, the Fed's Beige Book noting continued economic expansion, and consumer price inflation nudging higher, while housing data was mostly positive, headlined by a stronger-than-expected existing home sales report.

Schwab's Vice President, Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Where Do the Candidates Stand? Key Issues for Investors, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles. Also, for a look at the election and the potential impact on sectors, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Election Specialat www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. Moreover, for analysis of the potential impact of the election on the muni bond markets, see Schwab's Senior Fixed Income and Planning Research Analyst, Cooper Howard's, CFA, and Director of Income Planning, Rob Williams' latest article,Opposing Views: How the Candidates' Tax Plans Could Affect Muni Bonds, at www.schwab.com/marketinsight.

Stocks were mostly higher on the week as financials found support from Bank of America Corp. (BAC $17), Dow member Goldman Sachs Group Inc. (GS $175), and Morgan Stanley (MS $33) continuing the trend of upbeat earnings from the sector. Technology issues showed some resiliency in the face of disappointing results from Dow component International Business Machines Corp. (IBM $150) and guidance from Dow member Intel Corp. (INTC $35), aided by Friday's blowout report from Microsoft. Telecom issues fell behind as Dow member Verizon Communications Inc. (VZ $48) posted disappointing revenues. Thus far in earnings season, of the 116 companies that have reported results from the S&P 500, 66.4% have topped revenue forecasts and 81.9% bested profit projections, per data compiled by Bloomberg.

As noted in the recent Schwab Market Perspective: Spinning Our Wheels, U.S. equity indexes are within the summer’s range and we believe a bullish rotation within equities may be taking place. The important third quarter earnings season is just gearing up, with expectations having been downgraded over the past couple of months, setting up the likelihood of a good quarter relative to expectations. However, some improvement in economic data and higher inflation readings leaves the possibility of tighter monetary policy from the Fed and even other central banks. Read more at www.schwab.com/marketinsight.

Europe mixed, Asia mostly lower

European equities finished mixed, with the euro and British pound seeing some pressure versus the U.S. dollar as the markets grappled with yesterday's unchanged monetary policy decision from the European Central Bank (ECB), which also suggested any changes will be decided on at its December meeting. Also, earnings season continued to ramp up with some mixed reads. Technology issues led to the upside aided by Microsoft's results in the U.S., while healthcare and consumer goods issues moved to the downside. Bond yields in the region finished mixed. In economic news, U.K. public sector net borrowing for September topped expectations.

With the global markets choppy amid a plethora of uncertainty/volatility, 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 finished mostly lower to close out the week. Global market conviction may have been stymied by recent mixed earnings and economic reports and yesterday's weakness in crude oil prices, along with festering political and monetary policy uncertainty. Also, Mother Nature had a say on today's trading, with an earthquake hitting Western Japan and a typhoon disrupting markets in Hong Kong. Japanese equities declined, trimming a weekly gain as the yen strengthened late in the day, while markets in Hong Kong were closed due to the storm. Mainland Chinese stocks advanced following a solid rise in September property prices, though the report may have caused concerns about further crackdowns on the real estate sector to resurface. The data is the latest in a string of Chinese economic reads in the past week that have painted a mixed picture. Lending and 3Q GDP releases suggested steady growth in the world's second-largest economy and a miss in September industrial production appeared to stem some of the enthusiasm. For more on China, see Schwab's Director of International Research Michelle Gibley's, CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017) at www.schwab.com/oninternational. Meanwhile, securities trading in Australia, India and South Korea decreased.

Economic calendar returns to action on Monday

Next week, the U.S. economic calendar will heat back up with additional housing data in the form of new and pending home sales reports. Also, durable goods orders for September will likely garner some attention, expected to have matched the previous month's 0.1% increase. Schwab's Chief Investment Strategist, Liz Ann Sonders details in her article, Your Time is Gonna Come: Households' Leverage Down, Government Leverage Upthat the private sector has actually done a pretty herculean job of deleveraging since the financial crisis. Liz Ann further discusses how the rub for the economy this time is that households have become significantly more frugal as it relates to the balance between spending and saving. For an economy nearly 70% dependent on consumer spending, this helps explain the slow pace of growth since the recession ended in 2009. Read the whole article at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Additional reports set to be released next week include the Consumer Confidence Index, the Richmond and Kansas City Fed Manufacturing Indexes, advance 3Q GDP and the final University of Michigan Consumer Sentiment Index for October.

International reports due out next week include: China—the Leading Index and Industrial profits. Japan—the Leading Index, trade balance, small business confidence, CPI and jobless rate. U.K.—housing loans, advance 3Q GDP and the Index of Services. Germany—Ifo business climate survey, the Import Price Index, GfK consumer confidence and CPI. France—business confidence, PPI, CPI and consumer spending.

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