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Tuesday, March 21, 2017

Stocks Fall as Light Data Continues

Charles Schwab: On the Market
Posted: 3/21/2017 4:15 PM ET

Stocks Fall as Light Data Continues

U.S. stocks traded solidly lower as the economic calendar was again void of a major release. News was also on the lighter side and financials led the decline, possibly finding pressure from dipping Treasury yields. The U.S. dollar was lower following a jump in U.K. consumer prices and eased political nervousness in France. Crude oil prices were lower and gold was higher. In equity earnings news, General Mills missed quarterly forecasts and Lennar Corp topped the Street's expectations.

The Dow Jones Industrial Average (DJIA) dropped 238 points (1.1%) to 20,668, the S&P 500 Index fell 29 points (1.2%) to 2,344, and the Nasdaq Composite tumbled 108 points (1.8%) to 5,794. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil traded $0.67 lower to $48.24 per barrel and wholesale gasoline was unchanged at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price gained $10.05 to $1,244.29 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 99.70.

General Mills Inc. (GIS $60) reported fiscal 3Q profits of $0.61 per share, or $0.72 ex-items, compared to the $0.71 FactSet estimate, on a 5.2% year-over-year decline in sales to $3.8 billion, slightly short of the $4.0 billion projection. The consumer food company blamed the decline in sales to pricing gap issues and promotional activity, citing a 7.0% drop in North American revenue. GIS reaffirmed is full-year 2017 guidance. Shares traded lower.

Lennar Corp. (LEN $51) posted fiscal 1Q EPS of $0.56, a penny above the FactSet estimate, with revenues rising to $2.3 billion, beating the $2.1 billion forecast. Home deliveries increased during the quarter, while the average sales price was consistent with what it was a year ago. The homebuilder’s CEO cited an improving macro environment following last year’s election for the results, noting that homebuilding operations have gone from “slow and steady to a faster-than-expected sales pace,” and that the company is positioned for increased pricing power and solid earnings going forward. However, shares finished lower as analysts expressed concerns over the decline in gross margins.

Economic calendar continues to be quiet

Treasuries were higher, with the economic calendar again void of any major reports today, as the yield on the 2-year note declined 3 basis points (bps) to 1.26%, and the yields on the 10-year note and the 30-year bond were down 4 bps at 2.42% and 3.04%, respectively.

This week's economic calendar won’t get going until tomorrow, with housing data taking center stage in the form of existing home sales, with economists forecasting a 3.3% month-over-month (m/m) increase to a rate of 5.56 million units, while MBA Mortgage Applications will also be released. Later in the week, new home sales will be reported, along with preliminary looks at manufacturing demand and activity via durable goods orders and Markit's Manufacturing PMI Index.

The stock markets pared back after reaching all-time highs in early March. The U.S. dollar has fallen in choppy trading as of late, and Treasury yields continue to trade in a narrow range following a recent rally, as investors weigh upbeat economic data, eased concerns over the pace of any future Fed rate hikes, political wrangling over proposed healthcare regulation, along with continued political uncertainty abroad. 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.

For analysis of the Fed and its implications for bond investors, see the video from Schwab's Chief Fixed Income Strategist, Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick titled Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?, while Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers timely commentary on the political front in his latest article, Return of the Debt Ceiling: What It Means for Investors at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Europe lower on economic data, Asia mixed amid another subdued session

European equities finished lower despite eased political worries, after some surprising economic data in the U.K stoked rate hike concerns. The euro gained ground against the U.S. dollar after last night’s Presidential debate in France among the top five contenders soothed concerns of a populist win in the upcoming election. Polls in the region widely judged that centrist Macron came out on top, calming fears of a possible victory for anti-European Union (EU) candidate Le Pen, which many think could lead a campaign to separate from the EU. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Randy Frederick discuss the upcoming election and its possible implications in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. News on the economic front centered on the U.K., with the nation reporting its fastest pace of consumer inflation in over three years, citing the pound’s depreciation against the U.S. dollar following the country’s vote to leave the EU. Prices in February jumped 2.3% from 1.8% the month prior, the first time consumer prices have eclipsed the Bank of England’s 2.0% target since November 2013, prompting analysts to posit the notion of a possible rate hike in May. Meanwhile, producer prices in the county were roughly in line with forecasts, and retail sales were higher than expected.

For additional international perspective, 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, as well as Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU?. The British pound climbed to trade higher against the U.S. dollar following the nation’s inflation report, while bond yields in the region are mixed.

Stocks in Asia finished mixed in a second day of lackluster action and news, even as additional geopolitical concerns surfaced amid reports that the Trump Administration is priming new sanctions against North Korea. Despite some weakness in the yen, Japanese equities fell, returning to action following yesterday’s holiday, as financials lagged. Mainland Chinese shares declined, while those in Hong Kong gained ground, after the People’s Bank of China (PBoC) injected 30 billion yuan into the markets, coinciding with a decline in money market rates. Mainland media outlets stated that the PBoC will continue selective policy tightening, while Reuters reported that Beijing is seeking guidance on how to counter any trade penalties imposed against it by the U.S. For more on the impact of the Fed’s rate-hiking cycle on China, see Schwab’s Jeffrey Kleintop’s latest article, The Fed has China in a Tough Spot, at www.schwab.com/marketinsight. Australian securities were little changed in the wake of the release of the minutes from the Reserve Bank of Australia’s March monetary policy meeting, which noted concerns over household debt and wage growth.

Elsewhere, South Korea equities staged a solid advance and Indian stocks were nearly unchanged. Schwab's Michelle Gibley, CFA, provides timely analysis of global investing in her articles, Fed Rate Hikes May Benefit Japanese Stocks and Currency Hedging: 5 Things You Need to Know, at www.schwab.com/oninternational.

Tomorrow, the international economic calendar will include trade data, the All Industry Activity Index and department store sales from Japan, the Leading Index from Australia and the current account for Italy and the Eurozone.

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