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Friday, March 17, 2017

Equities Finish Fairly Flat

On the Market
Posted: 3/17/2017 4:15 PM ET

Equities Finish Fairly Flat

U.S. stocks wavered on either side of the unchanged mark before ultimately finishing the regular trading session mildly lower. Treasury yields declined and the U.S. dollar was nearly unchanged despite upbeat economic reads on consumer sentiment and leading indicators. Gold managed minor gains and crude oil prices were mostly flat. In equity news, Adobe Systems posted upbeat earnings and Amgen was lower after announcing study results on a cholesterol-lowering drug. Also, volume was on the heavy side due to quadruple witching, the simultaneous expiration of options and futures contracts on individual stocks and stock indexes.

The Dow Jones Industrial Average (DJIA) decreased 20 points (0.1%) to 20,915 and the S&P 500 Index shed 3 points (0.1%) to 2,378, while the Nasdaq Composite was unchanged at 5,901. In heavy volume due to quadruple witching, 2.2 billion shares were traded on the NYSE and 3.0 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.03 higher to $48.78 per barrel and wholesale gasoline ticked $0.01 higher to $1.60 per gallon. Elsewhere, the Bloomberg gold spot price gained $2.41 to $1,229.02 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined nearly 0.1% to 100.31. Markets were lower for the week, as the DJIA increased 0.1%, the S&P 500 Index gained 0.2%, and the Nasdaq Composite was 0.7% higher.

Adobe Systems Inc. (ADBE $127) reported fiscal 1Q earnings-per-share (EPS) of $0.80, or $0.94 ex-items, compared to the FactSet estimate of $0.87, with revenues rising 21.6% year-over-year (y/y) to $1.7 billion, above the projected $1.6 billion. ADBE said it saw strong creative cloud and document cloud adoption and retention. The company noted that it remains "bullish about our prospects for the rest of 2017 and beyond." Shares finished nicely higher.

Amgen Inc. (AMGN $168) fell after a key study of the company's cholesterol-lowering drug Repatha reduced heart risk by a lower rate than had been expected. Shares of competing cholesterol drugmakers were also lower.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Big Machine: Why Large Caps Are Likely to Outperform, momentum, breadth, sentiment, earnings, valuation and macro conditions currently support a bias within the U.S. equity market toward large caps over small caps. Read more at www.schwab.com/marketinsight, where you can also find Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: How Should Investors Look at Health Care Now?. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Tiffany & Co. (TIF $92) posted 4Q earnings of $1.26 per share, or $1.45 ex-items, versus the expected $1.39, as revenues increased 1.0% y/y to $1.2 billion, roughly in line with estimates. 4Q same-store sales were flat y/y, compared to the forecasted 1.4% decline. The upscale retailer issued current year sales and EPS guidance that was mostly in line with the Street's estimates, noting that despite an outlook for continued macroeconomic and geopolitical challenges it believes it has meaningful growth opportunities. TIF traded solidly to the upside.

Industrial production flat, though consumer sentiment and Leading Index improve

Industrial production (chart) came in flat month-over-month (m/m) in February, compared to the Bloomberg estimate of a 0.2% gain, and January's favorably revised 0.1% decrease. Manufacturing and mining production both gained ground, with the former rising for a sixth-straight month and the latter jumping, while utilities output tumbled amid continued unseasonably warm weather. Capacity utilization dipped to 75.4%, compared to January's upwardly revised 75.5%, where it was expected to remain. Capacity utilization is 4.5 percentage points below its long-run average.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for February matched January's unrevised 0.6% m/m gain, just above projections of a 0.5% increase. Support came from the components pertaining to the yield curve, jobless claims, ISM new orders, stock prices, average workweek, and consumer expectations, more than offsetting a drop in building permits.

The preliminary University of Michigan Consumer Sentiment Index (chart) improved this month to 97.6, from the prior month's 96.3 level and compared to expectations of an increase to 97.0. The current economic conditions component rose solidly m/m, while the outlook portion ticked higher. The 1-year inflation estimate fell from 2.7% to 2.4%, and 5-10 year inflation outlook dropped to 2.2% from 2.5%.

Treasuries were higher, with the yield on the 2-year note declining 2 basis points (bps) to 1.32%, while the yields on the 10-year note and the 30-year bond dropped 4 bps to 2.50% and 3.11%, respectively.

Treasury yields and the U.S. dollar have seen some pressure in the wake of this week's highly-expected Fed rate hike, which also delivered a dovish tone in the statement and forecast of future rate hikes that seemed to ease concerns that an upbeat economic outlook would accelerate the pace of further increases. For analysis of the Fed's decision, see Senior Fixed Income Research Analyst, Collin Martin's, CFA, commentary, Fed Raises Rates, Signals Additional Hikes in 2017, and our article, Fed Rate Hike: What Does It Mean for Your Portfolio?, at www.schwab.com/insights.

Finally, for a look at the stock markets, which rallied after the Fed's decision, potential increased volatility, and festering political uncertainty, see our article, End of an Era: Why Volatility May Return to the Stock Market and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's commentary, Return of the Debt Ceiling: What It Means for Investors, at www.schwab.com/insights.

Europe ticks higher amid central bank and political focus

European equities nudged higher to add to yesterday's gains, with the global markets continuing to grapple with this week's flood of monetary policy decisions, and eyeing the start of the two-day meeting between G20 finance ministers and central bank governors. The U.S. hiked rates as widely expected, though it offered a dovish statement and forecast for future rate increases that soothed concerns. The U.K., Japan and Switzerland held policies steady, while China increased its short-term borrowing costs. Also, the political front remained in focus, after this week's approval for U.K. Prime Minister May to trigger Article 50, which formally starts the clock on a Brexit, while a midweek Dutch election eased fears about a populist threat in Europe. This set the stage for the upcoming key French Presidential election next month as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick, in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Also, be sure to check out Jeff's articles, Five Reasons to Stay Invested Despite Heightened Uncertainty and The future of Europe: EU 2.0 and its impact on the markets at www.schwab.com/oninternational, where you can also find Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU?. In economic news, the eurozone trade surplus narrowed much more than expected, preceding today's meeting between U.S. President Donald Trump and German Chancellor Angela Merkel, and the region's construction output declined. The euro was lower and the British pound ticked higher versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed as the global markets grappled with a plethora of monetary policy decisions this week, headlined by the highly-expected rate hike in the U.S., which included a dovish tone and unchanged rate hike outlook. Also, China raised its short-term rates, while the Japan, the U.K. and Switzerland left policy stances unchanged. Japanese equities declined, with the yen choppy following the monetary policy actions as discussed by Schwab's Michelle Gibley CFA, in her article, Fed Rate Hikes May Benefit Japanese Stocks at www.schwab.com/oninternational, where you can also find her commentary, Currency Hedging: 5 Things You Need to Know. Mainland Chinese shares fell on the heels of the higher borrowing costs, while stocks trading in Hong Kong ticked slightly higher. Securities in Australia and India advanced, while South Korean equities also increased despite lingering geopolitical concerns.

Stocks tick higher following midweek Fed-fueled jump

U.S. stocks nudged higher as a midweek rally was bookended by sessions of modest declines on continued subdued volatility. Lingering global political uncertainty and a plethora of monetary policy decisions kept conviction contained, except for the Fed's highly-anticipated rate hike decision. The stock markets rallied on Wednesday afternoon, while Treasury yields and the U.S. dollar fell as the Central Bank delivered a dovish tone in its statement and its forecast for future hikes cooled concerns of a higher-than-expected acceleration in borrowing costs. Interest rate sensitive sectors made the biggest moves, with financials falling, while real estate and utilities rallied. Energy stocks got a reprieve from recent selling pressure as crude oil prices rebounded modestly from a tumble as of late, with some bullish supply data helping ease some concerns. A robust economic front saw retail sales tick higher and consumer price inflation match estimates, but homebuilder sentiment jumped to the highest level since June 2005. The equity front was relatively quiet in the wake of earnings season, though Dow member Intel Corp's (INTC $35) $15.3 billion agreement to acquire Mobileye NV (MBLY $61) and Oracle Corp's (ORCL $46) solid quarterly results caught the Street's attention.

Next week's economic calendar will decelerate somewhat, but bring a couple key reads on housing in the form of new and existing home sales, along with preliminary looks at manufacturing demand and activity in the form of durable goods orders and Markit's Manufacturing PMI Index.

As noted in the latest Schwab Market Perspective: Teflon Market, political infighting, Presidential tweets, North Korean missile launches, oil falling below $50, European political uncertainty, higher bond yields, and the Fed raising rates: none of those forces have knocked stocks off their recent uptrend. Volatility remains remarkably low but that doesn't mean it won't pick up—investors should be prepared for bouts of volatility, and pullbacks along the way. The U.S. economy continues to expand; although there are signs that first quarter growth could be on the weak side, largely due to continued seasonal issues. We believe that economic growth is generally accelerating, a thought bolstered by the Fed’s confidence to raise rates again. Politics, both here and abroad, are keeping policy uncertainty high and should also contribute to bouts of volatility. Read more at www.schwab.com/marketinsight.

International reports due out next week include: China—property prices. Japan—trade balance and PMI Manufacturing Index. Eurozone—Markit's preliminary Composite PMI Index. U.K.—inflation statistics and retail sales.

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