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Monday, November 14, 2016

Stocks Fall Short of Continuing Gains

Charles Schwab: On the Market
Posted: 11/14/2016 4:15 PM ET

Stocks Fall Short of Continuing Gains

Domestic stocks finished mixed, while the U.S. dollar and Treasury yields extended post-election rallies. Financials issues were standout winners and technology listings were the biggest laggards. Though the economic calendar was dormant today, tomorrow the domestic docket will commence a busy week with the release of retail sales. In some M&A news, Samsung agreed to acquire Harman International and German engineering company Siemens inked a deal to purchase Mentor Graphics. Gold and crude oil prices were slightly lower.

The Dow Jones Industrial Average (DJIA) gained 21 points (0.1%) to 18,869, the S&P 500 Index was nearly unchanged at 2,164 and the Nasdaq Composite dipped 19 points (0.4%) to 5,218. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.09 to $43.32 per barrel, wholesale gasoline was $0.03 lower at $1.28 per gallon and the Bloomberg gold spot price was $8.39 lower at $1,219.25 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 1.0% higher at 100.03.

Samsung Electronics Co. Ltd (SSNLF $1,250) announced an agreement to acquire Harman International Industries Inc. (HAR $110) for $112.00 per share in cash, for a total equity value of about $8.0 billion. Samsung said the transaction will give it a significant presence in the connected technologies market, especially in automotive electronics. HAR traded sharply higher.

German engineering company Siemens AG (SIEGY $118) announced an agreement to acquire design automation and industrial software provider Mentor Graphics Corp. (MENT $36) for $37.25 per share in cash, representing an enterprise value of about $4.5 billion. MENT rallied.

Bond yields continue to rally with economic front quiet

Treasuries were lower, with the economic calendar void of any major reports today. The yield on the 2-year note rose 7 basis points (bps) to 0.99%, the yield on the 10-year note gained 9 bps to 2.24%, and the 30-year bond rate advanced 6 bps to 3.00%. Bond yields remain in rally mode as the markets grapple with President elect Donald Trump's surprising victory in last week's election, which also saw the Republicans maintain control of the House and Senate.

For our latest analysis of the bond markets following the surprise election results, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, Change Is in the Air: A Post-Election Look at Bonds. Kathy notes that bond yields rose on news of Donald Trump's election win, in expectation of increased government spending. We believe higher inflation and interest rates are likely over the longer term, but the potential for protectionist trade policies and a stronger dollar could offset the effects of increased growth and inflation. We believe the likelihood of a Federal Reserve rate hike in December has diminished due to heightened market volatility, but market indicators suggest that a rate hike is expected. We suggest investors continue to maintain a short-to-intermediate duration portfolio with a focus on high credit-quality bonds. Read more at www.schwab.com/onbonds, and follow Kathy on Twitter: @kathyjones.

For more analysis of the election, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Trump Pulls Off an Upset, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016. Michael also joins Schwab's Liz Ann Sonders in the video titled, Election 2016: The Votes Are In, so Now What?, at www.schwab.com/insights. Follow Schwab on Twitter: @schwabresearch.

This week, the U.S. economic docket will be headlined by reads on industrial production and capacity utilization, the Consumer Price Index, the Producer Price Index, housing starts and building permits, the Leading Index and regional manufacturing reports. Tomorrow, the busy economic week will kick off with the release of October retail sales, projected to match September's 0.6% month-over-month (m/m) gain. Excluding autos, sales are projected to rise 0.5%, in line with the prior month's increase. Stripping out autos and gas, sales are anticipated to rise 0.3%, matching September's gain, and the control group—a figure used to help calculate GDP—is estimated to grow 0.4%, after ticking 0.1% higher in the previous month.

The report will also be accompanied by a plethora of earnings reports out of the retail sector. In a post-election analysis of the major stock market sectors, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Refocusing, the consumer looks to be coming into the crucial holiday shopping season relatively healthy, in our view, and may gain some confidence from the election being over. But the American consumer continues to present a mixed picture to us. Wages are starting to rise, but caution still seems to permeate much of the consumer landscape. Tight margins and rising wage costs for retailers leave us with a marketperform rating on the consumer discretionary sector. Read more at www.schwab.com/marketinsight.

Additional economic reports set for release tomorrow include the Import Price Index, expected to show a 0.4% m/m increase during October following September's 0.1% rise, as well as the Empire Manufacturing Index, anticipated to have improved to a reading of -2.5 for November, from the previous report's -6.8, with a reading below zero indicating contraction in manufacturing activity. Business inventories are also due out tomorrow, forecasted to tick 0.2% higher in September, matching the rise seen in August.

Europe mostly higher, Asia mixed

European equities finished mostly higher, with the U.S. Presidential election remaining in the spotlight as the markets digest the unexpected Trump victory and the implications for the global economy. Crude oil prices continued to drop to pressure the oil & gas sector, while utilities remain hampered amid the global stock market rally following the U.S. election. However, financials extended a jump, with bond yields resuming a rally. The markets also grappled with some mixed economic data out of China and a stronger-than-expected 3Q GDP report out of Japan. Eurozone industrial production declined by a smaller amount than anticipated for September. The euro and British pound fell versus the U.S. dollar. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the recent movement in the global yield curve in his latest article, Recession Odds Pass Key Threshold at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed with the global markets continuing to digest the implications of last week's surprising U.S. Presidential victory for Donald Trump. Traders also weighed a plethora of economic data out of China and Japan. China's industrial production and retail sales both rose at smaller-than-expected amounts for October, while the nation's fixed asset investment topped forecasts. The data follows late-Friday's softer-than-expected October lending statistics. Japan's preliminary 3Q GDP grew at a quarter-over-quarter annualized 2.2% rate, well above the 0.8% expansion that was expected and an acceleration from the 0.7% rise posted in 2Q. Schwab's Jeffrey Kleintop, CFA, offers a World Tour: An Around The World Look At the Economic Landscape, at www.schwab.com/oninternational.

Mainland Chinese stocks rose as the softer-than-expected economic data appeared to suggest stability in the world's second largest economy. However, listings trading in Hong Kong fell with property-related issues dropping on flared-up concerns toward the real estate sector amid the recent government crackdown and a rally in bond yields. Japanese equities rallied with the upbeat GDP data being met with a solid drop in the yen. Australian securities declined with technology and basic materials issues seeing some pressure. Stocks in South Korea traded to the downside as the country deals with its own multifaceted political uncertainties and as emerging markets remained under pressure following the U.S. election results. Finally, Indian markets were closed for a holiday.

The international economic docket for tomorrow will yield machine tool orders from Japan, wholesale prices from India and consumer confidence from Australia. European releases will include CPI and PPI from the U.K., the Zew business climate survey and 3Q GDP from Germany and the trade balance and 3Q GDP for the Eurozone.

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