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Friday, November 18, 2016

Modest Losses Heading into the Weekend

Charles Schwab: On the Market
Posted: 11/18/2016 4:15 PM ET

Modest Losses Heading into the Weekend

U.S. equities finished out the last trading day of the week with slight losses, as the election-fueled bull market run paused. However, the U.S. dollar extended its rally on yesterday's solid economic data and comments from Fed Chair Yellen that bolstered December rate hike expectations. Meanwhile, financials continued to move higher and energy stocks got a boost from a turn upward for crude oil prices. Treasuries and gold were lower.

The Dow Jones Industrial Average (DJIA) lost 36 points (0.2%) to 18,868, the S&P 500 Index declined 5 points (0.2%) to 2,182 and the Nasdaq Composite fell 12 points (0.2%) to 5,322. In moderately-heavy volume, 930 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.38 to $46.36 per barrel, wholesale gasoline gained $0.01 to $1.46 per gallon and the Bloomberg gold spot price was $8.31 lower at $1,208.11 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 101.32. Markets were higher for the week, as the DJIA rose 0.1%, while the S&P 500 Index gained 0.8% and the Nasdaq Composite jumped 1.6%.

Salesforce.com Inc. (CRM $78) reported 3Q earnings-per-share (EPS) ex-items of $0.24, above the $0.21 FactSet estimate, as revenues rose 25.0% year-over-year (y/y) to $2.1 billion, roughly in line with forecasts. CRM raised its full-year EPS and revenue guidance. Shares were solidly higher.

Williams-Sonoma Inc. (WSM $53) posted 3Q EPS of $0.78, one penny north of forecasts, with revenues rising 1.1% y/y to $1.3 billion, roughly in line with expectations. 3Q same-store sales declined 0.4% y/y, compared to the estimated 1.4% gain. WSM issued 4Q earnings and sales guidance that was below the Street's projections. Shares were lower.

Shares of Gap Inc. (GPS $26) fell sharply after the retailer noted challenging traffic trends during 3Q after reaffirming its full-year EPS outlook, which prompted some concerns among analysts regarding its 4Q performance, which includes the crucial holiday shopping season.

Leading indicators tick higher

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) rose 0.1% month-over-month (m/m) in October, in line with the Bloomberg projection, and compared to the prior month's unrevised 0.2% increase. Support came from the components pertaining to the yield curve and average workweek, while the index was bogged down by jobless claims, ISM new orders and consumer expectations.

The Kansas City Fed Manufacturing Activity Index for November fell to 1 from October's unrevised 6 level, though a reading north of zero depicts expansion.

Treasuries finished lower, as the yield on the 2-year note ticked 2 basis point (bp) higher to 1.07%, the yield on the 10-year note gained 4 bps to 2.34%, while the 30-year bond was flat at 3.02%.

Bond yields have surged in the wake of President-elect Donald Trump's surprising victory in last week's election, which also saw the Republicans maintain control of Congress. For our latest analysis of the bond markets following the surprise election results, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, at www.schwab.com/onbonds, where you can also find Schwab's Director of Income Planning, Rob Williams' latest article, Can Bond Funds Make Sense When Interest Rates Rise?. Follow Kathy and Schwab on Twitter: @kathyjones and @schwabresearch.

With the markets being driven by posturing since Donald Trump's surprising Presidential election victory last week, see Schwab's Chief Investment Strategist Liz Ann Sonders' and Senior Vice President with the Schwab Center for Financial Research, Mark Riepe's, CFA, video titled The Election's Over, so What's Next for Markets? at www.schwab.com/insights. Follow Liz Ann on Twitter: @lizannsonders. Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Could Tax Cuts Really Happen in 2017?, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016.

Europe declines, Asia mixed as monetary policy and politics command attention

European equities finished mostly lower, with cooled post U.S. election-posturing allowing the markets to focus on diverging global monetary policy and a host of looming political events in Europe. Schwab's Director of International Research, Michelle Gibley, CFA, offers analysis of the European political landscape in her latest article, Europe Votes: Could More Countries Reject the EU?. Michelle notes that upcoming votes in Europe could create market volatility, but resolving outstanding political uncertainty could be good for stocks and the economy. Read more at www.schwab.com/oninternational. Yesterday, Federal Reserve Chairwoman Janet Yellen signaled that a rate hike "could well become appropriate relatively soon," while warning about the risks to financial stability and frequency of tightening monetary policy of holding the fed funds rate at its current level for too long. European Central Bank President Mario Draghi said today that the current monetary policy support will be key for the economic outlook in coming years, while adding that it does not yet see a consistent strengthening of underlying price dynamics, per Bloomberg. The euro and British pound fell versus the U.S. dollar, while bond yields in the region finished mixed. Technology issues moved higher, though basic materials, oil & gas and utilities stocks saw some pressure.

Stocks in Asia finished mixed, with fading U.S. election fallout giving way to elevated Fed rate hike expectations in the wake of yesterday's plethora of stronger-than-expected data and comments from Fed Chair Yellen that signaled a December rate increase may be on track. Japanese equities gained ground, with the yen extending a slide versus the U.S. dollar to take the index to an 11-month high and technically entering a bull market. The gain came as yesterday the Bank of Japan began its first bond market operation since the September decision to change its monetary policy direction to focus on managing the yield curve. For our latest analysis of Japan's monetary policy, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Going Godzilla: What has the Bank of Japan Unleashed?.

Mainland Chinese stocks declined amid continued caution toward the real estate market as the government has cracked down on buying activity, while a report showed growth in October new home prices slowed m/m, but securities traded in Hong Kong advanced, snapping a two-session losing streak. Australia's markets rose, with strength in financials being accompanied by a rally in technology issues. South Korean listings and those traded in India both declined, with emerging markets remaining choppy in the wake of the U.S. election. Following the past week of U.S. election-fueled market volatility, 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. Read all these articles from Jeff at www.schwab.com/oninternational, and follow him on Twitter: @jeffreykleintop.

Stocks continue election run

The Dow, S&P 500 and Nasdaq all threatened record territory as stocks extended a rally stemming from last week's surprising Presidential victory by Donald Trump. Moreover, Fed rate hike expectations remained elevated, bolstered by some strong economic data and Fed Chair Janet Yellen's Congressional testimony where she signaled a December hike was likely. Housing starts surged to more than a nine-year high, jobless claims tumbled to the lowest level since 1973, and retail sales easily topped expectations. Treasury yields and the U.S. dollar both added to rallies, with the yield on the 10-year note hitting levels not seen in about a year. Financials led the way, while healthcare issues gave back some of last week's post-election rebound. Energy was also a standout winner as crude oil prices overcame some of a recent plunge. The retail sector dominated the earnings front, highlighted by Best Buy Co. Inc. (BBY $45) and Target Corp. (TGT $76), though results were mixed as Dow members Wal-Mart Stores Inc. (WMT $69) and Home Depot Inc. (HD $128) both fell as their reports disappointed the Street. Outside the retail sector, Dow component Cisco Systems Inc. (CSCO $30) dropped to help limit gains for the Dow after issuing softer-than-expected 2Q guidance. With 3Q earnings season largely in the books, the growth rate for the S&P 500 sits at 3.0%, poised to post y/y growth for the first time since 1Q 2015, per data compiled by FactSet.

Although next week will be shortened by market closures on Thursday's Thanksgiving holiday, focus on the fallout from the election and elevated Fed rate hike expectations are likely to continue. As such, the U.S. economic calendar is poised to command attention, with the release of key reads on existing and new home sales, durable goods orders, Markit's preliminary Manufacturing PMI Index, and the final University of Michigan Consumer Sentiment Index.

International reports headlining a light week of data include: Japan—trade balance and the Consumer Price Index (CPI). Eurozone—Markit's business activity reports, as well as 3Q GDP and business confidence reports out of Germany. U.K.—3Q GDP.

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