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Tuesday, November 29, 2016

Global Uncertainty Keeps Lid on Gains

Charles Schwab: On the Market
Posted: 11/29/2016 4:15 PM ET

Global Uncertainty Keeps Lid on Gains

U.S. equities finished modestly higher, as a favorable revision to 3Q GDP and a jump in Consumer Confidence was met with continued political uncertainty in Europe and a tumble in crude oil prices ahead of tomorrow's OPEC meeting. Meanwhile, news on the equity front was positive, with Tiffany & Co. beating expectations and Dow member UnitedHealth Group guiding higher. Treasury yields, the U.S. dollar and gold were all lower.

The Dow Jones Industrial Average (DJIA) rose 24 points (0.1%) to 19,122, the S&P 500 Index gained 3 points (0.1%) to 2,205 and the Nasdaq Composite added 11 points (0.2%) to 5,380. In moderately-heavy volume, 912 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $1.85 to $45.23 per barrel and wholesale gasoline was down $0.03 at $1.38 per gallon. Elsewhere, the Bloomberg gold spot price traded $4.99 lower to $1,189.01 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—decreased 0.4% to 100.97.

Tiffany & Co. (TIF $81) reported 3Q earnings-per-share (EPS) of $0.76, above the $0.67 FactSet estimate, with revenues rising 1.0% year-over-year (y/y) to $949 million, topping the expected $924 million. 3Q same-store sales declined 2.0% y/y, versus the projected 4.1% decline. TIF maintained its full-year guidance, and shares were nicely higher.

Dow member UnitedHealth Group Inc. (UNH $158) was solidly higher after the company issued stronger-than-expected 2017 guidance, while maintaining its 2016 outlook.

First revision to 3Q GDP tops forecasts

The second look (of three) at 3Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 3.2%, revised up from the 2.9% expansion reported in the first report. The Bloomberg forecast called for an adjusted 3.0% pace of expansion. 2Q GDP grew by an unrevised 1.4% rate. Personal consumption came in at a 2.8% gain for 3Q, up from the preliminary estimate of a 2.1% increase, and compared to the expectations of a 2.3% increase. Personal consumption grew by an unrevised 4.3% in 2Q. The upward revision to GDP primarily reflected the stronger-than-initially reported personal consumption, which was partially offset by downward adjustments to nonresidential fixed investment and private inventory investment.

On inflation, the GDP Price Index was revised to a 1.4% gain, versus forecasts of an unrevised 1.5% increase, while the core PCE Index, which excludes food and energy, was adjusted at a 1.7% rise, matching expectations.

The Consumer Confidence Index (chart) jumped to the highest level since July 2007, surging to 107.1 in November from the upwardly revised 100.8 level in October, and compared to estimates of 101.5. Sentiment toward the present situation and expectations of business conditions both rose solidly. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—improved to 5.2 from the 3.6 posted in October.

Today's GDP and Consumer Confidence reports add credence to Schwab's Chief Investment Strategist Liz Ann Sonders' article, Emotional Rescue: What to make of the post-election surge?, where she points out that recent economic releases have also provided support for the post-election rally, suggesting that some of the lift in the economy was already happening, and isn't just a hope for next year under a Trump administration. Reflecting the better economic data and higher inflation, the Federal Open Market Committee (FOMC) is likely to raise rates at its December meeting. Liz Ann also addresses the question of whether the market has gone too far too fast, noting that perhaps in the short-term, but animal spirits—assuming they've awoken—can fuel rallies for an extended period, discussing that there is much about this rally so far to behold—and much which is also unique. She concludes that the secular bull market lives on, but some of next year's performance may get pulled into this year. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.1% gain in home prices y/y in September, versus expectations of a 5.2% increase. Month/month (m/m), home prices were up 0.4% on a seasonally adjusted basis for September, roughly in line with forecasts.

Treasuries finished higher, as the yield on the 2-year note was flat at 1.11%, the yield on the 10-year note lost 1 basis point (bp) 2.30%, and the 30-year bond rate fell 2 bps to 2.95%.

Bond yields are choppy following the sharp post-election rally, bolstered by elevated December Fed rate hike expectations, and Schwab's Director of Income Planning, Rob Williams notes in his article, Can Bond Funds Make Sense When Interest Rates Rise?, although the value of most bonds and bond funds fall when interest rates increase, not all bond funds react the same way. Rob offers a look at how various bond fund categories performed in prior rate-hike cycles can help your fixed income strategy at www.schwab.com/onbonds, where you can also find Rob and Senior Fixed Income and Planning Analyst, Cooper Howard's, CFA, latest article, Muni Bonds: Making Sense of the Post-Election Landscape. Follow Schwab on Twitter: @schwabresearch.

Tomorrow's economic calendar will bring a plethora of key reads, courtesy of weekly MBA mortgage applications, the ADP's November employment change report, October personal income and spending, which includes the Fed's favored inflation gauge of the PCE deflator, the Chicago PMI, and pending home sales. The day will culminate with the afternoon release of the Federal Reserve's Beige Book—an anecdotal look at national economic activity—used as a tool by the FOMC when it is widely expected to announce a rate hike on December 14. As noted in the latest Schwab Market Perspective: Is the Fog Starting to Lift?, "full" employment is at least in sight, housing is recovering, economic growth has improved and inflation is heating up. A December rate hike may remove some uncertainty, but questions will remain as to the path and frequency of rate hikes in 2017 and beyond. We continue to believe the Fed will be able to go slow in normalizing rates, as they have stated they want to do, but signs of rising inflation could force its hand. Read more at www.schwab.com/marketinsight.

Europe mostly higher on U.S. data, Asia mixed

European equities finished mostly higher on the heels of the upbeat economic and earnings data in the U.S., though oil & gas issues were lower with headlines ahead of tomorrow's OPEC meeting fostering supply change skepticism to put heavy pressure on crude oil prices. Political uncertainty continued to ramp up ahead of this weekend's key Italian referendum and other political events are nearing to exacerbate the uncertainty as discussed by Schwab's Director of International Research, Michelle Gibley, CFA, in her latest article, Europe Votes: Could More Countries Reject the EU?. Michelle notes that the near-term risks to European stocks are heightened by the uncertainty posed by these votes. However, the resulting political uncertainty isn't sufficient reason to abandon global diversification. We believe having a diversified portfolio can set you up to participate if and when the trends switch. Read more at www.schwab.com/oninternational. The European Central Bank has reportedly pledged to step up purchases of Italian government bonds to help calm the markets in the wake of the referendum result.

Financials gained modest ground after yesterday's drop on the political uncertainty in Italy, while the Bank of England is set to unveil its banking sector stress test results tomorrow. French preliminary 3Q GDP grew 1.1%, matching forecasts, but dipping from the 1.2% expansion in 2Q, German consumer price inflation ticked 0.1% higher m/m, in line with estimates, and U.K. figures on consumer credit and mortgage approvals topped projections. The euro was little changed and the British pound gained ground on the U.S. dollar, while bond yields in the region finished mixed. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Happy Unrecession: The Alice in Wonderland economy, noting that in our view, the modest gain in the stock market this year is not as misguided or illogical as it may at first seem. He adds that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. Read more at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed as the surprise U.S. election fallout continued to fade, opening the door for the global markets to grapple with uncertainty ahead of tomorrow's OPEC meeting and this weekend's referendum in Italy. Japanese securities declined, with the yen choppy in the wake of yesterday's rebound from a post-U.S. election drop that has come amid the U.S. dollar's rally. Losses may have been limited by stronger-than-expected reads on Japan's October household spending and retail sales. Mainland Chinese stocks nudged higher, continuing a rally to the highest level since January amid optimism that the recent crackdown on the real estate market may vector funds into the stock market, per Bloomberg, but markets in Hong Kong declined, giving back yesterday's advance that came amid the announcement that December 5 will commence the exchange link between Hong Kong and Shenzhen.

Australian equities dipped, with oil & gas and basic materials issues seeing pressure to overshadow gains in healthcare and financials, while those traded in India rose slightly, and stocks in South Korea finished flat after battling back from early losses as the nation's President said she is willing to step down after coming under pressure following an influence-peddling scandal. With the global markets choppy on flared-up global uncertainties and following the surprise U.S. election, Schwab's Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think at www.schwab.com/oninternational.

Similar to the domestic economic docket, tomorrow's international economic calendar will be busy, with reports slated for release to include industrial production, housing starts and construction orders from Japan, industrial production from South Korea, GDP from India, consumer confidence and housing prices out of the U.K., employment data and retail sales from Germany, CPI and PPI from France, retail sales out of Spain, and CPI from Italy and the Eurozone.

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