Morning in Arizona

Morning in Arizona

The Headline Animator

Friday, January 27, 2017

Record Runs Level Off

Charles Schwab: On the Market
Posted: 1/27/2017 4:15 PM ET

Record Runs Level Off

The bull runs into record territory for the U.S. equity markets of late cooled a bit in today’s action, with stocks closing mixed after being range-bound for most of the day, as declines in Treasury yields and crude oil prices pressured financials and energy stocks, respectively. Domestic economic data did little to catalyze the markets, while a heavy dose of earnings reports hit the Street with mixed results. Meanwhile, the U.S. dollar and gold rose.

The Dow Jones Industrial Average (DJIA) declined 7 points to 20,094, the S&P 500 Index ticked 2 points (0.1%) lower to 2,295, while the Nasdaq Composite inched 6 points (0.1%) higher to 5,661. In moderate volume, 751 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.61 to $53.17 per barrel and wholesale gasoline lost $0.02 to $1.55 per gallon. Elsewhere, the Bloomberg gold spot price rose $2.50 to $1,191.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 100.57. Markets were solidly higher for the week, as the DJIA increased 1.3%, the S&P 500 Index gained 1.0% and the Nasdaq Composite jumped 1.9%.

After the closing bell yesterday, Google parent, Alphabet Inc. (GOOGL $845) reported 4Q earnings-per-share (EPS) ex-items of $9.36, below the $9.64 FactSet estimate, as revenues excluding traffic acquisition costs (TAC) rose 22.8% year-over-year (y/y) to $21.2 billion, versus the expected $20.6 billion. Shares traded to the downside.

Dow member Microsoft Corp. (MSFT $66) reported 2Q EPS ex-items of $0.83, above the $0.79 FactSet estimate, while revenues increased 2.2% y/y to $26.1 billion versus the consensus forecast of $25.3 billion. Shares of MSFT gained ground.

Dow component Intel Corp. (INTC $38) announced 4Q EPS of $0.79 ex-items, above the $0.75 FactSet estimate, with revenues rising 10.1% y/y to $16.4 billion, topping estimates of $15.8 billion. INTC finished higher.

Dow constituent Chevron Corp (CVX $114) came under pressure after it reported 4Q EPS ex-items of $0.22, well short of the $0.64 FactSet estimate, while revenues rose 7.6% y/y to $30.1 billion, missing the consensus estimate of $36.9 billion. The company's Chairman and CEO noted that the 2016 earnings reflect the low oil and gas prices experienced during the year.

AbbVie Inc. (ABBV $60) reported 4Q EPS results of $1.20 ex-items, in line with the FactSet estimate, while revenues rose 6.2% y/y to $6.8 billion, just shy of the $6.9 billion consensus estimate. ABBV issued full-year 2017 EPS guidance of $5.44 to $5.54, which excludes $0.89 per share of intangible asset amortization expense and other specified items. Shares of ABBV fell.

Honeywell International Inc. (HON $118) reported 4Q EPS of $1.74, matching the FactSet estimate, with revenues flat y/y at $10.0 billion. The company reaffirmed its 2017 EPS guidance of $6.85 to $7.10, while the CEO concluded that the company delivered outstanding returns in 2016 and has set the stage for a successful 2017. Shares of HON were mildly higher.

Starbucks Corp. (SBUX $56) reported 1Q EPS of $0.52, in line with the FactSet estimate, with consolidated net revenues increasing 6.7% y/y to a record $5.7 billion, though short of expectations calling for $5.9 billion. SBUX reaffirmed its 2017 full-year EPS guidance, lowered its expectations for consolidated revenue growth and issued 2Q guidance that fell below consensus. Shares of SBUX were solidly lower.

Headline GDP and durable goods orders fall short of forecasts, consumer sentiment beats estimate

The first look (of three) at 4Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 1.9%, from the unrevised 3.5% expansion in 3Q, and below the 2.2% growth forecasted by Bloomberg. Personal consumption matched forecasts, rising 2.5%, following the unadjusted 3.0% increase recorded in 3Q.

On inflation, the GDP Price Index came in at a 2.1% rise, in line with expectations and above the unrevised 1.4% gain seen in 3Q, while the core PCE Index, which excludes food and energy, increased 1.3%, as expected and following the unrevised 1.7% advance in 3Q.

December preliminary durable goods orders (chart) declined 0.4% month-over-month (m/m), compared to estimates of a 2.5% rise and November's downwardly revised 4.8% drop. Ex-transportation, orders grew 0.5% m/m, matching forecasts and versus November's favorably revised 1.0% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, rose 0.8%, versus projections of a 0.2% increase, and following the upwardly revised 1.5% increase in the month prior.

The final January University of Michigan Consumer Sentiment Index (chart) was revised to 98.5—the highest since January 2004—from the preliminary level of 98.1, where the Bloomberg estimate called for it to remain. The index was up compared to December's level of 98.2. The expectations component improved m/m, rising to a two-year high, while the current conditions component eased slightly. The 1-year inflation outlook increased to 2.6% from December's 2.2% rate, and the 5-10 year inflation projection rose to 2.6% from 2.3%.

Treasuries finished higher, as the yield on the 2-year note was 1 basis point (bp) lower at 1.22%, the yield on the 10-year note lost 2 bps to 2.48%, and the 30-year bond rate decreased 3 bps to 3.06%.

The U.S. dollar and Treasury yields remained in focus, with the latter gaining some momentum as of late following the plethora of policy actions of President Donald Trump in his first week of office, which has been accompanied by continued relatively favorable economic data. 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, where you can also find Michael's article, New Congress Plans Ambitious Agenda. Follow Schwab on Twitter: @schwabresearch.

Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets and 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. For additional commentary on bond investing against this backdrop, listen to Schwab's Director of Income Planning, Rob Williams', CFP, podcast, Managing Your Fixed Income Holdings When Rates Rise, at www.schwab.com/insights.

Europe lower as PM May meets President Trump, Asia mostly higher in subdued action

European equities finished mostly lower with banking stocks among the worst performers of the day. Investors may have lent some of their focus to Washington where U.K. Prime Minister Theresa May will meet with U.S. President Donald Trump as the new U.S. leader commences the implementation of his vision of a more assertive style for trade relationships. Separately, some investors have taken note that the U.K. economy has recently been growing faster than expected with soaring levels of consumer borrowing, leaving some to believe that a possible interest-rate hike from the Bank of England could transpire by year-end. In economic news in the region, Germany reported a larger-than-expected m/m and y/y increase in the price for imported goods and a consumer confidence read in France was in line with expectations, while Italian consumer confidence came in below forecasts and hourly wage data was flat. With the global markets entering 2017 in volatile fashion, 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 dipped versus the greenback and bond yields in the region were mixed.

Stocks in Asia finished mostly higher in lighter-than-usual volume as markets in mainland China and South Korea were closed for holidays with the former observing its week-long Lunar New Year which will keep markets shuttered next week through February 2. China did report that its industrial profits for December increased 2.3% y/y after rising 14.5% y/y in January. Stocks in Hong Kong were little changed in an abbreviated, half-day session, though the nation’s Hang Seng Index was able to register its biggest monthly gain in the past ten. Japanese equities advanced, with energy issues leading gains as the price of crude oil, though lower for the day, is headed for a second weekly increase and as the evolving global economic landscape may be boosting investors' willingness to take on risk. Meanwhile, the yen weakened versus the U.S. dollar as the Bank of Japan increased purchases of its bonds due in five-to-ten years after the benchmark yield approached 0.1% this week. Indian listings gained ground aiding the country's benchmark S&P BSE Sensex 30 Index to post its best weekly advance in the past eight months as overseas investors increased purchases of local shares. Finally, Australia's markets were higher, finding some support from strength in financials.

The international markets have been eyeing a number of executive orders from U.S. President Trump and appear somewhat optimistic regarding his plans to boost infrastructure spending and reduce regulations and taxes, while shrugging off his actions to change global trade relations. 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.

Stocks gain ground in first-week of new administration

With waves of corporate earnings reports flooding the Street, U.S. stocks managed to advance for the trading week despite some disappointing housing data in the form of new and existing home sales, which was joined by Friday's cooler-than-expected read on 4Q GDP, while a solid consumer sentiment report along with upbeat reads on regional and national manufacturing activity were seemingly able to build some investor confidence. The advance for stocks transpired amid the backdrop of the first full-week in office for President Donald Trump. The new administration took the reins at the White House and wasted no time in turning out executive actions that could potentially change current dealings in trade agreements, energy issues and health care. In his most recent Schwab Sector Views: Upgrading Health Care and Downgrading Real Estate, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, doesn't shy away from controversy, discussing various issues that have resulted in the health care sector being the worst-performing group over the past 12 months. But we think this is about to change. Read why at www.schwab.com/marketinsight and be sure to follow Schwab on Twitter: @schwabresearch.

Heavy dose of data next week

Next week, investors will have slew of data to digest, with the 4Q earnings season robust, as well as a domestic economic calendar that is chock full of key reports, including employment data in the form of the Employment Cost Index, non-farm productivity and labor costs, weekly initial jobless claims, the ADP Employment Change Report and Friday’s highly anticipated labor report. As well, manufacturing data is on the docket, with items slated for release to comprise both services and manufacturing reports from the Institute for Supply Management (ISM) and Markit, the Chicago Purchasing Managers’ Index and the Dallas Fed Manufacturing Index. Housing data will also be in focus, with pending home sales gracing the calendar, as well as the S&P CoreLogic/Case-Shiller Home Price Index and weekly MBA Mortgage Applications, while rounding out the heavy docket will be personal income & spending, factory orders, and construction spending. Not to be outdone, and likely the headlining event of the week, will be Wednesday's monetary policy decision from the Federal Open Market Committee (FOMC).

As noted in the latest Schwab Market Perspective: A New World, now that it’s President Trump instead of candidate or President-elect Trump, we’ll see how quickly some of the much talked about plans come to fruition. Issuing executive orders to roll back previous executive orders is relatively easy in a lot of cases; but getting tax reform and new health care legislation written and passed will prove to be more difficult. Investor and corporate confidence may have gotten a bit ahead of the pace at which many of the administration’s policy priorities can get enacted, and the balance between those which are growth-friendly and those which could retard growth and confidence. Read more at www.schwab.com/marketinsight.

International reports due out next week that deserve a mention include: the Markit Manufacturing and Services PMIs from across the globe; as well as from Australia—business confidence and the Reserve Bank of Australia’s monetary policy meeting. Japan—retail sales and the Bank of Japan’s monetary policy meeting. Eurozone—CPI, and German unemployment and CPI. U.K.—construction spending and the Bank of England’s monetary policy meeting. Markets in China, South Korea and Hong Kong will be closed in observance of the Lunar New Year holidays.

No comments: