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Thursday, March 30, 2017

Stocks Close Higher with Financials Leading Gains

Charles Schwab: On the Market
Posted: 3/30/2017 4:15 PM ET

Stocks Close Higher with Financials Leading Gains

U.S. equities finished the trading session higher with financial shares leading gains as Treasury yields gained ground. In economic news, 4Q GDP growth was revised to the upside and weekly jobless claims dipped, but were higher than expected. Crude oil prices extended a rebound, the U.S. dollar managed a solid advance and gold was lower. On the equity front, Lululemon announced 1Q and full-year guidance that was below the Street's forecasts and ConocoPhillips revealed an agreement to sell assets for $13.3 billion.

The Dow Jones Industrial Average (DJIA) increased 69 points (0.3%) to 20,728, the S&P 500 Index increased 7 points (0.3%) to 2,368, and the Nasdaq Composite was 17 points (0.3%) higher at 5,914. In moderate volume, 761 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.84 to $50.35 per barrel and wholesale gasoline gained $0.01 to $1.68 per gallon. Elsewhere, the Bloomberg gold spot price moved $8.73 lower to $1,244.72 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—advanced 0.5% to 100.50.

Lululemon Athletica Inc. (LULU $51) reported 4Q earnings-per-share (EPS) of $0.99, or $1.00 ex-items, versus the $1.01 FactSet estimate, as revenues grew 12.0% year-over-year (y/y) to $790 million, above the projected $783 million. 4Q same-store sales rose 8.0% y/y, compared to the expected 5.4% gain. LULU issued 1Q and full-year guidance that was well below the Street's forecasts, with the company noting a slow start to 2017. Shares tumbled over 20%.

ConocoPhillips (COP $50) announced an agreement to sell its interest in the Foster Creek Christina Lake oil sands partnership, as well as the majority of its western Canada Deep Basin gas assets to Cenovus Energy Inc. (CVE $11) for total proceeds of $13.3 billion. COP said the proceeds will be used to reduce debt and to double its existing share repurchase authorization to $6.0 billion. COP rallied, while CVE fell.

Final read on 4Q GDP revised higher, jobless claims dip

The final look (of three) at 4Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 2.1%, adjusted up from the 1.9% expansion posted in the second and first reports. This compared to the Bloomberg forecast of a revised 2.0% pace of growth. 3Q GDP expanded by an unrevised 3.5% rate. Personal consumption came in at a 3.5% gain for 4Q, up from the preliminary estimate of 3.0%, where it was expected to remain. Personal consumption grew by an unrevised 3.0% in 3Q.

On inflation, the GDP Price Index was adjusted to a 2.1% gain, versus forecasts of an unrevised 2.0% increase, while the core PCE Index, which excludes food and energy, was adjusted to a 1.3% rise, compared to expectations of an unrevised 1.2% gain.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data, after a "typical" weak first quarter, economic growth should accelerate. Based on history, soft data—generally survey-based readings, such as consumer and business measures of confidence, as well as purchasing managers' surveys (PMIs)—is likely to retreat, while hard data—quantitative data or actual measures of economic activity—is likely to gain steam but curb your enthusiasm for a more meaningful acceleration due to longer-term pressures. Read more at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.

Weekly initial jobless claims (chart) declined by 3,000 to 258,000 last week, above forecasts of 247,000, with the prior week’s figure being unrevised at 261,000. The four-week moving average rose by 7,750 to 254,250, while continuing claims jumped by 65,000 to 2,052,000, north of estimates of 2,031,000.

Treasuries finished lower, with the yield on the 2-year note ticking 1 basis point (bp) higher to 1.28%, the yield on the 10-year note rising 4 bps to 2.42%, and the 30-year bond rate gaining 5 bps to 3.03%.

Bond yields have come under pressure as of late, while the U.S. dollar has shown some signs of recovery and the stock markets have been choppy following a string of losses. The markets continue to grapple with U.S. and European political uncertainty, solid economic data, and the Fed's March rate hike, which included an outlook that appeared to calm concerns of a faster pace of rate increases this year than had been expected.

For analysis, see our commentary titled, Stay Disciplined: Resilient Bull Market Is No Cause for Complacency, at www.schwab.com/insights, and follow Schwab on Twitter: @schwabresearch. Also, for a look at the recent activity in the bond markets, check out the video by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, titled, Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?, and Randy's and Schwab's Chief Fixed Income Strategist, Kathy Jones' video, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond, at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Tomorrow, the U.S. economic calendar will finish off the week with releases expected to include personal income and spending, with economists predicting a 0.4% m/m increase in income and a 0.2% rise in spending in February, matching the respective advances seen the month prior, as well as the Chicago Purchasing Managers Index, forecasted to tick lower to 56.9 in March from the 57.4 registered in February, though a level above 50 indicates expansion in activity. Rounding out the day will be the final March University of Michigan Consumer Sentiment Index, expected to remain at the preliminary level of 97.6, but above February's final read of 96.3.

Europe mostly higher, Asia mixed

European equities finished mostly higher, with oil & gas issues continuing to recover along with crude oil prices. Cooler-than-expected German inflation data and recent dovish commentary from European Central Bank (ECB) officials weighed on the euro and suggested the central bank will hold off on cutting back on its accommodative monetary policy in the near term. Moreover, political uncertainty continued to hamstring conviction following the U.K.'s triggering of formal Brexit negotiations yesterday and a recent push for a new Scottish independence referendum, while next month's key French Presidential election looms. For analysis of the European political front, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's video's, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights, and Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop. The British pound rebounded versus the U.S. dollar to likely hamper the U.K. markets, while bond yields in the region finished mixed.

Stocks in Asia finished mixed with festering political uncertainty in the U.S. and Europe continuing to drain conviction as the quarter nears a close, though the recovery in oil prices helped provide some support. Japanese equities fell despite the yen retreating somewhat from a recent rally, with utilities falling solidly to weigh on the markets. Stocks trading in mainland China and Hong Kong dropped with resurfacing liquidity concerns pressuring the markets. Japan and China have seen some choppiness in the wake of the Fed's March rate hike and outlook for future increases, as discussed by Schwab's Michelle Gibley, CFA, in her recent article, Fed Rate Hikes May Benefit Japanese Stocks, and Jeffrey Kleintop, CFA, in his commentary, The Fed has China in a Tough Spotat www.schwab.com/oninternational. Australian securities gained ground amid the extended recovery in oil & gas issues, while South Korean shares dipped. Indian stocks increased to post a three-session winning streak.

The international economic docket for tomorrow will include a plethora of releases from Japan as the island nation releases reports on its jobless rate, CPI, industrial production, housing starts, construction orders and vehicle production. Additional releases for tomorrow will include manufacturing and non-manufacturing PMIs from China, private sector credit from Australia, consumer confidence, GDP and business investment from the U.K., consumer spending from France, and CPI from France, Italy and the Eurozone.

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