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Tuesday, January 31, 2017

Stocks Battle Back from Lows

Charles Schwab: On the Market
Posted: 1/31/2017 4:15 PM ET

Stocks Battle Back from Lows

Able to move well off solid lows on the day, U.S. equities finished mixed amid a superfecta of persistent U.S. political uncertainty, a slew of disappointing earnings reports, a sub-par domestic economic calendar, and caution ahead of tomorrow's Fed monetary policy decision. Meanwhile, Treasury yields and the U.S. dollar were lower, while gold jumped and crude oil prices inched higher.

The Dow Jones Industrial Average (DJIA) declined 107 points (0.5%) to 19,864, the S&P 500 Index fell 2 points (0.1%) to 2,281, while the Nasdaq Composite inched 1 point higher to 5,615. In heavy volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.18 higher to $52.81 per barrel and wholesale gasoline added $0.02 to $1.55 per gallon. Elsewhere, the Bloomberg gold spot price rallied $16.47 to $1,212.17 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.8% to 99.60.

Under Armour Inc. (UA $19) reported 4Q earnings-per-share (EPS) of $0.23, two cents below the FactSet estimate, as revenues rose 12.0% year-over-year (y/y) to $1.3 billion, compared to the expected $1.4 billion. UA issued 2017 revenue guidance that missed analysts' expectations, while forecasting that gross margin is expected to be slightly down y/y. The company also announced that its Chief Financial Officer will depart. Shares tumbled over 20%.

United Parcel Service Inc. (UPS $109) posted 4Q EPS ex-items of $1.63, below the forecasted $1.69, with revenues growing 5.5% y/y to $16.9 billion, versus the estimated $17.0 billion. UPS issued 2017 earnings guidance that came in below expectations. Shares were solidly lower.

Dow member Exxon Mobil Corp. (XOM $84) announced 4Q profits of $0.41, though the figure may not be comparable to the FactSet estimate of $0.70 due to one-time items affecting the bottomline results. Revenues rose 2.0% y/y to $61.0 billion, south of the forecasted $61.5 billion. XOM traded lower.

Dow component Pfizer Inc. (PFE $32) reported 4Q EPS of $0.47, below the expected $0.50, with revenues declining 3.0% y/y to $13.6 billion, roughly in line with estimates. Shares gained ground.

Mastercard Inc. (MA $106) posted 4Q profits ex-items of $0.86 per share, one penny north of estimates, with revenues rising 9.0% y/y to $2.8 billion, roughly in line with forecasts. Shares moved lower.

Aetna Inc. (AET $119) announced 4Q EPS ex-items of $1.63, compared to the forecasted $1.44, as revenues rose 5.0% y/y to $15.7 billion, below the projected $15.8 billion. AET said it expects 2017 EPS to be at least $8.55, versus the expected $8.78. Shares were higher.

Consumer Confidence dips from multi-year high, Chicago manufacturing output falls

The Consumer Confidence Index (chart) dipped from the highest level since 2001to 111.8 in January from the downwardly revised 113.3 level in December, and compared to the Bloomberg estimate of 112.8. Sentiment toward the present situation improved solidly but expectations of business conditions for the next six months fell. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 5.9 from the 3.3 posted in December.

The Chicago Purchasing Managers Index (chart) held onto a level slightly depicting expansion (above 50), after surprisingly falling to 50.3 in January from 54.6 in December, and versus expectations of a gain to 55.0. Growth in new orders fell to contraction territory and growth in production slowed, while contractions in inventories and employment both accelerated.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.3% gain in home prices y/y in November, versus expectations of a 5.0% increase. Month/month (m/m), home prices were up 0.9% on a seasonally adjusted basis for November, topping forecasts calling for a 0.7% gain. For a look at our outlook for the real estate sector see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Upgrading Health Care and Downgrading Real Estate at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The 4Q Employment Cost Index (chart) increased by 0.5% quarter-over-quarter (q/q), below forecasts of a 0.6% rise, which was the gain seen in 3Q.

Treasuries were higher, as the yield on the 2-year note ticked 1 basis point (bp) lower to 1.21%, the yield on the 10-year note fell 4 bps to 2.45%, and the 30-year bond rate declined 3 bps to 3.05%.

Treasury yields and the U.S. dollar continue to be choppy as of late, with the global markets grappling with the economic data ahead of tomorrow's Fed monetary policy decision and the latest policy moves from President Donald Trump, notably on trade and immigration. The Federal Open Market Committee (FOMC) is expected to keep its policy stance unchanged after December's rate increase, and will not deliver updated economic projections and a press conference from Fed Chairwoman Janet Yellen. However, the accompanying statement is likely to garner scrutiny for insight to the timing of future rate hikes this year and if President Donald Trump's actions are having an impact on their economic outlook and forecasts for future policy moves.

Ahead of the FOMC's decision, we will get national reads on manufacturing activity for January from ISM and Markit, with the former's report projected to show expansion for the fifth-straight month. Other reports due out tomorrow include: ADP's employment change report, MBA mortgage applications, construction spending and monthly auto sales.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, 5 Themes to Watch as the Trump Era Begins, at www.schwab.com/insights, and with the stock markets pulling back from record highs, Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Rise Up: Dow 20k Fails to Thrill Individual Investors, individual sentiment has become less bullish, while other measures show highly elevated optimism. She adds that extremely low volatility isn't likely to persist, but the bull market is. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Europe adds to yesterday's drop, Asia falls as U.S. political fallout persists

European equities gave up modest early gains and extended yesterday's drop that came courtesy of global market uneasiness stemming from U.S. President Donald Trump's actions to temporarily ban entry into the U.S. for refugees from seven predominantly Muslim countries. However, earnings reports in the region were mostly positive, but oil & gas and basic materials issues saw some pressure despite higher crude oil prices and an economic front that was relatively favorable. Preliminary eurozone 4Q GDP accelerating to a 0.5% q/q pace of growth, from the 0.4% expansion in 3Q, while output rose 1.8% y/y, topping forecasts of a 1.7% gain. The eurozone consumer price inflation estimate for January came in well above forecasts and the unemployment rate declined to a level below expectations for December. However, German retail sales unexpectedly fell last month. The euro and British pound rose versus the U.S. dollar. Financials moved lower amid festering banking sector concerns and pressure on global bond yields.

For more on the global markets, see Schwab's Jeffrey Kleintop's, CFA, latest article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Also, Jeff delivers his articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read all these articles at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished lower as the global markets remain jittery in the wake of U.S. President Donald Trump's recent moves to crackdown on immigration. For more on Trump's policies, see Schwab's 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. The yen extended gains to weigh on Japanese equities, while the Bank of Japan kept its monetary policy stance unchanged and a separate report showed the nation's household spending declined by a smaller amount than expected in December. Stocks in Australia and India decreased, while those traded in South Korea also traded lower in its return to action following yesterday's holiday. Markets in China and Hong Kong remained closed for the Lunar New Year holiday. For more on international investing, see Schwab's Michelle Gibley's, CFA, 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.

For tomorrow's international economic calendar, the headlining events will be manufacturing PMI figures from across the globe.

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