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Friday, January 13, 2017

Stocks Lose Ground; Financials Led Decliners

Charles Schwab: On the Market
Posted: 1/12/2017 4:15 PM ET

Stocks Lose Ground; Financials Led Decliners

U.S. stocks finished the trading session lower, with financial and tech issues leading the decline as some omissions in President-elect Donald Trump's news conference yesterday appeared to disappoint the global equity markets. Treasuries, gold and crude oil prices were higher and the U.S. dollar was lower. In equity news, Fiat Chrysler Automobiles fell sharply after the EPA accused the company of using software related to excess diesel emissions in U.S. vehicles.

The Dow Jones Industrial Average (DJIA) decreased 63 points (0.3%) to 19,891, the S&P 500 Index was 5 points (0.2%) lower at 2,270 and the Nasdaq Composite declined 16 points (0.3%) to 5,547. In moderate volume, 787 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.76 to $53.01 per barrel and wholesale gasoline added $0.02 to $1.61 per gallon. Elsewhere, the Bloomberg gold spot price rose $4.28 to $1,195.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 101.37.

Fiat Chrysler Automobiles NV (FCAU $10) fell sharply after the U.S. Environmental Protection Agency (EPA) accused the company of using software related to excess diesel emissions in roughly 104,000 U.S. vehicles. FCAU said it was disappointed by the allegations and believes its 2014-16 model year light duty 3.0-liter diesel engines meet EPA standards. The company said it intends to work with the incoming administration to present its case and resolve this matter fairly and equitably.

Delta Air Lines Inc. (DAL $51) reported 4Q earnings-per-share (EPS) ex-items of $0.82, in line with the FactSet estimate, as revenues declined 0.5% year-over-year (y/y) to $9.5 billion, above the projected $9.4 billion. The company said as it moves into 2017, it is seeing its unit revenues turn positive which should return the company to margin expansion by the back half of the year. Shares dipped.

KB Home (KBH $17) posted 4Q EPS of $0.40, one penny above forecasts, with revenues rising 21.0% y/y to $1.2 billion, roughly in line with expectations. The homebuilder said with healthy net order activity in 4Q contributing to its highest backlog value level in 10 years, it is entering 2017 with strong momentum. However, shares traded solidly lower, as some analysts expressed uncertainty regarding the company's profitability as its 4Q gross margin missed forecasts and its 2017 guidance garnered scrutiny.

Amazon.com Inc. (AMZN $814) announced that it plans to create an additional 100,000 full-time jobs in the U.S. over the next 18 months. Shares moved higher.

Jobless claims rise by a smaller amount than expected

Weekly initial jobless claims (chart) increased 10,000 to 247,000 last week, below forecasts of a rise to 255,000, as the prior week figure was revised higher to 237,000. The four-week moving average declined by 1,750 to 256,500, while continuing claims fell by 29,000 to 2,087,000, in line with estimates.

The Import Price Index (chart) rose 0.4% month-over-month (m/m) for December, compared to projections of a 0.7% increase and November's upwardly revised 0.2% decline. Compared to last year, prices were higher by 1.8%, matching forecasts, and following November's upwardly revised 0.1% increase.

Treasuries were mostly higher, with the yield on the 2-year note declining 1 basis point (bp) to 1.17%, the yield on the 10-year note declining 2 bps to 2.36% and the 30-year bond rate nearly unchanged at 2.96%.

Bond yields and the U.S. dollar have declined amid continued choppy action in the wake of post-election optimism, a string of upbeat economic data, and the Fed's December rate hike and a faster-than-previously-forecasted pace of rate increases for 2017. Also, yesterday yields and the greenback moved lower in reaction to President-elect Donald Trump's news conference, which was his first since July, where he offered no discussion about his proposed business-friendly policies.

A town-hall meeting hosted by Federal Reserve Chairwoman Janet Yellen tonight at 7:00 p.m. ET may garner attention and Schwab's Chief Fixed Income Strategist, Kathy Jones discusses How Should Bond Investors Prepare in Light of Fed Outlook for 2017? in a video with Schwab's Vice President of Trading and Derivatives, Randy Frederick at www.schwab.com/insights. Kathy also addresses the potential changes facing the fixed income market and the jump in the greenback in her articles, Changing Conditions: A Bond Market FAQ and Will the U.S. Dollar Bull Market Continue in 2017?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

With the markets near record highs as we moved into 2017, Schwab’s Chief Investment Strategist Liz Ann Sonders and Vice President of Trading and Derivatives, Randy Frederick offer their latest video, Record Territory: Could the Bull Market Continue in 2017? Watch the video at www.schwab.com/insights, where you can also find Senior Vice President of the Schwab Center for Financial Research, Mark Riepe's, CFA, latest podcast, 7 Principles for Investing Success.

Finally, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers analysis of the changes coming to Capitol Hill when Trump takes the oath of office on January 20th in his latest article, New Congress Plans Ambitious Agenda, at www.schwab.com/insights. Follow Schwab on Twitter: @schwabresearch.

Tomorrow's economic calendar will bring a couple key reads on the consumer, with the releases of December retail sales and the preliminary January University of Michigan Consumer Confidence Index. Retail sales are projected to show a modest acceleration over November as the holiday season ramped up, while consumer sentiment is expected to tick higher from December's jump to the highest level since January 2004 amid the post-election optimism. However, the economic data could be overshadowed by the first looks at 4Q earnings performance for the banking sector, as Bank of America Corp. (BAC $23), Dow member JPMorgan Chase & Co. (JPM $86), and Wells Fargo & Co. (WFC $54) are expected to deliver results.

Expectations are elevated for earnings growth in 2017, with the financial sector projected to be a key contributor amid the recent rally in interest rates and continued momentum in the economy. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Luminous Times: Looking Ahead With Optimism About 2017, corporate earnings have joined the economy in hitting an inflection point. Aggregate S&P 500 earnings spent four consecutive quarters in an earnings recession; with the third quarter of 2016 marking the turn from negative to positive. The jump in earnings growth to 12% currently expected for 2017 helps ease a valuation concern. Read more at www.schwab.com/marketinsight, where you can also find a look at all the major sectors ahead of earnings season in Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Sectors and Politics. Follow Liz Ann on Twitter: @lizannsonders.

Additional releases on tomorrow's domestic docket will include the Producer Price Index, projected to have increased 0.3% m/m in December after gaining 0.4% in November and business inventories, expected to have risen 0.6% for November after declining 0.2% the month prior.

Europe mostly lower, Asia mixed

European stocks finished mostly lower, with healthcare issues seeing pressure following yesterday's vow to crack down on drug pricing in the first news conference from U.S. President-elect Donald Trump since he won the election. The press conference also appeared to disappoint the markets as he did not discuss economic policies that have driven stock market rallies since November. Automakers came under pressure as shares of Fiat Chrysler Automobiles tumbled on the emission software allegations from the EPA. However, oil & gas issues ticked higher as crude oil prices are extending yesterday's jump. The minutes from the December monetary policy decision from the European Central Bank were released and showed a divergence in opinions regarding the path of its stimulus measures. The euro was higher and British pound was little changed versus the U.S. dollar, while bond yields finished mixed. In economic news, eurozone industrial production rose much more than expected in November.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, The CURE for a calm Market: Four risks for 2017, that after a calm post-election climb, developments in China, United Kingdom, Russia, and Europe may bring a return of stock market volatility. However, Jeff points out that better and broader global economic growth should help offset these risks and result in stock market gains for 2017. Read these articles at www.schwab.com/oninternational, where you can also find Jeff's commentary, 5 Reasons International Stocks May Underperform In 2017. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed as the markets appeared to be disappointed after yesterday's news conference from U.S. President-elect Donald Trump. Trump did not discuss economic policies that have been a key driver of the rally in the global stock markets since November, but he did resuscitate concerns toward the healthcare sector as he vowed to crack down on drug pricing. The yen gained ground as the U.S. dollar saw weakness following the press conference, weighing on Japanese equities which fell. Healthcare issues led to a dip for Australian securities though basic materials continued to gain ground as mining issues extended a recent rally that has come amid optimism about higher metals prices in the wake of some upbeat global economic data, notably in China.

Equities trading in mainland China extended a losing streak to three days, and those trading in Hong Kong also decreased, snapping a five-session winning streak. Casino stocks weighed on Chinese markets amid flared-up concerns about gaming revenue forecasts, per Bloomberg, while liquidity/currency and regulatory uneasiness continued to fester. After the closing bell, China reported stronger-than-expected lending statistics ahead of this month's Lunar New Year holiday. South Korean stocks rose, while Indian equities also advanced, ahead of the nation's reports on consumer price inflation and industrial production, with the former coming in cooler than expected and the latter rising much more than expected. Schwab's Director of International Research Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read more 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.

The international economic calendar for tomorrow will be light, yielding the Wholesale Price Index from Germany.

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