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Friday, January 20, 2017

Stocks Manage Gains in Friday's Session

Charles Schwab: On the Market
Posted: 1/20/2017 4:15 PM ET

Stocks Manage Gains in Friday's Session

U.S. stocks finished Friday's regular session with gains as Donald Trump was sworn in as the 45th President of the United States. In earnings news, Dow members American Express, IBM, GE and Procter & Gamble reported mixed results. Treasuries were mostly higher, though the domestic economic calendar was void of any releases today. Gold and crude oil prices were higher and the U.S. dollar declined.

The Dow Jones Industrial Average (DJIA) increased 95 points (0.5%) to 19,827, the S&P 500 Index was 8 points (0.3%) higher at 2,271 and the Nasdaq Composite gained 15 points (0.3%) to 5,555. In moderate-to-heavy volume, 973 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil increased $1.10 to $53.22 per barrel and wholesale gasoline added $0.04 to $1.57 per gallon. Elsewhere, the Bloomberg gold spot price ticked $2.99 higher to $1,207.84 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—dipped 0.3% to 101.15. Markets were lower for the week, as the DJIA decreased 0.3%, the S&P 500 Index shed 0.2% and the Nasdaq Composite declined 0.3%.

Dow member American Express Co. (AXP $76) reported 4Q earnings-per-share (EPS) ex-items of $0.91, below the FactSet estimate of $0.99, with revenues declining 4.0% year-over-year (y/y) to $8.0 billion, above the projected $7.9 billion. AXP issued 2017 earnings guidance that was above estimates. Shares finished lower.

Dow component International Business Machines Corp. (IBM $171) posted 4Q EPS ex-items of $5.01, above the forecasted $4.88, as revenues dipped 1.0% y/y to $21.8 billion, compared to the expected $21.6 billion. IBM issued 2017 profit guidance that topped estimates and shares moved higher.

Dow member General Electric Co. (GE $31) announced 4Q earnings ex-items of $0.46 per share, roughly in line with forecasts, with revenues decreasing 2.0% y/y to $33.1 billion, below the expected $33.9 billion. GE noted that it continues to invest in the industrial internet. Shares closed lower.

Dow component Procter & Gamble Co. (PG $87) achieved fiscal 2Q EPS ex-items of $1.08, two cents north of projections, as revenues were flat y/y to $16.9 billion, exceeding the estimated $16.8 billion. PG raised its 2017 guidance for organic sales growth—excluding acquisitions and divestitures and foreign exchange fluctuations—and maintained its core EPS outlook. Shares traded nicely higher.

Bristol-Myers Squibb Co. (BMY $49) saw heavy pressure after the company announced that it will not seek accelerated regulatory approval for its first-line lung cancer treatment based on a review of data available at this time.

Economic calendar goes quiet as inauguration day arrives

Treasuries were mixed with the economic calendar void of any major reports today. The yield on the 2-year note declined 3 basis points (bps) to 1.19%, the yield on the 10-year note decreased 1 bp 2.47% and the 30-year bond rate was nearly unchanged at 3.05%.

The U.S. dollar was little changed and Treasury yields were higher in a choppy holiday-shortened week, with political uncertainty flaring up amid comments ahead of the inauguration of President Donald Trump, while U.K. political concerns resurfaced as British Prime Minister May offered details of her nation's Brexit plans. 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. Follow Schwab on Twitter: @schwabresearch. Moreover, the European Central Bank (ECB) held its monetary policy stance, including its asset purchase program, unchanged, while Federal Reserve Chairwoman Janet Yellen preserved expectations of more rate hikes this year. Against this backdrop, U.S. economic data remained relatively positive, headlined by a rebound in industrial production, a jump in housing starts, accelerated growth in manufacturing activity in Philadelphia, a drop in jobless claims, and the Fed's Beige Book noting growth across the nation continued. Finally, earnings season continued to ramp up, with results mostly favorable but being met with elevated expectations.

Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets and the recent rally in 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.

With the stock markets dipping this week from record levels, Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Not Fade Away: Will High Consumer/Business Confidence Fade or Persist?, at www.schwab.com/marketinsight and be sure to check out our article, The Trump Effect: Can the Post-Election Rally Continue at www.schwab.com/insights. Follow Liz Ann on Twitter: @lizannsonders.

Next week, earnings season will accelerate to give us further insight to whether earnings growth can meet these lofty expectations, while guidance will likely garner heavy attention as consumer, business and investor confidence has jumped on optimism that President Trump's administration and Republican controlled Congress can deliver on proposed policies. Also, the U.S. economic calendar will bring key releases of existing and new home sales, the first look (of three) at 4Q GDP,durable goods orders and the final University of Michigan Consumer Sentiment Index for January.

As noted in the Schwab Market Perspective: A Perfect Mix?, the conditions for a continuation of the long-running equity bull market appear to be intact. The recent digestion of gains since the election is a healthy process as it forestalls a potentially dangerous "melt-up" scenario, at least for now. Economic data and corporate earnings growth are conspiring with a boost in consumer and business confidence to ignite "animal spirits." Add in a Federal Reserve that is slowly normalizing monetary policy, but still remains accommodative, and we see a good mix for further equity gains. Manufacturing has rebounded around the globe, and could continue on a positive trajectory in the first half of 2017. Read more at www.schwab.com/marketinsight.

Europe and Asia mixed

European equities finished mixed, with the global markets awaiting today's inauguration of U.S. President Donald Trump, while digesting yesterday's unchanged monetary policy decision from the ECB. Oil & gas issues led the way higher as crude oil prices added to yesterday's gains, while healthcare issues moved lower. Basic materials overcame early pressure and were modestly higher in the wake of some mixed Chinese economic reports, headlined by a slightly stronger-than-expected read on 4Q GDP growth. The choppiness in the currency markets persisted, with the British pound remaining volatile, dipping against the U.S. dollar as a sizable miss in U.K. retail sales for December met flared-up Brexit concerns. The euro reversed modestly to the upside versus the greenback, while bond yields in the region traded mostly higher. 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 more 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 following a plethora of mixed Chinese economic data and ahead of the inauguration of U.S. President-elect Donald Trump. Japanese equities rose as the yen saw choppy action following comments from Fed Chair Yellen and coming off yesterday's drop. The global currency markets have been volatile amid a host of catalysts, notably political uncertainty in the U.S. and U.K., and Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article, Currency Hedging: 5 Things You Need to Know. Mainland Chinese stocks advanced and those in Hong Kong declined following the plethora of economic data and posturing amid government actions toward liquidity in the financial markets ahead of the Lunar New Year holiday at the end of the month. China's 4Q GDP came in at a 6.8% y/y pace of growth, ticking higher from the 6.7% expansion posted in 3Q, where economists had expected it to remain. Also, the nation's retail sales topped expectations, though fixed asset investment and industrial production both slightly missed forecasts. The GDP report adds to a recent string of data that has suggested stabilization in the world's second-largest economy, and Schwab's Michelle Gibley, CFA, delivers analysis of China in her article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017) read both these articles at www.schwab.com/oninternational.

Australian securities fell as financials and basic materials listings saw pressure. Finally, South Korean equities declined and Indian stocks dropped. 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.

International reports due out next week that deserve a mention include: Australia—CPI, PPI and trade data. China—Leading indicators and industrial profits. Japan—All industry Activity Index, Leading Index and trade data. U.K.—4Q GDP. Germany—Ifo business climate survey and the Import Price Index. Italy—retail sales, consumer confidence and wage data.

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