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Wednesday, February 22, 2017

Markets Mixed Following Fed Minutes

Charles Schwab: On the Market
Posted: 2/22/2017 4:15 PM ET

Markets Mixed Following Fed Minutes

U.S. equities finished mixed, with the Dow notching another record high, while the S&P 500 and Nasdaq were near the flatline, as investors assessed political risks on both sides of the pond, as well as the minutes from the Fed's last meeting. Treasuries were modestly higher, even as existing home sales jumped to a 10-year high, and crude oil prices and the U.S. dollar were lower, while gold inched higher. Meanwhile, news on the earnings front was relatively upbeat.

The Dow Jones Industrial Average (DJIA) increased 33 points (0.2%) to 20,776, the S&P 500 Index declined 3 points (0.1%) to 2,363, and the Nasdaq Composite fell 5 points (0.1%) to 5,861. In moderate volume, 824 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.74 to $53.59 per barrel and wholesale gasoline gained $0.01 to $1.73 per gallon. Elsewhere, the Bloomberg gold spot price increased $3.04 to $1,238.78 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 101.22.

TJX Companies Inc. (TJX $76) reported 4Q earnings-per-share (EPS) of $1.03, versus the $1.00 FactSet estimate, with revenues rising 6.0% year-over-year (y/y) to $9.5 billion, besting the projected $9.4 billion. 4Q same-store sales rose 3.0% y/y, north of the expected 2.6% gain. TJX announced plans to increase its dividend and an addition to its stock repurchase program. The company issued 1Q EPS and same-store sales guidance that missed forecasts. Shares ticked higher.

Toll Brothers Inc. (TOL $34) posted fiscal 1Q EPS of $0.42, topping the estimated $0.34, as revenues declined 0.9% y/y to $921 million, exceeding the projected $889 million. The luxury homebuilder's deliveries, net contracts and backlog all topped expectations. TOL raised its 2017 outlook for deliveries and initiated a quarterly dividend of $0.08 per share. Shares of TOL rallied.

Garmin Ltd. (GRMN $54) announced 4Q earnings of $0.72 per share, or $0.73 ex-items, above the forecasted $0.58, with revenues rising 10.0% y/y to $861 million, topping the estimated $793 million. GRMN issued 2017 EPS guidance that was just shy of projections, while its revenue outlook exceeded expectations. Shares were sharply higher.

DISH Network Corp. (DISH $62) reported 4Q EPS of $0.70, above the forecasted $0.67, as revenues decreased 1.6% y/y to $3.7 billion, compared to the expected $3.8 billion. The company's new pay-TV subscribers increased y/y. Shares gained ground.

Schwab’s Chief Investment Strategist Liz Ann Sonders offers a look at the earnings front in her latest article, Better Days: Earnings Growth Picks Up Sharply in 2017, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Existing home sales rise to highest in almost a decade ahead Fed meeting details

Existing-home sales in January rose 3.3% month-over-month (m/m) to a 5.69 million annual rate—the highest since February 2007—compared to the Bloomberg forecast of a 5.55 million pace. December's figure was upwardly revised to a 5.51 million annual rate. Compared to last year, sales were 3.8% higher. The median existing-home price was up 7.1% y/y at $228,900. Housing supply came in at a 3.6-month pace at the current sales rate, and the inventory of homes for sale is down 7.1% y/y. Sales in the Northeast jumped m/m, and rose in the South and West, with all these regions higher y/y. However, sales in the Midwest were down m/m and y/y.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said, "Market challenges remain, but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions." Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses investing in the real estate sector in his article, Real Estate Sector: Underperform, noting that real estate companies, in general, have had a great run over the past couple of years, but we think now is a great opportunity to take some profits and prepare for potential underperformance in the coming months. Read more at www.schwab.com/marketinsight,

The MBA Mortgage Application Index declined 2.0% last week, following the previous week's 3.7% drop. The decrease came as a 1.0% decline for the Refinance Index was met with a 2.8% fall for the Purchase Index. The average 30-year mortgage rate rose 4 basis points (bps) to 4.36%.

In afternoon action, the Federal Reserve released the minutes to the January/February Federal Open Market Committee’s monetary policy meeting where it opted to keep interest rates unchanged. The report showed that "many" Fed officials indicated support for raising rates "fairly soon" if the economy stayed the course or strengthened. However, policymakers voiced uncertainty over the fiscal policy plans of the Trump administration and Republican-controlled Congress, as well as headwinds the rising dollar may present. Following the meeting on Feb.1, the Committee's statement appeared to foster a dovish takeaway by the markets. However, last week's Congressional testimony by FOMC Chief Janet Yellen suggested a March rate hike was still on the table.

As noted in the latest Schwab Market Perspective: Not So Fast!, elevated earnings and economic expectations could lead to a pullback or more sideways action but we believe the bull market in U.S. stocks will continue. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here. Read more at www.schwab.com/marketinsight, and for more on the Fed, see our article, Changes at the Fed: What Does the Coming Personnel Shake-up Mean?, at www.schwab.com/insights. Follow Schwab on Twitter: @schwabresearch.

Treasuries finished modestly higher, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, all ticked 1 bp lower to 1.21%, 2.42% and 3.03%, respectively. For a look at the bond markets, see Schwab's Director of Income Planning, Rob Williams', CFP, and Senior Research Analyst, Cooper Howard's, CFA, latest article, Short-Term Bonds: Why They Could Outperform As Interest Rates Rise, at www.schwab.com/marketinsight.

Treasury yields and the U.S. dollar remained in focus, and the stock markets paused a bit from rallies to all-time highs, bolstered by continued upbeat economic data, March Fed rate hike expectations that remain intact, and lingering optimism of U.S. President Donald Trump's reflationary policy pledges. For a look at the political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington's Way: Why Trump's Policy Changes Could Take Time, at www.schwab.com/insights.

Tomorrow's economic calendar will offer investors a look at some regional manufacturing activity in the form of the Kansas City Fed Manufacturing Index for February, forecasted to remain at January's level of 9, with a reading above zero denoting expansion in activity, as well as weekly initial jobless claims, with economists expecting a slight uptick to a level of 240,000 from the prior week's 239,000.

Europe mixed after recent run, Asia mostly higher

European equities finished mixed, with the markets assessing the recent rally and the U.S. markets pausing from all-time highs that have been driven by upbeat economic data and optimism of reflationary policies from U.S. President Donald Trump. The markets digested some mixed earnings reports in the region, along with festering European political uncertainty as a key French Presidential election looms. For more on the global markets and the European political risk, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, The stock market sees nothing to worry about—that may be about to change. Jeff notes that Europe's economy is performing the best in many years on many key measures and stock markets are currently behaving as if there is nothing to worry about, but that may be about to change now that we are within 45 trading days of the French Presidential election. He concludes that savvy investors should be prepared for a rise in volatility in global stock markets in the coming months. Read more at www.schwab.com/oninternational, and be sure to check out Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Follow Jeff on Twitter: @jeffreykleintop.

The euro ticked higher and the British pound dipped versus the U.S. dollar, while bond yields in the region were mostly lower. In economic news, German business confidence unexpectedly improved for this month, and preliminary U.K. 4Q GDP growth topped expectations, while eurozone core consumer price inflation rose in line with forecasts.

Asian markets finished mostly higher as the U.S. markets returned to action yesterday from a long holiday weekend, continuing a rally to all-time highs, despite political uncertainty in Europe and the U.S. Stocks in China and Hong Kong advanced, with financials leading the way despite a report that showed a slowdown in property price gains. Australian equities increased modestly, overcoming early losses that stemmed from hawkish commentary from Reserve Bank of Australia Governor Lowe, and showing some resiliency in the face of weakness in technology and financial issues. Markets in South Korea and India rose, with the latter extending a winning streak to five sessions. However, Japanese securities finished flat, as the yen rebounded from recent weakness. Schwab's Director of International Research, Michelle Gibley, CFA, provides some timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational.

Tomorrow's economic calendar for overseas will be fairly light, with reports expected to include Japan's Leading Index, GDP and the Gfk Consumer Climate Index from Germany, and CPI from Italy. Meanwhile, The Bank of Korea will meet to discuss monetary policy, with no change to its stance expected.

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