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Tuesday, January 24, 2017

Dow Makes Another Run Toward 20,000

Charles Schwab: On the Market
Posted: 1/24/2017 4:15 PM ET

Dow Makes Another Run Toward 20,000

U.S. stocks finished solidly higher, with the Dow again nearing the elusive 20,000 mark, amid a plethora of mixed earnings and economic reports, as well as a number of actions by President Donald Trump, including reviving the Dakota Access and Keystone XL oil pipelines. Treasuries were lower and crude oil prices recovered from yesterday's decline, while the U.S. dollar was slightly higher and gold lost ground.

The Dow Jones Industrial Average (DJIA) rose 113 points (0.6%) to 19,913, the S&P 500 Index was 15 points (0.7%) higher at 2,280 and the Nasdaq Composite jumped 48 points (0.9%) to 5,601. In moderate volume, 865 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.43 to $53.18 per barrel and wholesale gasoline added a penny to $1.60 per gallon. Elsewhere, the Bloomberg gold spot price fell $8.60 to $1,209.63 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.1% higher to 100.29.

Dow member 3M Co. (MMM $176) reported 4Q earnings-per-share (EPS) of $1.88, one penny above the FactSet estimate, as revenues ticked 0.4% higher year-over-year (y/y) to $7.3 billion, roughly in line with projections. MMM reaffirmed its 2017 EPS guidance. Shares lost ground.

Dow component Verizon Communications Inc. (VZ $50) posted adjusted 4Q profits of $0.86 per share, three cents south of forecasts, as revenues declined 5.6% y/y to $32.3 billion, compared to the expected $32.1 billion. VZ said its earnings and revenue for 2017 are expected to be fairly consistent with 2016. The company said in regard to its acquisition of Yahoo Inc. (YHOO $44), it continues to work with the search engine to assess the impact of data breaches. VZ traded solidly lower. Late yesterday, YHOO reported 4Q EPS and revenues that topped forecasts and shares were nicely higher.

Dow member Johnson & Johnson (JNJ $112) announced 4Q EPS ex-items of $1.58, above the estimated $1.56, with revenues rising 1.7% y/y to $18.1 billion, below the projected $18.3 billion. JNJ issued 2017 EPS and revenue guidance that came in just shy of expectations. Separately, JNJ announced that it is evaluating potential strategic options for its diabetes care companies, LifeScan Inc., Animas Corp., and Calibra Medical Inc. JNJ traded lower.

Dow component DuPont (DD $76) achieved 4Q earnings ex-items of $0.51 per share, above the estimated $0.41, with revenues decreasing 2.0% y/y to $5.2 billion, below the projected $5.3 billion. DD issued 1Q EPS guidance that came in south of expectations. DD said it expects to close its merger with Dow Chemical Co. (DOW $60) in the first half of 2017, pending regulatory approval. DD gained solid ground.

Dow member Travelers Companies Inc. (TRV $117) reported 4Q EPS of $3.20, compared to the estimated $2.80, as net written premiums rose 3.0% y/y to $6.1 billion, roughly in line with forecasts. Shares traded lower.

Steel companies based in the U.S., including United States Steel Corp. (X $33) and Nucor Corp. (NUE $61), saw nice gains after President Donald Trump signed executive orders today to restore the controversial Dakota Access and Keystone XL oil pipelines that were shuttered during the Obama administration. During the signing, Mr. Trump said that he is "very insistent that if we're going to build pipelines in the United States, the pipe should be made in the United States."

Housing sales slip, while manufacturing activity accelerates more than expected

Existing-home sales in December fell 2.8% month-over-month (m/m) to a 5.49 million annual rate, compared to the Bloomberg forecast of a 5.52 million pace. November's figure was upwardly revised to a 5.65 million annual rate. Compared to last year, sales were only 0.7% higher, but existing homes sold in 2016 (5.25 million) were the highest since 2006. The median existing-home price was up 4.0% y/y at $232,200. Housing supply came in at a 3.6-month pace at the current sales rate, versus 3.9 months in December 2015, and the inventory of homes for sale fell to the lowest since 1999. Sales in the Northeast, Midwest and West all declined m/m, but were higher y/y, while the South was flat m/m and down y/y.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said solid job creation and exceptionally low mortgage rates translated into a good year for the housing market, but higher mortgage rates and home prices combined with record low inventory levels stunted sales in December. For analysis of the real estate sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Sectors and Politics at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

The preliminary Markit U.S. Manufacturing PMI Index for January improved to the best level since March 2015 after rising to 55.1 from December's 54.3 level, and versus forecasts of 54.5. A reading above 50 denotes expansion in activity and Markit said the solid improvement was led by a sharp increase in new work.

The Richmond Fed Manufacturing Activity Index unexpectedly jumped further into expansion territory (a reading above zero), rising to 12 for January from the 8 posted in December, and versus expectations of a 7 reading.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Not Fade Away: Will High Consumer/Business Confidence Fade or Persist?, measures of both consumer and business confidence have recently surged, with the former resting on fairly strong pillars, but the latter may be on weaker pillars and subject to post-inauguration volatility. Read more at www.schwab.com/marketinsight and be sure to check out our article, The Trump Effect: Can the Post-Election Rally Continue at www.schwab.com/insights for analysis of the late-2016 rally to record highs. Follow Liz Ann on Twitter: @lizannsonders.

Treasuries finished lower, as the yield on the 2-year note rose 4 basis points (bps) to 1.19%, while the yields on the 10-year note and the 30-year bond advanced 6 bps to 2.46% and 3.05%, respectively.

The U.S. dollar and Treasury yields have been volatile but remain elevated amid political uncertainty in the wake of last week's inauguration of President Donald Trump, while economic data continues to be relatively positive. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Vice President of Trading and Derivatives, Randy Frederick offer their latest video, How Could the Items on the Republican Agenda Impact Investors?, at www.schwab.com/insights. Follow Schwab on Twitter: @schwabresearch.

Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets and the recent rally in the greenback in her articles, Anatomy of a Bond Bear Market: What to Look For When Yields Rise and Will the U.S. Dollar Bull Market Continue in 2017?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

The only report slated for release on tomorrow's economic calendar is MBA Mortgage Applications.

Europe rebounds slightly, Asia mixed

European equities rebounded modestly, despite some mixed data in the region and as the global markets remained skittish after U.S. President Trump took actions yesterday to withdraw from the Trans-Pacific Partnership (TPP) and renegotiate the North American Free Trade Agreement (NAFTA). The British pound pared solid early losses and finished modestly lower versus the U.S. dollar amid festering "hard" Brexit uncertainty even as the U.K. Supreme Court ruled that the government will need parliamentary approval to start Brexit negotiations. With the global markets remaining jittery to begin 2017, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers Five Reasons to Stay Invested Despite Heightened Uncertainty, at www.schwab.com/oninternational. The euro also dipped versus the greenback and bond yields in the region gained ground.

In economic news, Markit's preliminary Eurozone Composite PMI Index—a gauge of business activity in both the manufacturing and services sectors—dipped to 54.3 in January, from 54.4 in December, and compared to the 54.5 reading that was expected. However, a reading above 50 denotes expansion. Schwab's Jeffrey Kleintop, CFA, offers his article, The CURE for a calm Market: Four risks for 2017, at www.schwab.com/oninternational, where you can also find his commentary, 5 Reasons International Stocks May Underperform In 2017. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed, with global sentiment remaining jittery amid U.S. President Donald Trump's actions in the first few days following his inauguration that have caused protectionism concerns to flare up, notably yesterday's executive order to withdraw from the Trans-Pacific Partnership (TPP). Japanese equities declined, with the U.S. trade concerns being met with the yen holding onto most of yesterday's rally, overshadowing a report that showed growth in the nation's manufacturing output accelerated slightly in January. For more on Trump's trade policies, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? at www.schwab.com/oninternational, where you can also find Schwab's Director of International Research, Michelle Gibley's, CFA, latest article, Currency Hedging: 5 Things You Need to Know.

Mainland Chinese stocks and those traded in Hong Kong both rose, with the markets continuing to coast into the long Lunar New Year holiday break beginning at the end of the week. Markets in Australia advanced, buoyed by a rally in basic materials, while Indian securities gained solid ground following some upbeat earnings reports in the region and yesterday's drop for the U.S. dollar. Finally, South Korean stocks finished flat. Schwab's Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Tomorrow's international economic calendar will hold GDP from South Korea, trade data from Japan, CPI from Australia, confidence figures from France, PPI from Spain, the Ifo Business Climate Survey from Germany, and industrial orders and sales from Italy.

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