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Thursday, February 16, 2017

Stocks Finish Mixed as Dow Ekes Out a Gain

Charles Schwab: On the Market
Posted: 2/16/2017 4:15 PM ET

Stocks Finish Mixed as Dow Ekes Out a Gain

U.S. equities managed a mixed finish with the Dow turning positive in the final hour of trading as stocks seemingly paused from their recent rally which saw major domestic indexes advancing for five-straight sessions. Treasury yields and the U.S. dollar also pulled back despite an upbeat read on U.S. housing construction activity and a surge in regional manufacturing activity. Gold and crude oil prices were higher, while in equity news, Dow member Cisco topped earnings expectations.

The Dow Jones Industrial Average (DJIA) increased 8 points to 20,620, the S&P 500 Index shed 2 points (0.1%) to 2,347, and the Nasdaq Composite declined 5 points (0.1%) to 5,815. In moderate volume, 853 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.25 higher to $53.36 per barrel and wholesale gasoline decreased $0.03 to $1.52 per gallon. Elsewhere, the Bloomberg gold spot price rose $5.15 to $1,238.85 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 100.48.

Dow member Cisco Systems Inc. (CSCO $34) reported fiscal 2Q earnings-per-share (EPS) ex-items of $0.57, one penny above the FactSet estimate, as revenues declined 2.0% year-over-year (y/y) to $11.6 billion, roughly in line with forecasts. CSCO issued 3Q guidance that mostly matched expectations. Separately, the company raised its quarterly dividend by 11.5% to $0.29 per share. Shares moved nicely higher.

NetApp Inc. (NTAP $41) posted fiscal 3Q EPS ex-items of $0.82, above the projected $0.74, with revenues rising 1.0% y/y to $1.4 billion, roughly in line with forecasts. NTAP issued 4Q earnings guidance that bested expectations. NTAP rallied.

Kraft Heinz Co. (KHC $87) announced adjusted 4Q operating profit of $1.9 billion, just shy of the $2.0 billion estimate, as revenues declined 3.7% y/y to $6.9 billion, compared to the forecasted $6.7 billion. KHC raised its target for cost savings by the end of 2017 as a result of its multi-year integration program but raised its outlook for the programs costs. Shares were solidly lower. 

CBS Corp. (CBS $65) reported 4Q EPS ex-items of $1.11, one penny above estimates, as revenues decreased 1.9% y/y to $3.5 billion, below the anticipated $3.6 billion. CBS dipped. 

Avon Products Inc. (AVP $5) tumbled after the company posted adjusted profits of $0.01 per share, below the expected $0.09, as revenues declined 2.0% y/y to $1.6 billion, roughly in line with forecasts.

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, noting that the market's march to all-time highs brought valuations up with it; but courtesy of better earnings growth ahead, valuations are not stretched to the extreme. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Housing construction activity tops forecasts, regional manufacturing jumps again

Housing starts (chart) for January declined 2.6% month-over-month (m/m) to an annual pace of 1,246,000 units, above the Bloomberg forecast of a 1,226,000 unit rate. December starts were upwardly revised to an annual pace of 1,279,000. Starts on single-family units grew m/m, while multi-family starts moved lower. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 4.6% m/m in January to an annual rate of 1,285,000, after December's favorably revised 1,228,000 rate, and north of the expected annual pace of 1,230,000 units. Permits for multi-family units jumped m/m to overshadow a decline in single-family structures.

Weekly initial jobless claims (chart) increased 5,000 to 239,000 last week, below forecasts of 245,000, with the prior week’s figure unrevised at 234,000. The four-week moving average rose by 500 to 245,250, while continuing claims declined by 3,000 to 2,076,000, north of estimates of 2,050,000.

The Philly Fed Manufacturing Index (chart) in February jumped further into a level depicting expansion (a reading above zero) after surging to 43.3—the highest since early 1984—from 23.6 in January, and compared to estimates of a decline to 18.0.

Treasuries were higher, as the yields on the 2-year and 10-year notes fell 4 basis points (bps) to 1.21% and 2.45%, respectively, and the 30-year bond rate declined 2 bps to 3.06%. For a look at bond investing, see the video by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Schwab's Fixed Income Director, Collin Martin, CFA, titledCan Bond Portfolios Benefit from "Floaters" in a Rising Rate environment, at www.schwab.com/insights.

Treasury yields and the U.S. dollar have retreated somewhat from recent rallies, and the stock markets modestly pulled back from record high territory. These moves were bolstered by this week's hawkish testimony from Federal Reserve Chairwoman Janet Yellen that kept the possibility of a March rate hike on the table. Moreover, economic data has remained favorable and the markets have shifted attention to President Donald Trump's reflationary policy promises, notably tax reform, away from exacerbated concerns about global trade and immigration.

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. Finally, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Simple Indicators In A Complex World, noting that while markets may exhibit increasing volatility, we believe the bull market is being supported by tangible and effective indicators of global growth. For more useful indicators see Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Read these articles at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Tomorrow, the U.S. economic calendar will deliver the Leading Index, which is expected to have increased 0.5% in January, matching the increase in December.

European equities retreat on data and following recent run, Asia mixed

European equities finished lower, with the euro and British pound gaining ground on the U.S. dollar and bond yields seeing some pressure. The global markets pulled back after a recent rally, highlighted by record highs in the U.S. that has been fostered by optimism of U.S. President Trump's reflationary policy promises and upbeat economic data. However, European political uneasiness continues to fester ahead of some key elections in the region. For analysis of the U.S. and European political fronts, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? and Director of International Research, Michelle Gibley's, CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. The earnings front weighed on stocks in the region, while the markets showed little reaction to the minutes from the European Central Bank's January policy meeting that showed the central bank remained committed to a "very substantial degree of monetary accommodation." For global market investing analysis, see Schwab's Jeffrey Kleintop's, CFA, articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read these articles at www.schwab.com/oninternational.

Stocks in Asia finished mixed following another day of record highs in the U.S., with the markets focusing on the recent rally in the U.S. dollar that has come courtesy of upbeat economic data, preserved March Fed rate hike expectations, and optimism regarding U.S. President Trump's reflationary policy pledges. Japanese equities declined, as the yen regained some of a recent drop. South Korean stocks dipped, while Indian listings rose. Australian securities ticked higher, on the heels of an upbeat employment report. Stocks trading in mainland China and Hong Kong advanced. For our analysis of the global markets, see Schwab's Director of International Research, Michelle Gibley's, CFA, 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, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

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