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Tuesday, November 15, 2016

Stocks Go Green with Energy and Tech Gains

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

Stocks Go Green with Energy and Tech Gains

U.S. stocks were able to stage an advance as the Dow overcame some early pressure to close higher for its seventh-straight session. The post-election rally for financials paused, while technology issues rebounded from some recent weakness. Retail sales for October rose, registering the second consecutive month of solid gains. Crude oil prices surged, recovering from a recent selloff despite the U.S. dollar continuing to gain modest ground. Treasuries and gold managed gains.

The Dow Jones Industrial Average (DJIA) advanced 54 points (0.2%) to 18,923, the S&P 500 Index gained 16 points (0.7%) at 2,180 and the Nasdaq Composite increased 57 points (1.1%) to 5,276. In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil surged $2.49 to $45.81 per barrel, wholesale gasoline was $0.06 lower at $1.34 per gallon and the Bloomberg gold spot price was $6.16 higher at $1,227.51 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 100.17.

Dow member Home Depot Inc. (HD $124) reported 3Q earnings-per-share (EPS) of $1.60, two cents north of the FactSet estimate, as revenues increased 6.1% year-over-year (y/y) to $23.2 billion, above the projected $23.0 billion. 3Q same-store sales rose 5.5% y/y, topping the expected 4.4% gain. The company raised its full-year EPS outlook, while reaffirming its revenue guidance. HD traded lower amid concerns regarding a potential cooling of home improvement activity as the company did not raise its full-year revenue outlook and its 3Q sales growth decelerated heading into the crucial 4Q.

TJX Companies Inc. (TJX $73) posted 3Q EPS ex-items of $0.91, above the forecasted $0.87, with revenues increasing 7.0% y/y to $8.3 billion, topping the expected $8.2 billion. Quarterly same-store sales grew 5.0% y/y, exceeding the estimated 3.4% increase. TJX issued softer-than-expected 4Q EPS and same-store sales guidance. Shares traded lower.

Advance Auto Parts Inc. (AAP $164) announced 3Q earnings ex-items of $1.73 per share, two pennies north of estimates, as revenues decreased 2.0% y/y to $2.3 billion, exceeding the expected $2.2 billion. 3Q same-store sales declined 1.0% y/y, versus the projected 3.5% drop. AAP also offered an update to its strategic initiatives. Shares rallied.

Retail sales top forecasts

Advance retail sales (chart) for October were up 0.8% month-over-month (m/m), above the Bloomberg forecast of a 0.6% increase, and compared to September's favorably revised 1.0% rise. Also, last month's sales ex-autos were higher by 0.8% m/m, topping expectations of a 0.5% gain, and following the upbeat revision to the 0.7% rise seen in the previous month. Sales ex-autos and gas rose 0.6% m/m, exceeding estimates of a 0.3% increase, and versus September's upward revision to a 0.5% gain. The retail sales control group, a figure used to help calculate GDP, was up 0.8%, compared to the projected 0.4% rise, and compared to the prior month's upwardly revised 0.3% rise.

The second-straight solid monthly advance in retail sales was broad-based with 11 of the 13 major categories rising, led by jumps in autos and nonstore retailers—which include online shopping. Food services and drinking places, along with furniture stores, were the two categories that declined.

The data adds credence to the latest Schwab Market Perspective: Is the Fog Starting to Lift?, that despite all the hand wringing over the election, the U.S. economy continues to grow. Although the solid acceleration in 3Q GDP growth was boosted by possible unrepeated catalysts, early fourth quarter data suggest that we won't give back all of the gains seen from the previous quarter. Auto sales rebounded after concerns that they may be in for a longer slump, and wages accelerated, while housing should continue to support both the economy and consumer confidence. For more on the consumer, which accounts for a large majority of U.S. economic output, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Refocusing. Read both articles as well as other timely articles from our experts at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The Import Price Index (chart) increased 0.5% m/m for October, compared to projections of a 0.4% increase and September's upwardly revised 0.2% increase. Compared to last year, prices were lower by 0.2%, versus forecasts of a 0.3% drop, and following September's downwardly revised 1.0% fall.

The Empire Manufacturing Index showed output from the New York region unexpectedly moved back into expansion territory (a reading above zero) for November. The index rose to 1.5 from October's unrevised -6.8 level, with forecasts calling for an improvement to -2.5.

Business inventories (chart) ticked 0.1% higher m/m in September, below forecasts of a 0.2% rise, and versus August's unrevised 0.2% gain.

Treasuries were mostly higher, with the yield on the 2-year note little changed at 1.00%, while the yield on the 10-year note declined 3 basis points (bps) to 2.24% and the 30-year bond rate decreased 4 bps to 2.97%.

Bond yields on the longer end of the curve are pulling back from the recent surge in the wake of 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, where you can also find his latest article, Could Tax Cuts Really Happen in 2017?. Follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will commence with the weekly MBA mortgage applications report, which will be followed by the Producer Price Index, expected to have increased 0.3% m/m. Prior to the opening bell, we will get the latest report from the Federal Reserve on industrial production and capacity utilization, while after the regular session begins, the docket will deliver the NAHB Housing Market Index for November.

Europe ticks higher and Asia mostly lower on continued U.S. election focus and data

European equities finished mostly to the upside, with the global markets continuing to digest the implications of last week's surprise U.S. election victory for Donald Trump, after which volatility has ramped up, bolstered by rallies in bond yields and the U.S. dollar. Amid the backdrop of heightened global market 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 at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop. Financials remained in rally mode and oil & gas issues rebounded amid a recovery from a sharp selloff in crude oil prices. Preliminary eurozone 3Q GDP growth came in at a 1.6% y/y rate, matching estimates and 2Q's pace, despite softer-than-expected growth out of Germany. German investor confidence improved much more than expected for November, while U.K. consumer price inflation came in cooler than projected in October. The euro was little changed and the British pound fell versus the U.S. dollar, while bond yields in the region gave back some of a recent jump.

Stocks in Asia finished mostly lower, with the global markets pausing from a recent bout of volatility that has come in the wake of the surprising U.S. Presidential election results, while U.S. Fed rate hike expectations remain elevated. Bond yields and the U.S. dollar have rallied since last Tuesday's election. Financials and healthcare issues extended a recent run as global bond yields rallied and concerns eased about tighter regulations in the sectors, bolstered by some upbeat banking sector results in Japan, though technology stocks added to recent declines. Oil & gas issues also rebounded as crude oil prices gain back some of a recent plunge, while basic materials gave back a recent jump.

Japanese equities finished flat, with the yen recovering slightly from a recent drop. Mainland Chinese stocks dipped and those traded in Hong Kong advanced. Australian securities decreased, while the minutes from the Reserve Bank of Australia's unchanged monetary policy decision earlier this month showed inflation expectations stabilized. South Korean equities declined and Indian stocks fell after being closed yesterday for a holiday. After the closing bell, India reported slightly hotter than expected consumer price inflation and an acceleration in export growth for October. Emerging markets have come under pressure in the wake of the U.S. election results, and Schwab's Jeffrey Kleintop, CFA, offers his latest article, President Trump and Global Trade: How Will Campaign Promises Play Out?, at www.schwab.com/oninternational.

The international economic docket for tomorrow will be light, yielding housing loans from Japan, leading indicators, the Wage Price Index and vehicle sales from Australia and employment data from the U.K.

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