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Saturday, November 12, 2016

Stocks Stir up Mixed Finish as S&P can't Shake Red

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

Stocks Stir up Mixed Finish as S&P can't Shake Red

U.S. stocks finished a wild week in mixed fashion with technology issues rebounding from a recent pullback and healthcare stocks giving back some of a post-election boost. Energy issues were also under some pressure as crude oil prices resumed a selloff. Bond traders were sidelined in observance of the Veteran's Day holiday, keeping the recent Treasury yield rally in check. The U.S. dollar was higher and gold dropped, while equity news consisted of a mixed bag of earnings reports.

The Dow Jones Industrial Average (DJIA) gained 40 points (0.2%) to 18,848, the S&P 500 Index declined 3 points (0.1%) to 2,164 and the Nasdaq Composite gained 28 points (0.5%) to 5,237. In moderately-heavy volume, 1.1 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.25 to $43.41 per barrel, wholesale gasoline was $0.03 lower at $1.31 per gallon and the Bloomberg gold spot price was $32.50 lower at $1,226.70 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 99.06. Markets rallied for the week, as the DJIA surged 5.4%, while the S&P 500 Index and the Nasdaq Composite jumped 3.8% lower.

Dow member Walt Disney Co. (DIS $98) reported fiscal 4Q earnings-per-share (EPS) ex-items of $1.10, below the $1.16 FactSet estimate, as revenues declined 3.0% year-over-year (y/y) to $13.1 billion, compared to the expected $13.5 billion. DIS' cable networks unit remains a big focus on the Street, and profits during the quarter from the segment decreased, due to declines at ESPN and the Disney Channel. However, DIS offered relatively favorable forecasts for the current year and the following year, including an upbeat forecast for ESPN subscribers. Shares gained ground.

J.C. Penney Co. Inc. (JCP $9) posted a 3Q loss of $0.21 per share, roughly in line with forecasts, as revenues decreased 1.4% y/y to $2.9 billion, below the forecasted $3.0 billion. 3Q same-store sales declined 0.8% y/y, compared to the expected 2.2% gain. JCP lowered its full-year same-store sales outlook. Shares overcame some early pressure to finish higher.

NVIDIA Corp. (NVDA $88) announced 3Q EPS ex-items of $0.94, well above the estimated $0.56, with revenues jumping 54.0% y/y to $2.0 billion, topping the expected $1.7 billion. NVDA issued stronger-than-expected 4Q profit guidance, boosted its quarterly dividend by 22.0% to $0.14 per share and added $2.0 billion to its share repurchase program. Shares surged nearly 30%.

Nordstrom Inc. (JWN $59) reported 3Q earnings ex-items of $0.84 per share, easily exceeding the projected $0.51, as revenues rose 7.2% y/y to $3.5 billion, roughly in line with forecasts. 3Q same-store sales grew 2.4% y/y, versus the anticipated 2.3% increase. JWN raised its full-year earnings and revenue outlooks. Shares traded higher.

Consumer sentiment improves more than expected, while bond markets were closed

The preliminary University of Michigan Consumer Sentiment Index (chart) this month rose to 91.6, topping the prior month's 87.2 level, and compared to the Bloomberg expectations of an increase to 87.2. The current economic conditions and outlook components of the survey both improved month-over-month. The 1-year and 5-10 year inflation estimates both rose to 2.7% from 2.4%.

The bond markets were closed in observance of the Veteran's Day holiday, with the yield on the 2-year note at 0.92%, the yield on the 10-year note at 2.15%, and the 30-year bond rate at 2.94%. Bond yields and the U.S. dollar have rallied this week with inflation and Fed rate hike expectations elevated in the wake of the surprising results from Tuesday's election, with Donald Trump being elected the 45th U.S. President and the Republicans maintaining 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.

Stocks rallied up to and after the election results, with the global markets appearing to warm up to what a Trump Presidency and Republican control of Congress may mean for the economy. 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.

Financials jumped to lead the way, while a sharp rebound in bio-tech stocks boosted the healthcare sector, which had been beaten up leading up to the election. Utilities were a standout loser on the week. For post-election analysis of the stock market and the major sectors, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Refocusing at www.schwab.com/marketinsight. The election took center stage, aided by a relatively quiet economic front and as earnings season moved further down the home stretch. Thus far, with 454 companies in the S&P 500 Index delivering results, about 56% have topped revenue estimates and roughly 76% have bested earnings forecasts, per data compiled by Bloomberg. Crude oil prices extended their recent selloff.

Europe mostly lower, Asia mixed

European equities finished mostly lower, with the global markets grappling with the economic implications of Tuesday's surprising U.S. Presidential victory for Donald Trump, as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, in his latest article, President Trump and Global Trade: How Will Campaign Promises Play Out?, and follow Jeff on Twitter: @jeffreykleintop. Oil & gas issues led to the downside as crude oil prices extended a selloff. The British pound pared gains versus the U.S. dollar amid choppy trading on heightened Brexit uncertainty, following a recent court ruling that the U.K. government would have to request parliamentary approval to trigger Article 50 and start official Brexit negotiations with the European Union (EU). For more analysis of the Brexit fallout, Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article, Keep Calm and Carry On: The Brexit Shock That Wasn't. Read both articles at www.schwab.com/oninternational. German consumer price inflation rose in line with forecasts for October, while U.K. construction output unexpectedly grew in September. The euro turned lower versus the greenback, while bond yields in the region extended a recent rally.

Stocks in Asia finished mixed after rallying yesterday as the global markets appear to be warming up to the surprising Presidential election results and the Republicans maintaining control of Congress. Japanese equities rose, with the yen modestly regaining some of yesterday's drop. Mainland Chinese stocks advanced, while shares trading in Hong Kong fell and Australian securities finished higher. Moreover, South Korean equities declined, with the Bank of Korea leaving its benchmark interest rate at 1.25%, while Indian listings dropped as emerging markets came under pressure on the recent rally in the U.S. dollar on the election results and still elevated expectations of a December Fed rate hike. After the closing bell, China reported softer-than-expected lending statistics for October, while India's industrial production rose by a larger amount than expected for September. Schwab's Jeffrey Kleintop, CFA, offers analysis of the global economic landscape in his article, Recession Odds Pass Key Threshold, at www.schwab.com/oninternational.

Looking ahead

Next 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, retail sales, the Leading Index and regional manufacturing reports. With the Presidential election now passed investors may be trying to decipher what impacts the result may have on the domestic economy. In the recent Schwab Market Perspective: Is the Fog Starting to Lift?, Schwab's experts discuss that despite the surprising election result, stocks have staged an impressive rally. The country has managed to move on following bitter election fights and continue to prosper to varying degrees, and we have little doubt that will occur this time around, too. As such, we urge investors not to overreact to the results and to remain focused on the long-term goals. Read the whole article as well as other timely articles from our experts at www.schwab.com/marketinsight, and be sure to follow Schwab on Twitter: @schwabresearch.

International reports due out next week that deserve mention include: China—retail sales, foreign direct investment and industrial production. India—wholesale prices, trade balance and CPI. Japan—industrial production and capacity utilization, 3Q GDP, machine tool orders and housing loans. U.K.—house prices, CPI, PPI, employment data and retail sales. Germany—CPI, 3Q GDP, PPI and the Zew business climate survey. Eurozone—industrial production, trade balance, CPI and construction output.

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