Stocks Close Lower for Final Session of 2016

Charles Schwab: On the Market

Posted: 12/30/2016 4:15 PM ET

Stocks Close Lower for Final Session of 2016

U.S. stocks closed the final trading session of 2016 lower as complacency lingered and volume and data were light ahead of the New Year holiday weekend. Treasuries were higher and the U.S. dollar, gold and crude oil prices ticked lower. In light economic news, a read on some regional manufacturing activity missed expectations.

The Dow Jones Industrial Average (DJIA) decreased 57 points (0.3%) to 19,763, the S&P 500 Index lost 10 points (0.5%) to 2,239 and the Nasdaq Composite declined 49 points (0.9%) to 5,383. In moderately-light volume, 783 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.05 lower to $53.72 per barrel and wholesale gasoline was $0.01 lower at $1.67 per gallon. Elsewhere, the Bloomberg gold spot price shed $5.73 to $1,152.40 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 102.30. Markets were lower for the week, as the DJIA declined 0.9%, the S&P 500 Index lost 1.1% and the Nasdaq Composite decreased 1.5%.

Mylan NV (MYL $38) announced the launch of a generic version of Dow member Johnson & Johnson's (JNJ $115) drug, Concerta, aimed at treating Attention Deficit Hyperactivity Disorder (ADHD). MYL traded higher and JNJ was little changed.

Cabela's Inc. (CAB $59) dropped after the company received a "second request" from the Federal Trade Commission (FTC) for additional information in regard to its proposed merger with Bass Pro Shops.

Regional manufacturing activity slips

The Chicago Purchasing Managers Index (chart) declined more than expected but remained in expansion territory (above 50), decreasing to 54.6 in December from 57.6 in November, and versus the Bloomberg expectation of a dip to 56.8. Growth in new orders and production both decelerated, while inventories and employment both signaled contraction.

Treasuries were higher, with the yield on the 2-year note dipping 2 basis points (bps) to 1.20%, the yield on the 10-year note declining 3 bps to 2.44% and the 30-year bond rate slipping 1 bp to 3.07%.

Bond yields have rallied this year in the wake of upbeat economic data, which has accompanied high expectations for fiscal stimulus, tax reform and regulatory rollbacks following the surprise November Presidential election. Also, the rally in rates was bolstered in early December as the Fed's highly expected 25 bp increase to its target for the fed funds rate included a forecast for more rate hikes in 2017 than it had previously projected. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? at www.schwab.com/insights, where you can also find her latest, Changing Conditions: A Bond Market FAQ. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Signs of rising inflation have also pressured bond prices and Schwab's Fixed Income Director, Collin Martin, CFA, discusses in his article, Inflation Is Rising: Time to Consider Treasury-Inflation Protected Securities? at www.schwab.com/onbonds.

Please note: All U.S. markets will be closed on Monday in observance of the New Year holiday.

Europe modestly higher and Asia mixed to close out 2016

European equities finished slightly higher, amid lingering complacency to close out 2016, which saw mixed performance in the region as U.K. markets stood out with a sharp rally, though Italian stocks fell noticeably on exacerbated banking sector concerns. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Financials led to the upside, as the banking sector got a reprieve, with Italian lender Banca Monte dei Paschi di Siena SpA (BMDPD $7) announcing plans to issue about $15.8 billion of debt to bolster is capital position. The report comes as the company is expected to receive government support after it approved a bank bailout decree that will allow it to increase its public borrowing by 20 billion euros to help fund bank bailouts. Stocks shrugged off flared-up geopolitical concerns as the U.S. announced new sanctions against Russia, as well as the expulsion of 35 diplomats, due to allegations that the country interfered with the November elections. Russia announced today that it will not retaliate by expelling American diplomats. The euro and British pound traded higher versus the U.S. dollar, while bond yields in the region gained ground.

Stocks in Asia finished mixed in the final trading session of 2016, which has seen divergent performance, while volume continued to be subdued ahead of the New Year holiday, with markets in South Korea closed today. Japanese equities declined despite the yen giving back some of yesterday's advance. Stocks trading in mainland China and Hong Kong advanced on the heels of yesterday's upbeat November trade data. Chinese stocks rebounded from recent weakness that has come courtesy of festering currency/liquidity concerns in the wake of the U.S. dollar's recent jump, uncertainty following government crackdowns—notably on the real estate and insurance sectors—and lingering uneasiness regarding trade relations with the U.S. For analysis of the impact on the global markets of the U.S. election, see Schwab's Jeffrey Kleintop's, CFA, latest article, President Trump and Global Trade: How Will Campaign Promises Play Out?.

Australian securities fell, with financials seeing pressure. Indian equities rallied, along with other emerging markets, continuing to pare recent weakness that has been fostered by earnings and economic concerns, along with government reform uncertainty and monetary policy divergence. Schwab's Director of International Research, Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio, Read both articles at www.schwab.com/oninternational, and be sure to check out our latest article, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Stocks limp to 2016 finish line

U.S. stocks finished lower on the holiday-shortened final week of 2016, with the markets complacent amid a lack of catalysts and data light ahead of the New Year. The U.S. dollar and Treasury yields pulled back from 2016 rallies, while crude oil prices added to a year-to-date surge. The global markets assessed the wild swings in 2016, with the Fed raising rates in the wake of some signs the economy is gaining steam, while showing some resiliency in the face of heightened political uncertainty in Europe, notably a short-lived negative reaction to the U.K.'s vote to leave the European Union, known as Brexit. All major U.S. indexes rallied sharply on the year, bolstered by the surprise November election, which saw Donald Trump win the Presidency and the Republicans gain control of Congress. On the year, most major sectors jumped, led by energy issues on crude oil's surge and financials in the wake of the upward charge in interest rates, but real estate stocks dipped and healthcare issues saw red.

The New Year will begin with another shortened-week, but the economic calendar will be robust, with the ISM Manufacturing and non-Manufacturing Indexes being joined by the Fed's minutes from its December meeting where it raised rates and offered a forecast for a faster pace of hikes in 2017 than it had previously estimated. Other reports include the trade balance, factory orders and Markit's reads on manufacturing and services sector activity. However, the headlining release will likely be Friday's December nonfarm payroll report.

As noted in the Schwab Market Perspective: Will the Momentum Continue Into 2017?, some of the enthusiasm since the election may have pulled some gains from 2017 into 2016, but we believe the economic momentum seen in the latter half of 2016 will continue into 2017. A compelling support for 2017 is investor flows into U.S.-based funds, helping to keep the bull market alive. The populist trend seen globally last year may not continue and investors should focus on market reactions in the face of political "shocks" and on the improving global manufacturing picture. Read more at www.schwab.com/marketinsight, where you can also find Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, look at investing in the major sectors heading into the New Year in his latest Schwab Sector Views: Entering 2017 the Same Way as 2016.

International reports due out next week include: Australia—trade balance. China—manufacturing and services data. India—preliminary 1Q GDP estimate. Eurozone—Markit's business activity reports, CPI estimate, economic confidence and retail sales. Germany—factory orders. U.K.—Markit's business activity reports.