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Thursday, January 26, 2017

Stocks Finish Mixed, Dow Holds 20,000

Charles Schwab: On the Market
Posted: 1/26/2017 4:15 PM ET

Stocks Finish Mixed, Dow Holds 20,000

U.S. stocks were able to hold most of their recently acquired gains, finishing the regular trading session mixed but near the flatline as the major domestic indexes are on track for their best week of the New Year. The Street digested a flood of earnings and economic data, while investors seem to be optimistically cautious in regard to the new administration's possible fiscal policy plans. Treasuries, crude oil prices and the U.S. dollar were higher and gold declined.

The Dow Jones Industrial Average (DJIA) rose 32 points (0.2%) to 20,101, the S&P 500 Index was nearly 2 points (0.1%) lower at 2,297 and the Nasdaq Composite shed 1 point to 5,655. In moderate volume, 829 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $1.03 to $53.78 per barrel and wholesale gasoline gained $0.02 to $1.57 per gallon. Elsewhere, the Bloomberg gold spot price fell $11.64 to $1,189.04 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.5% higher to 100.50.

Dow member Caterpillar Inc. (CAT $97) reported 4Q earnings-per-share (EPS) ex-items of $0.83, above the $0.66 FactSet estimate, as revenues fell 13.2% year-over-year (y/y) to $9.6 billion, versus the projected $9.8 billion. The mining and construction equipment maker said although its adjusted profit was better than expected, it continued to reflect pressure in many of its markets from weak economic conditions around much of the world. CAT issued 2017 EPS guidance that was below expectations, though its revenue forecast was roughly in line with forecasts and the company noted that it is seeing positive signs that could be early indications of modest recovery in several of its businesses, and it may being seeing a bottom in mining-related sales. Shares finished lower.

AT&T Inc. (T $42) posted 4Q adjusted EPS of $0.66, matching forecasts, with revenues dipping 0.7% y/y to $41.8 billion, below the estimated $42.0 billion. T issued 2017 guidance that was roughly in line with expectations. T overcame early losses and closed modestly higher.

Ford Motor Co. (F $12) announced 4Q earnings ex-items of $0.30 per share, one penny below forecasts, as revenues declined 4.0% y/y to $38.7 billion, compared to the projected $35.0 billion. F reaffirmed its previously-announced 2017 guidance of generally lower than 2016. Shares moved solidly lower.

Comcast Corp. (CMCSA $76) reported 4Q EPS of $0.89, two cents north of estimates, with revenues rising 9.2% y/y to $21.0 billion, above the expected $20.7 billion. Separately, the company announced a 2-for-1 stock split, a 15.0% increase of its dividend and a boost of its share repurchase program to $12.0 billion. CMCSA traded nicely higher

Bristol-Myers Squibb Co. (BMY $47) announced 4Q EPS ex-items of $0.63, below the expected $0.67, as revenues rose 22.0% y/y to $5.2 billion, above the projected $5.1 billion. BMY lowered its 2017 profit outlook. Shares saw pressure.

eBay Inc. (EBAY $32) posted 4Q profits ex-items of $0.54 per share, one penny above estimates, as revenues rose 3.0% y/y to $2.4 billion, roughly in line with forecasts. The company's 1Q guidance came in a bit shy of forecasts, while its 2017 guidance was mixed. However, shares were higher as analysts expressed some optimism regarding its 2017 guidance for gross merchandise volume—a measure of total value of merchandise sold—as it suggested a potential build in momentum on the back half of the year.

Qualcomm Inc. (QCOM $54) announced fiscal 1Q EPS ex-items of $1.19, one cent north of projections, with revenues growing 4.0% y/y to $6.0 billion, below the expected $6.1 billion. The mobile phone chipmaker issued 2Q guidance that bracketed analysts' forecasts. Shares traded solidly lower with the Street expressing uncertainty regarding the financial impact of a plethora of legal disputes, notably its recent fight with Dow member Apple Inc. (AAPL $122).

Services sector activity accelerates more than expected, new home sales fall

The preliminary Markit U.S. Services PMI Index for January rose to 55.1 from December's reading of 53.9, versus the Bloomberg forecast of an improvement to 54.4, with a reading above 50 indicating expansion. Markit said business activity and new work accelerated and input cost inflation slowed, while the business outlook reported by services firms was the strongest in nearly two years. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and its index components are weighted differently.

New home sales (chart) fell 10.4% month-over-month (m/m) in December to an annual rate of 536,000, well below forecasts of 588,000 units. The median home price rose 7.9% y/y to $322,500. The supply of new home inventory rose m/m to 5.8 months at the current sales pace. Sales jumped m/m in the Northeast, but fell in the Midwest, South and West. New home sales are based on contract signings instead of closings, so this is one of the first looks at housing activity since the recent rally in mortgage rates.

Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her article, Anatomy of a Bond Bear Market: What to Look For When Yields Rise 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.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) was up 0.5% m/m in December, matching projections, after November's upwardly revised 0.1% gain. Support came from the components pertaining to the yield curve, stock prices, consumer expectations and ISM new orders, while the index was bogged down by jobless claims.

Weekly initial jobless claims (chart) rose 22,000 to 259,000 last week, above forecasts of 247,000, with the prior week’s figure revised to 237,000 from 234,000. The four-week moving average declined by 2,000 to 245,500, while continuing claims gained 41,000 to 2,100,000, north of estimates of 2,040,000.

The Kansas City Fed Manufacturing Activity Index for January remained at December's downwardly revised 9 reading, versus forecasts of a dip to 8, though a level north of zero depicts expansion.

The advance goods trade deficit shrunk modestly to $65.0 billion in December, from the unrevised $65.3 billion in November, where it was expected to remain.

Tomorrow, the economic calendar will culminate with the releases of the first look (of three) at 4Q GDP, projected to show output slowed to a 2.2% quarter-over-over annualized pace of growth, from 3.5% in 3Q, as well as preliminary December durable goods orders, with growth forecasted to rebound to 2.6% m/m from November's 4.5% drop. Stripping out the more volatile components of transportation and defense, durable goods orders are projected to rise for the third-consecutive month to close out 4Q. Finally, we will get the final University of Michigan Consumer Sentiment Index, which is expected to be unrevised at 98.1, down slightly from December's 98.2, which was the highest since January 2004. For analysis of the outlook for consumer and business sentiment following their recent jumps, see Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, Not Fade Away: Will High Consumer/Business Confidence Fade or Persist?, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Treasuries were mildly higher, with the yields on the 2-year and 10-year notes, as well as the 30-year bond ticking 1 basis point lower to 1.22%, 2.50%, and 3.08% respectively.

The U.S. dollar and Treasury yields remain in focus, with the latter regaining 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. Also, Schwab's Kathy Jones offers analysis of the greenback's move in her article, Will the U.S. Dollar Bull Market Continue in 2017? at www.schwab.com/marketinsight.

Europe mixed, Asia higher

European equities finished mixed, on the heels of the previous two sessions of gains, that have been fostered by the global markets appearing to grow more optimistic following the plethora of executive orders from U.S. President Donald Trump. Optimism seems to be centered on whether Trump's campaign promises of boosted infrastructure spending and reduced taxes and regulations could come to fruition, though concerns remain about his actions to change global trade relations. The euro and British pound lost ground on the U.S. dollar, while bond yields in the region were mostly higher. Healthcare issues got a boost from a rally in shares of Actelion Ltd. (ALIOY $68) after Dow member Johnson & Johnson (JNJ $112) announced an agreement to acquire the Swiss biotech company for about $30.0 billion. Earnings in the region were mostly positive, while U.K. 4Q GDP growth came in stronger-than-expected.

With the global markets choppy as of late, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, 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 higher on the heels of the continued rally in the U.S., with the Dow breaching the 20,000 mark. The global markets have been eyeing a plethora of executive orders from U.S. President Trump, appearing 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.

Japanese equities rallied, with the yen holding onto yesterday's pullback from recent strength, while stocks trading in mainland China gained ground and those trading in Hong Kong jumped, though volume was subdued ahead of tomorrow's beginning of the Lunar New Year. South Korean securities advanced and markets in India and Australia were closed for holidays. 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, the international economic docket will yield CPI from Japan, the Import Price Index from Germany and consumer confidence reads from France and Italy.

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