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Friday, March 10, 2017

Stocks Rebound After Brief Dip

Charles Schwab: On the Market
Posted: 3/10/2017 4:15 PM ET

Stocks Rebound After Brief Dip

After a brief dip midday, U.S. equities recovered to finish higher following a stronger-than-expected nonfarm payroll report. Meanwhile, crude oil prices fell, as did the U.S. dollar, and Treasury yields dipped as political uncertainty continued to linger. Gold inched higher. News on the equity front was on the light side.

The Dow Jones Industrial Average (DJIA) rose 45 points (0.2%) to 20,903, the S&P 500 Index added 8 points (0.3%) to 2,373, and the Nasdaq Composite increased 23 points (0.4%) to 5,862. In moderate volume, 838 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.79 to $48.49 per barrel and wholesale gasoline shed $0.02 to $1.60 per gallon. Elsewhere, the Bloomberg gold spot price ticked $3.25 higher to $1,204.49 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 101.28. Markets were lower for the week, as the DJIA decreased 0.5%, the S&P 500 Index declined 0.4%, and the Nasdaq Composite was 0.2% lower.

Ulta Beauty Inc. (ULTA $286) reported 4Q earnings-per-share (EPS) of $2.24, above the $2.14 FactSet estimate, as revenues rose 24.6% year-over-year (y/y) to $1.6 billion, above the projected $1.5 billion. 4Q same-store sales rose 16.6% y/y, compared to the expected 13.8% gain. The company's gross margin came in a bit shy of the Street's estimates and its 1Q and full-year guidance missed forecasts. Separately, ULTA announced a new $425 million share repurchase program. Shares gained solid ground.

Finisar Corp. (FNSR $27) posted fiscal 3Q EPS of $0.40, or $0.59 ex-items, below the projected $0.62, as revenues grew 2.9% y/y to $381 million, south of the estimated $390 million. The fiber optics equipment company's gross margin missed expectations. FNSR issued 4Q guidance that was below expectations. Shares fell sharply.

Southwest Airlines Co. (LUV $56) saw some pressure after lowering its 1Q guidance for key industry metric revenue per available seat mile (RASM), citing loss of traffic from heavy California rainfall and unexpected softness in close-in demand in the second half of February "that has since rebounded in March."

February labor report shows job growth tops forecasts

Nonfarm payrolls (chart) rose by 235,000 jobs month-over-month (m/m) in February, compared to the Bloomberg forecast of a 200,000 increase. The rise of 227,000 seen in January was upwardly revised to a gain of 238,000 jobs. The total upward revision to the job gains in January and December was 9,000. Excluding government hiring and firing, private sector payrolls increased by 227,000, versus the forecasted gain of 215,000, after increasing by 221,000 in January, revised down from the 237,000 rise that was initially reported. Construction job growth posted the strongest monthly gain in nearly a decade and manufacturing employment rose at the fastest pace since August 2013, per Bloomberg, though the unseasonably warm weather in February likely pulled some of gains forward. Other sectors showing job growth were healthcare, mining and private educational services, but retail employment edged down.

The unemployment rate dipped to 4.7% from 4.8%, matching forecasts, while the labor force participation rate ticked higher. Average hourly earnings rose 0.2% m/m, versus projections of a 0.3% increase, and January's favorably revised 0.2% gain. Compared to last year, wage growth was 2.8%, matching expectations and the prior month's upwardly revised figure. Finally, average weekly hours remained at January's unrevised 34.4 rate, in line with estimates.

Today's report is having no impact on an already almost 100% probability that the Fed hikes rates next week. Also, the data, notably the slight uptick in hourly earnings, appears to be in that sweet spot, keeping expectations of a faster-than-expected pace of rate hikes for the rest of the year in check and not rattling the markets. As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations, the economic picture continues to look good, but inflation is heating up, and we are watching to see if this could force the Fed's hand. History compiled by Strategas Research Partners shows that the best stock market performance during a rate hiking cycle comes when the Fed moves slowly in the first year, but quicker in the second year. That pattern appears to be panning out in this cycle. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries finished higher, as the yield on the 2-year note dipped 2 basis points (bps) to 1.36%, while the yields on the 10-year note and the 30-year bond decreased 3 bps to 2.58% and 3.16%, respectively.

The equity markets modestly extended yesterday's slight rebound that snapped a three-session losing streak, while Treasury yields pared a weekly rally and the U.S. dollar saw pressure, with political uncertainty remaining and economic data buoying sentiment amid the heightened expectations of a Fed rate hike next week.

Amid this backdrop, see our latest article, End of an Era: Why Volatility May Return to the Stock Market and video from Schwab’s Chief Investment Strategist Liz Ann Sonders and Vice President of Trading and Derivatives, Randy Frederick titled, Stock Rally Continues, but Is It Time for Markets to Take a Breather?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

For analysis of the Fed and President Trump's highly-anticipated reflationary policies, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors? at www.schwab.com/onbonds, and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights. Follow Kathy on Twitter: @kathyjones.

Europe higher following jobs data and as oil recovers

European equities finished mostly higher, led by oil & gas issues, which rebounded even as crude oil prices failed to recover from a two-day tumble, while the markets digested another solid U.S. employment report. Yesterday's relatively upbeat economic tone from the European Central Bank, as it left its monetary policy stance unchanged, continued to lift bond yields, which buoyed the financial sector. Political uncertainty took a back seat to the global economic optimism, though a key French Presidential election looms as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. 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. Follow Jeff on Twitter: @jeffreykleintop.

In economic news, the German trade surplus shrank more than expected and French industrial production declined unexpectedly, while the U.K. reported a smaller-than-expected trade deficit and declines in manufacturing and industrial production. The euro jumped and the British pound was little changed versus the U.S. dollar.

Stocks in Asia finished mostly higher, with yesterday's relatively upbeat economic tone from the European Central Bank and optimism of another strong U.S. employment report later today helping overshadow festering global political uncertainty and heightened expectations of a U.S. rate hike next week. The political uncertainty was exacerbated by a court ruling in South Korea upholding a parliamentary vote to impeach President Park. Japanese equities rallied, with the yen falling, and South Korea's Kospi Index gained modest ground. Australia's markets saw gains, despite the continued pullback in basic resources, and India's bourse ticked higher amid continued caution as exit polls from state elections continued to be eyed.

Stocks in China were mixed, with shares traded in the mainland dipping slightly, while those in Hong Kong increased, on the heels of yesterday's data showing mixed inflation rates and lending statistics, while the markets focused on resurfacing liquidity/currency concerns. Moreover, despite the mixed Chinese data yesterday, which may have been impacted by the Lunar New Year holiday, the nation has reported a string of stronger-than-expected economic reports that is fostering concerns that the central bank may tighten monetary policy. For insight on global investing, see Schwab's Director of International Research, Michelle Gibley's, CFA, 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 rare post-election red figures

U.S. stocks snapped a four-week winning streak, with political uncertainty continuing to hamper conviction as the markets grapple with the timing and details of President Donald Trump's policies and as a key French Presidential election moved closer. Also, last weekend's firing of ballistic missiles by North Korea off its east coast exacerbated geopolitical concerns, while the markets braced for a Fed rate hike next week as expectations remain near a 100% probability. The energy sector was pressured as crude oil prices plunged on flared-up supply concerns, while financials also pared a post-election rally even as Treasury yields rallied. However, as the week matured, stocks snapped a three-session losing streak as global economic optimism appeared to catch a tailwind after ADP's employment report blew away expectations and European Central Bank President Mario Draghi noted that the cyclical recovery may be gaining momentum after leaving its policy stance unchanged. The relatively upbeat tone boosted the euro and aided a downside reversal of early week gains for the U.S. dollar. The technology sector was the lone sector to post a gain on the week, extending its recent run as discussed by Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, in his latest Schwab Sector Views: Can the Tech Rally Continue? at www.schwab.com/marketinsight.

The table is set for next week's full-loaded economic calendar, headlined by Wednesday's conclusion of the Federal Open Market Committee's (FOMC) two-day monyetary policy meeting, which is expected to deliver a 25 bp hike to the target fed funds rate. The markets are likely to pay close attention to the statement and accompanying updated economic projections, which includes individual fed funds forecasts from FOMC participants, known as the dot plots, to see if the pace of rate hikes is expected to accelerate beyond current expectations. This will be followed by the customary press conference by Fed Chairwoman Janet Yellen, which typically garners heavy focus.

Next week will also bring a plethora of key reads on small business optimism, producer and consumer price inflation, retail sales, housing starts and building permits, industrial production and capacity utilization, leading indicators, and consumer sentiment. As noted in the Schwab Market Perspective, there are solid economic supports for the market's surge, but gains may have gotten a bit ahead of themselves. Be prepared for a pullback, but don't fear it marks the end of the bull market. We would likely view any pullbacks as buying opportunities for those needing to add to equity exposure; while also taking some of the pressure off from sentiment. Read more at www.schwab.com/marketinsight.

The international calendar will bring some data worth noting: Australia—consumer confidence and employment change. China—retail sales, fixed asset investment and industrial production. India—whole and consumer price inflation and trade balance. Japan—machine orders and the Bank of Japan's monetary policy decision. Eurozone—industrial production, consumer price inflation, and the trade balance, along with German investor confidence. U.K.—employment change and the Bank of England monetary policy decision.

Schwab Center for Financial Research - Market Analysis Group

©2017 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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