Markets Ring in New Year on Positive Note

Charles Schwab: On the Market

Posted: 1/3/2017 4:15 PM ET

Markets Ring in New Year on Positive Note

Though off the best levels of the day, U.S. equities started 2017 in the green amid a plethora of upbeat global manufacturing reports, headlined by a two-year high in U.S. output, and despite a tumble in crude oil prices. Treasuries finished mixed, while gold and the U.S. dollar were sharply higher. News on the equity front was light, though General Motors responded to a tweet about the automaker's Mexican production from President-elect Trump, and Ford canceled plans for a new $1.6 billion Mexican factory.

The Dow Jones Industrial Average (DJIA) increased 119 points (0.6%) to 19,882, the S&P 500 Index gained 19 points (0.8%) to 2,258 and the Nasdaq Composite added 46 points (0.9%) to 5,429. In heavy volume, 968 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.39 to $52.33 per barrel and wholesale gasoline shed $0.05 to $1.62 per gallon. Elsewhere, the Bloomberg gold spot price rose $10.47 to $1,157.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 0.9% higher to 103.18.

General Motors Co. (GM $35) was in focus after President-elect Donald Trump said today on Twitter that the automaker could face a "big border tax" if it does not make its Chevy Cruze automobiles in the U.S. GM responded by saying that it manufactures all Chevy Cruze sedans sold in the U.S. in Lordstown, Ohio, and it builds the Chevy Cruze hatchback for global markets in Mexico, with a small number sold in the U.S. Shares were higher.

Separately, Ford Motor Co. (F $13) announced that it is cancelling plans for a $1.6 billion new plant in San Luis Potosi, Mexico, and will invest $700 million to expand its Flat Rock plant in Michigan into a factory that will build autonomous and electric vehicles along with the Mustang and Lincoln Continental. Shares gained ground.

Revlon Inc. (REV $30) was nicely higher after the company announced restructuring actions in the wake of its merger with Elizabeth Arden that include the elimination of 350 jobs worldwide.

U.S. data joins positive global manufacturing sentiment

The Institute for Supply Management (ISM) Manufacturing Index (chart) for December moved further into expansion territory (above 50) than expected after rising to 54.7 from November's 53.2 level, and compared to the Bloomberg forecast of a modest rise to 53.8. Production and new orders both rose solidly to levels above 60, and growth in employment accelerated slightly, with all these posting new highs for 2016. Prices jumped to 65.5 and inventories declined further below 50. The ISM said forward-looking comments from the survey were largely positive.

The final Markit U.S. Manufacturing PMI Index was revised higher to 54.3 for December from the 54.2 preliminary level, where it was expected to remain. The index is up from the 54.1 level posted in November. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Both reports, notably the ISM's index hitting the highest level in two years, add to favorable December manufacturing data out of China, Eurozone and the U.K., bolstering global economic sentiment. The data adds credence to our view in the Schwab Market Perspective: Will the Momentum Continue Into 2017?, that 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. 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. 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 in the New Year in his latest Schwab Sector Views: Entering 2017 the Same Way as 2016.

Construction spending (chart) rose 0.9% month-over-month (m/m) in November, versus projections of a 0.5% advance, and following October's favorably revised 0.6% gain. Residential spending was 1.0% higher, and non-residential spending rose 0.8%.

Treasuries were mixed, as the yield on the 2-year note rose 1 basis point (bp) to 1.22%, while the yield on the 10-year note was flat at 2.44%, and the 30-year bond rate declined 2 bps to 3.05%.

Bond yields are getting back into rally mode as the global manufacturing reports add to a recent string of upbeat economic data. Rates have also been bolstered by high expectations for fiscal stimulus, tax reform and regulatory rollbacks as President-elect Donald Trump is set to take office and the Republicans gain control of Congress later this month. Also, the Fed's highly expected 25 bp increase to its target for the fed funds rate in December included a forecast for more rate hikes in 2017 than it had previously projected. Tomorrow, we will get details of the Fed's decision and 2017 estimates in the form of the minutes from the December meeting (economic calendar). 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.

In addition to the Fed minutes, tomorrow’s economic calendar will offer only MBA Mortgage Applications.

Europe and Asia move higher on global data

European equities mostly traded to the upside, with financials leading the way, bolstered by a recovery in the troubled Italian banking sector, while upbeat global economic data boosted sentiment and commodity-related issues. U.K. manufacturing output grew at the fastest pace since June 2014 and complemented today's upbeat U.S. reports out of the sector. Global economic optimism was bolstered by signs of continued expansion in the eurozone and China that were posted in the past few days. Also, inflation statistics in Germany heated up for December, joining a separate release showing German unemployment fell more than expected last month. The euro and the British pound lost ground versus the U.S. dollar, while bond yields in the region mostly moved to the upside. For timely analysis of the global landscape, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, 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.

Stocks in Asia finished higher following some upbeat Chinese manufacturing data, while volume was lighter than usual as markets in Japan were closed for a holiday. The Caixin China PMI Manufacturing Index improved to 51.9 in December from 50.9 in November, where it was expected to remain. The report followed China's official manufacturing and services sector reports over the weekend that showed growth continued to expand last month. Mainland Chinese stocks and those traded in Hong Kong gained ground following the data, which added to a recent string of data suggesting stabilization in the world's second-largest economy. For more on China, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017). The data also bolstered commodity-related issues, helping equities in Australia finish higher, while listings in South Korea and India also notched gains. 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. Read both articles at www.schwab.com/oninternational, and be sure to check out our latest release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Markit’s Manufacturing PMI readings from across the globe will dominate tomorrow’s international economic calendar, while other reports slated for release include employment data from Spain, lending statistics from the U.K., and CPI from Italy.