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Monday, January 09, 2017

Stocks Temper New Year Momentum

Charles Schwab: On the Market
Posted: 1/9/2017 4:15 PM ET

Stocks Temper New Year Momentum

U.S. equities finished mixed, softening from their bull run to start the New Year, as strength in technology issues was met with weakness in financials and energy issues as Treasury yields saw some pressure and crude oil prices dropped. Meanwhile, the U.S. dollar fell and gold prices jumped. M&A news dominated the equity front, headlined by an agreement that VCA will be acquired by Mars for about $7.7 billion and Japan's Takeda Pharmaceutical Co will purchase Ariad Pharmaceuticals for about $5.2 billion.

The Dow Jones Industrial Average (DJIA) fell 76 points (0.4%) to 19,887, the S&P 500 Index lost 8 points (0.4%) to 2,269 while the Nasdaq Composite advanced 11 points (0.2%) to 5,532. In moderate volume, 810 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.03 to $51.96 per barrel and wholesale gasoline fell $0.06 to $1.57 per gallon. Elsewhere, the Bloomberg gold spot price rose $10.00 to $1,182.63 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 101.95.

Urban Outfitters Inc. (URBN $27) announced that its same-store sales over the November through December period were up 1.5% year-over-year (y/y), versus the FactSet estimate of a 1.3% gain. However, the company said its expects gross margins to "deleverage" more than previously expected, primarily driven by a larger-than-expected shift in demand and a larger-than-anticipated shift in product mix that saw customers respond more favorably to lower margin items and categories. Shares were lower.

Mars Inc. announced an agreement to acquire pet care provider VCA Inc. (WOOF $91) for $93.00 per share in cash, or about $7.7 billion, excluding debt. WOOF traded sharply higher.

Japan's Takeda Pharmaceutical Co. Ltd. (TKPYY $22) announced an agreement to acquire Ariad Pharmaceuticals Inc. (ARIA $24) for $24.00 per share in cash, for a total enterprise value of about $5.2 billion. Shares of ARIA surged over 70%.

Fiat Chrysler Automobiles NV (FCAU $11) announced plans to invest $1.0 billion to retool and modernize plants in Michigan and Ohio, which is expected to create 2,000 new jobs. Shares moved higher.

Consumer credit surged in November

Consumer credit, released in the final hour of trading, showed consumer borrowing jumped by $24.5 billion during November, the largest increase in eight months, compared to the $18.4 billion forecast of economists polled by Bloomberg, while October's figure was adjusted upward to an increase of $16.2 billion from the originally reported $16.0 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $13.5 billion, while revolving debt, which includes credit cards, surged by $11.0 billion.

Treasuries finished higher, showing little reaction to the consumer credit report, as the yield on the 2-year note declined 3 basis points (bps) to 1.18%, the yield on the 10-year note dropped 5 bps to 2.37%, and the 30-year bond decreased 4 bps to 2.97%.

Bond yields and the U.S. dollar have moderated somewhat from elevated levels that came courtesy of post-election optimism, the string of upbeat economic data, and the Fed's December rate hike and a faster-than-previously-forecasted pace of rate increases for 2017. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? 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 stock markets posting a sharp rally in the first week of 2017 and the potential for sideways movement and/or potential pullbacks in the New Year, see Senior Vice President of the Schwab Center for Financial Research, Mark Riepe's, CFA, latest podcast, 7 Principles for Investing Success, at www.schwab.com/insights.

This week will be the first full week of the New Year, and the U.S. economic calendar, albeit on the lighter side, will get rolling tomorrow, beginning with the NFIB Small Business Optimism Index, forecasted to rise to a level of 99.5 for December from the 98.4 registered in November, as well as the Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, expected to show 5.50 million jobs were available to be filled during November, down slightly from the 5.53 million posted in October. In addition, wholesale inventories will be reported, with economists anticipating a 0.5% increase for November, following the 1.4% increase the month prior. However, a highlight of the week will be that we will get our first glimpses at 4Q earnings season with  Bank of America Corp. (BAC $23), Dow member JPMorgan Chase & Co. (JPM $86), and Wells Fargo & Co. (WFC $54) set to deliver results on Friday.

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. We remain optimistic that this is an ongoing secular bull market in U.S. stocks; and the risk of it ending swiftly is low, but the trajectory of gains will likely not be as fierce as witnessed immediately post-election; and we do expect bouts of volatility. Read mote at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Europe mostly lower, Asia higher

European equities finished mostly to the downside, with oil & gas issues seeing some pressure as crude oil prices fell, while traders grappled with some mixed data in the region. German industrial production rose by a smaller amount than expected, while the nation's exports grew at a faster pace than projected. Eurozone investor confidence improved more than expected and the region's unemployment rate remained at 9.8% to match estimates. Italy's unemployment rate came in well above estimates. Financials traded lower, coming off last week's recovery from festering banking sector concerns, with bond yields losing ground. The British pound dropped sharply versus the U.S. dollar, helping buoy U.K. stocks along with a favorable read on the nation's home prices. The pound fell and U.K. stocks showed some resiliency in the face of flared-up concerns about a "hard" Brexit in the wake of comments from Prime Minister May over the weekend. The euro rose versus the U.S. dollar. For commentary on the Brexit vote fallout, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, Keep Calm and Carry On: The Brexit Shock That Wasn't at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

For timely analysis of the global landscape, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly higher following the solid global advance last week, with economic optimism buoying sentiment in the wake of a recent string of stronger-than-expected economic data. The data has added credence to Schwab's Jeffrey Kleintop's, CFA, view in his article, Happy Unrecession: The Alice in Wonderland economy, that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. However, volume was lighter than usual, with markets in Japan closed for a holiday. Mainland Chinese stocks and those traded in Hong Kong increased amid some strength in property developers, casino operators and energy stocks. Australian equities rallied following an upbeat read on the nation's November building approvals, despite some weakness in mining issues on some bearish forecasts for iron ore prices. South Korean listings finished flat, while India's markets dipped following late-Friday's 2017 GDP estimate, which showed growth is projected to slow to 7.1% from 7.6%, but topping forecasts of a 6.8% expansion. 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. Read the above articles 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's international economic calendar will offer investors a look at CPI and PPI from China, consumer confidence from Japan, retail sales from the U.K., as well as industrial and manufacturing production from France.

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