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Thursday, December 08, 2016

Stocks Continue Rise to New Highs

Charles Schwab: On the Market
Posted: 12/8/2016 4:15 PM ET

Stocks Continue Rise to New Highs

U.S. stocks continued to add to weekly gains as the major domestic indexes joined a global equity advance following a mixed monetary policy decision from the European Central Bank. Treasury yields extended gains, the U.S. dollar and crude oil prices also moved higher and gold declined. On the equity front, financials were stand-out winners, while Lululemon Athletica rallied on an upbeat earnings report.

The Dow Jones Industrial Average (DJIA) advanced 65 points (0.3%) to 19,615, the S&P 500 Index gained 5 points (0.2%) to 2,246 and the Nasdaq Composite added 24 points (0.4%) to 5,417. In moderately-heavy volume, 975 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil added $1.07 to $50.84 per barrel and wholesale gasoline was $0.01 lower at $1.50 per gallon. Elsewhere, the Bloomberg gold spot price declined $3.02 to $1,170.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.8% to 101.08.

Lululemon Athletica Inc. (LULU $69) reported 3Q earnings-per-share (EPS) ex-items of $0.47, above the $0.43 FactSet estimate, as revenues rose 13.0% year-over-year (y/y) to $544 million, topping the expected $541 million. 3Q same-store sales grew 7.0% y/y, exceeding the expected gain of 5.2%. The yoga apparel company issued 4Q guidance that was a bit shy of estimates, while offering a stronger-than-expected full-year EPS outlook. Separately, the company announced a $100 million share repurchase plan. Shares surged.

Costco Wholesale Corp. (COST $158) posted fiscal 1Q profits ex-items of $1.17 per share, below the forecasted $1.19, as revenues rose 3.2% y/y to $28.1 billion, versus the projected $28.3 billion. COST achieved a 1.0% y/y increase in 1Q same-store sales, compared to the expected 1.2% gain. Shares finished solidly higher despite the results, as the company noted that traffic seemed to have hit a trough and come back a little, pointing out that "It certainly seems like it's back on the mend."

Dow member Chevron Corp. (CVX $115) announced that its 2017 capital expenditures budget is expected to be $19.8 billion, down at least 15.0% versus 2016. CVX closed higher. For more on the energy sector in the wake of the OPEC production cut last month, see our article, Are Things Finally Looking Up for the Oil Industry?, at www.schwab.com/insights, and follow Schwab on Twitter: @schwabresearch.

H&R Block Inc. (HRB $23) announced a fiscal 2Q loss of $0.67 per share, compared to the expected shortfall of $0.68, with revenues rising 2.3% y/y to $131 million, above the forecasted $127 million. Shares declined amid concerns about the potential impact on demand for the company's tax prep services of President-elect Donald Trump's potential tax reforms.

Jobless claims decline

Weekly initial jobless claims (chart) fell by 10,000 to 258,000 last week, above the Bloomberg forecast calling for a decline to 255,000, as the prior week figure was unrevised at 268,000. The four-week moving average rose by 1,000 to 252,500, while continuing claims fell by 79,000 to 2,005,000, south of the estimated level of 2,048,000.

For our latest look at employment, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Welcome to the Working Week: An Update on Jobs. Liz Ann also offers her latest article, You've Got to Earn It: Valuations Aided by Improving "E," where she points out that economic and earnings momentum has picked up—and not just post-election, with the latter expected to grow by more than 12% in 2017. She concludes that valuations are reasonable considering inflation; but that also represents a risk factor next year. Read both these articles at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Treasuries were lower with the yield on the 2-year note ticking 1 basis point (bp) higher to 1.10%, the yield on the 10-year note gaining 5 bps to 2.39%, and the 30-year bond rate advancing 7 bps to 3.09%.

With bond yields having spiked since the surprise presidential election and amid elevated December rate hike expectations, which have been bolstered by some mostly stronger-than-expected economic data, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, Bond Market Outlook: Higher Rates and Known Unknowns at www.schwab.com/onbonds. Kathy notes the prospect of fiscal stimulus and tax reform under the new administration is driving bond yields higher, and we believe the upward trend is likely to continue into 2017. However, there are many "known unknowns" about policy that could affect the outlook for investors. We suggest investors take a cautious approach to the bond market, focusing on high quality domestic bonds and keeping the average portfolio duration in the short to intermediate term until there is more clarity.

Be sure to check out Kathy's video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled How Will Expected December Interest Rate Hike Affect Markets in 2017?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Releases for the U.S. economic calendar tomorrow will consist of wholesale inventories, expected to have declined 0.4% m/m during October after rising 0.1% in September, and the preliminary University of Michigan Consumer Sentiment Index for December, projected to move higher to 94.5 from the 93.8 registered for November's final read.

Europe higher in choppy action following ECB decision, Asia joins global market rally

European equities finished higher after a bout of choppiness in the wake of the monetary policy decision from the European Central Bank (ECB), which expectedly decided to leave its benchmark interest rate unchanged and extend its asset purchase program by about nine months. Briefly following the decision, the euro rallied and stocks moved to the downside as the ECB announced that during the nine-month extension, asset purchases will be lowered to a monthly pace of 60 billion euros from the current pace of 80 billion euros.

However, the knee-jerk reaction reversed, with the euro falling and stocks extending a winning streak to four sessions. The ECB noted that if its outlooks for inflation—"a sustained adjustment in the path of inflation consistent with its inflation aim"—and the economy become less favorable it intends to increase the asset purchase program in terms of size and/or duration. Also, the ECB eased the restrictions on the types of assets it can purchase as it will be allowed to buy bonds with a yield below the deposit rate, which was previously a minimum eligibility requirement. The central bank issued updated economic projections, saying it expects the economic expansion to proceed at a moderate but firming pace, leaving its outlook for real GDP growth broadly unchanged from its September forecasts. Basic materials and financials showed strength following the decision, with bond yields in the region moving higher.

Amid the choppiness in the markets and the likelihood of continued global 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. Follow Jeff on Twitter: @jeffreykleintop. Italian stocks continued to rebound from the failed Italian referendum over the weekend that exacerbated political uncertainty in the region as it was the first step of several that could pave the way for an Italian exit from the European Union (EU). Schwab's Director of International Research, Michelle Gibley, CFA, discusses the uncertain political front in the region in her latest article, Europe Votes: Could More Countries Reject the EU? Read all these articles at www.schwab.com/oninternational. The British pound finished lower versus the U.S. dollar.

Stocks in Asia finished mostly higher following strong rallies in the U.S. and Europe yesterday, bolstered by speculation ahead of today's European Central Bank decision which yielded an extension of its asset purchase program. Japanese equities gained ground despite some strength in the yen and a disappointing revision to the nation's 3Q GDP growth. Japan's economic output grew at a 1.3% annualized quarter-over-quarter pace, revised down from the preliminary estimate of a 2.2% rate of expansion, and compared to expectations of a 2.3% gain. The negative revision was led by decreases in capital spending and private inventories. Australian securities advanced with weakness in oil & gas issues on yesterday's extension of losses for crude oil prices being more than offset by strength in financials and basic materials stocks.

Stocks in India rallied to rebound from yesterday's decline that followed the Reserve Bank of India's unexpected decision to not cut its benchmark interest rates. South Korean equities jumped to extend a winning streak to three sessions. Stocks in Hong Kong rose as the markets continue to adjust to this week's start of the exchange trading link between Hong Kong and Shenzhen. Chinese markets also digested a relatively favorable November trade report, which showed exports snapped a seven-month losing streak and imports grew much more than expected. Securities trading in Shanghai finished lower. In the wake of the China data, Schwab's Jeffrey Kleintop, CFA, offers his latest article, Happy Unrecession: The Alice in Wonderland economy, noting that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. Read more at www.schwab.com/oninternational.

Tomorrow, the international economic docket will yield the BSI All Industry Index from Japan, CPI, PPI and foreign direct investment from China and home loans from Australia. Reports from across the pond are expected to include trade data and labor costs from Germany, industrial and manufacturing production from France and trade data and construction output from the U.K.

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