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Friday, March 24, 2017

Stocks Lag Over Healthcare Bill Future

Charles Schwab: On the Market
Posted: 3/24/2017 4:15 PM ET

Stocks Lag Over Healthcare Bill Future

U.S. equities lost momentum late in the day as investors awaited the tally of today’s result of the healthcare vote, only to be left in the dark after President Trump asked Speaker Ryan to pull the bill in the wake of a lack of “yes” votes. In economic news, preliminary durable goods orders were mixed for February and Markit's Manufacturing PMI Index fell short of estimates, but remained in expansion territory. Treasuries, gold and crude oil prices were all higher, while the U.S. dollar dipped.

The Dow Jones Industrial Average (DJIA) fell 60 points (0.3%) to 20,597 and the S&P 500 Index shed 2 points (0.1%) to 2,344, while the Nasdaq Composite was 11 points (0.2%) higher at 5,829. In moderate volume, 791 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.27 higher to $47.97 per barrel and wholesale gasoline gained $0.02 to $1.62 per gallon. Elsewhere, the Bloomberg gold spot price rose $3.20 to $1,248.40 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.2% to 99.58. Markets were lower for the week, as the DJIA lost 1.5%, the S&P 500 Index decreased 1.4%, and the Nasdaq Composite was 1.2% lower.

After the closing bell yesterday, Micron Technology Inc. (MU $28) announced fiscal 2Q earnings of $0.77 per diluted share on a GAAP basis and $0.90 per diluted share ex-items, versus the FactSet estimate of $0.86, while revenues jumped 58.4% year-over-year (y/y) to $4.7 billion, roughly matching expectations. Shares of MU were sharply higher.

GameStop Corp. (GME $21) also reported earnings after the close yesterday, announcing 4Q earnings of $2.36 per diluted share on a GAAP basis and $2.38 per diluted share ex-items, topping the FactSet estimate of $2.29, while revenues dropped 13.6% y/y to $3.1 billion, roughly in line with forecasts. Shares of GME finished solidly lower.

A large amount of investor focus was tuned to the current health-care bill that was expected to be voted on yesterday by the House of Representatives, but was postponed to today, only to be pulled from voting today. Though the legislative process is currently underway, many questions still surround the health-care industry and may or may not be addressed by the proposed legislation, however, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA tackles this sector with his three-to-six month outlook in the most recent Schwab Sector Views: How Should Investors Look at Health Care Now?. And be sure to check out Brad's views on ten other sectors at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch.

Mixed read on durable goods orders

February preliminary durable goods orders (chart) rose 1.7% month-over-month (m/m), compared to the Bloomberg estimate of a 1.4% rise and January's upwardly revised 2.3% increase. Ex-transportation, orders were 0.4% higher m/m, compared to forecasts of a 0.6% gain and versus January's upwardly revised 0.2% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, decreased 0.1%, versus projections of a 0.5% increase, and following the favorably revised 0.3% decline in the month prior.

The preliminary Markit U.S. Manufacturing PMI Index came in at 53.4 for March, down from February's final read of 54.2, and compared to estimates calling for an improved level of 54.8. A reading above 50 denotes expansion.

Treasuries were higher, as the yield on the 2-year note was unchanged at 1.26%, the yield on the 10-year declined 2 basis points (bps) to 2.40% and the 30-year bond rate decreased 3 bps to 3.01%.

As noted in the recent Schwab Market Perspective: Teflon Market, helping to bolster our belief in a strengthening economy—and our bullish stance—is the increased hawkishness of the Federal Reserve and their decision to hike rates at the March Federal Open Market Committee (FOMC) meeting. Additionally, the Fed signaled willingness to continue to hike rates in the coming months, which would mark the first time we would see more than one hike in a year since the financial crisis. Read the whole perspective at www.schwab.com/marketinsight. Also, for analysis on 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?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Europe lower following delayed health-care vote, Asia mostly higher

European equities finished trading mostly lower on Friday with financials and energy issues leading the decline. Traders seemed to be exercising a cautious and uncertain tone following the delayed health-care vote in the U.S. The declines in the region developed despite some upbeat manufacturing data as Germany and France both posted better-than-expected manufacturing PMI reads, though France also announced its 4Q GDP grew at a 1.1% annualized pace which was just shy of the 1.2% forecast. Elsewhere, U.K. consumers have coped fairly well since the Brexit referendum; however, they may face a real-income squeeze in 2017 as recent reports reveal the lowest level of household saving in the country since the 2008 crisis. The British pound declined versus the U.S. dollar after a U.K. policy maker attempted to downplay the chances of an interest rate increase. In his recent article The future of Europe: EU 2.0 and its impact on the markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, informs us that after 60 years of integration, a rising tide of nationalism threatens to pull Europe’s union apart in the years ahead and there are five possible scenarios defined by the European Commission to address the question of what Europe may look like in 2025. Find out what these scenarios are by reading the whole article at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly higher following the delayed health-care vote in the U.S. and as the yen weakened, giving markets in Japan a boost, while comments from Bank of Japan (BoJ) Governor Kuroda may have also lent a hand. In referring to the central bank's current government bond buying program, Kuroda said that he does not think it will face difficulties in the near future and that the BoJ will not raise its target level of the long-term interest rates just because of such rises in other countries. Schwab's Director of International Research Michelle Gibley, CFA, discusses in her recent article Fed Rate Hikes May Benefit Japanese Stocks, that the central bank wants to overshoot its 2% inflation target in a bid to get people accustomed to the idea of rising prices again. This could keep changes by the BOJ at bay for some time. Read the whole article at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Stocks in China and Hong Kong were higher, despite recent concern over central bank policy, as Schwab's Jeffrey Kleintop, CFA, discusses in his recent article The Fed has China in a Tough Spot, where he notes that additional Fed rate hikes in 2017 may put increasing strain on China and revive worries about growth, currency and capital flows as tough trade negotiations near. Read the rest of the article at www.schwab.com/oninternational. Australian securities advanced, with banks contributing solidly to the gains, while listings in India also gained ground, but those traded in in South Korea declined.

Stocks unable to erase losses for the week

U.S. stocks finished the trading week noticeably lower, though most of the downward action took place during Tuesday's session. The economic calendar was slow to start and without much data to drive direction, equities pulled back from recent all-time highs that were reached earlier this month. The delayed health-care vote also seemed to subdue sentiment, but didn't exacerbate the weekly decline. When economic data began to dole out, traders were treated to some mixed housing reports as existing home sales and mortgage applications declined, but new home sales increased and topped expectations. Additional reads showed weekly jobless claims unexpectedly rose and some regional manufacturing activity moved further into expansion territory.

In earnings news for the week, Nike Inc. (NKE $56), Cintas Corp. (CTAS $126), and Lennar Corp. (LEN $51) bested top line projections, though NKE announced a contraction in gross margins, while FedEx Corp. (FDX $188) and General Mills Inc. (GIS $59) missed forecasts. In her latest article, Big Machine: Why Large Caps Are Likely to Outperform, Schwab’s Chief Investment Strategist Liz Ann Sonders notes that 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 why at www.schwab.com/marketinsight.

Data expected next week

Next week, the U.S. economic calendar will again start slowly, with Monday's sole release expected to be the Dallas Fed Manufacturing Index, but the docket will be relatively busy for the remaining four days. A report that will likely garner a fair amount of attention is Thursday's release of the third and final read on 4Q GDP. However, when viewing the results our experts remind us in the recent Schwab Market Perspective, that investors should remember that GDP growth is backward-looking and the stock market is forward looking; which is why leading economic indicators are more valuable "forecasting" tools for the stock market. Read more at www.schwab.com/marketinsight.

Additional reports of note for next week include the advance goods trade balance, wholesale inventories, the Richmond Fed Manufacturing Index, pending home sales, personal income and spending, and the final University of Michigan Consumer Confidence Index.

The international calendar will bring some data worth noting: Japan—retail sales, jobless rate, CPI, industrial production, construction orders, housing starts and vehicle production. China—current account balance, manufacturing PMI and non-manufacturing PMI. Eurozone—consumer confidence and CPI, along with German Ifo business climate survey, Import Price Index, CPI and retail sales. U.K.—consumer credit, GDP, total business investment and GfK consumer confidence.

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