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Friday, February 17, 2017

Stocks Finish Mostly Higher Ahead of Holiday Weekend

Charles Schwab: On the Market
Posted: 2/17/2017 4:15 PM ET

Stocks Finish Mostly Higher Ahead of Holiday Weekend

The Dow was able to turn positive in the final minutes of trading, leading to a mostly positive finish for equities ahead of the three-day holiday weekend. Consumer staples stocks were among the top performers as the sector seemingly received a boost after Kraft Heinz submitted an unsuccessful $143 billion bid to acquire Unilever. Treasuries and the U.S. dollar advanced, gold declined and crude oil prices were mostly flat.

The Dow Jones Industrial Average (DJIA) increased 4 points to 20,624, the S&P 500 Index added 4 points (0.2%) to 2,351, and the Nasdaq Composite gained 24 points (0.4%) to 5,839. In moderately-heavy volume, 945 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.03 higher to $53.78 per barrel and wholesale gasoline was unchanged at $1.52 per gallon. Elsewhere, the Bloomberg gold spot price declined $3.52 to $1,238.85 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 100.93. Markets were higher for the week, as the DJIA increased 1.8%, the S&P 500 Index advanced 1.5% and the Nasdaq Composite gained 1.8%.

Kraft Heinz Co. (KHC $97) confirmed that it has delivered a comprehensive proposal regarding a merger with Unilever NV (UN $49). KHC added that while Unilever has declined the proposal, it looks forward to working to reach an agreement and there can be no certainty that any further proposal will be made. UN confirmed receiving the proposal, valued at $50.00 per share, or a total equity value of about $143 billion, noting that it sees no merit for its shareholders and that it does not see the basis for any further discussions. Shares of both companies rallied, and the announcement helped lift the consumer staples sector.

Deere & Co. (DE $110) reported fiscal 1Q earnings-per-share (EPS) of $0.61, above the $0.56 FactSet estimate, as net sales of equipment declined 1.5% year-over-year (y/y) to $4.7 billion, roughly in line with expectations. The farm and construction heavy-equipment maker said it started the year on a positive note in the continued face of soft market conditions, and it is seeing signs that after several years of steep declines key agricultural markets may be stabilizing. DE raised its full-year profit outlook. Shares finished higher in choppy action.

J.M. Smucker Co. (SJM $136) posted fiscal 3Q EPS of $1.16, or $2.00 ex-items, compared to the projected $2.00, with revenues declining 5.0% y/y to $1.9 billion, roughly in line with forecasts. The company lowered the high end of its full-year earnings guidance and its outlook for sales, due to reduced U.S. retail coffee segment net sales results in 3Q and forecasted sales in 4Q. Shares were lower.

General Mills Inc. (GIS $59) fell on the Kraft Heinz and Unilever news and after the company reduced its sales and earnings outlook for the fiscal year, driven largely by recent sales performance of U.S. yogurt and soup.

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.

Leading Index tops forecasts

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) was up 0.6% month-over-month (m/m) in January, above the Bloomberg projection to match December's unrevised 0.5% gain. Support came from the components pertaining to the yield curve, building permits, jobless claims, ISM new orders and consumer expectations.

Treasuries were higher, with the yield on the 2-year note dipping 1 basis point (bp) to 1.19%, the yield on the 10-year note declining 3 bps to 2.42%, and the 30-year bond rate decreasing 2 bps to 3.03%. 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, titled, Can Bond Portfolios Benefit from "Floaters" in a Rising Rate environment, at www.schwab.com/insights.

The stock markets paused near record high territory, Treasury yields gave back some of their recent jumps and the U.S. dollar rebounded from losses as of late. The global markets continue to grapple with resurfaced optimism regarding President Donald Trump's reflationary policy promises, along with lingering trade and immigration concerns. 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. Moreover continued solid economic data, including signs of inflation heating up, and this week's hawkish Congressional testimony from Federal Reserve Chairwoman Janet Yellen, are keeping the possibility of a March rate hike on the table.

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 analysis of the 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.

Please note: All U.S. markets will be closed on Monday in observance of the President's Day holiday.

Europe mixed to close out the week, Asia mostly lower as global market rally stalls

European equities finished mixed on the heels of yesterday's pullback from a recent rally, and amid festering uncertainty regarding the political fronts in the U.S. and Europe. The markets appeared to assess the global rally that ushered in all-time highs in the U.S., bolstered by U.S. President Donald Trump's reflationary policy pledges, notably tax reform. Key elections loom on the horizon for the eurozone, which continued to hamstring sentiment. For further analysis, 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. However, shares of Unilever jumped on the news of Kraft Heinz's merger proposal, which helped lift the consumer goods sector and U.K. stocks, though technology, financials and oil & gas issues led to the downside. In economic news, U.K. retail sales missed expectations for January. The euro and British pound lost ground as the U.S. dollar rebounded from a two-day pullback, while bond yields in the region finished mixed. For our latest on international 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 mostly lower, with the global market rally that has seen U.S. stocks hit all-time highs stalling as traders grapple with political uncertainty in the U.S. and Europe, while assessing the recent run. Japanese equities declined as the yen extended gains amid the pullback in the U.S. dollar. A retreat in banking stocks from a recent rally led Chinese stocks lower. Australian securities traded lower and South Korean equities dipped; however, Indian stocks extended a string of weekly gains after trading to the upside. 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, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Stocks post another weekly rally to all-time highs, housing data due out next week

U.S. stocks headlined a global market rally for the week, posting more record highs as sentiment continued to shift focus to President Donald Trump's pledged reflationary policies, highlighted by last week's promise of a "phenomenal" tax plan in the coming weeks. This helped overshadow lingering political uneasiness toward U.S. trade and immigration and the looming key elections in Europe. Moreover, the economic front continued to suggest the economy is heating up, with retail sales easily topping forecasts, regional manufacturing output surging, small business optimism remaining at the highest since December 2004, and housing construction activity besting forecasts. This appeared to help the markets absorb a sign that the possibility of a March Fed rate hike remains on the table delivered by this week's semi-annual monetary Congressional testimony from Fed Chairwoman Janet Yellen.

Volatility in the currency and bond markets ensued, with the Dollar Index finishing little changed following a mid-week stumble, while Treasury yields nudged higher in choppy action. Stocks also showed some resiliency in the face of hotter-than-expected reads on consumer and producer price inflation. Earnings season continued to roll on but reached the home stretch as 411 companies have reported out of the S&P 500. So far, about 74% have topped earnings estimates, while 52% have exceeded sales projections, per data compiled by Bloomberg.

The holiday-shortened economic calendar next week will still bring a plethora of key reports for the markets to consider when grappling with whether a March rate-hike is in the offing. Housing will be in focus, courtesy of January existing and new home sales reports, while national business activity will be on display as Markit will release its preliminary February looks at manufacturing and services sector output. Rounding out the week, we will get the final University of Michigan Consumer Sentiment Index and the minutes from the Fed's monetary policy meeting that concluded with an unchanged decision on February 1st.

As noted in the latest Schwab Market Perspective: Not So Fast!, investor caution is rising, which contrarily should help the bull market continue. Economic data has continued to beat expectations, but the number of upside surprises may start to level off, and investor enthusiasm toward potential new policies from Washington could wane as political realities set in. 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.

International reports to look out for include: Australia—wage inflation. China—property prices. Japan—trade balance. Eurozone—the Consumer Price Index and Markit's business activity reports, along with German 4Q GDP and business confidence. U.K.—4Q GDP.

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