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Friday, May 05, 2017

Stocks Manage Late-Day Advance

Charles Schwab: On the Market
Posted: 5/5/2017 4:15 PM ET

Stocks Manage Late-Day Advance

U.S. stocks managed a mid-afternoon advance to finish the trading session higher as domestic markets grappled with a jobs report that showed growth rebounded but wages were mixed. Treasury yields were mostly lower and the U.S. dollar dipped, while crude oil prices rebounded from a recent drop to power gains in the energy sector. Political uncertainty remained after yesterday's passage in the House of a health care bill and ahead of this weekend's second round of the French Presidential election. Dow member IBM was lower after Warren Buffett said he trimmed his stake in the company. Gold was little changed.

The Dow Jones Industrial Average (DJIA) gained 55 points (0.3%) to 21,007, the S&P 500 Index added 10 points (0.4%) to 2,399, and the Nasdaq Composite ticked 25 points (0.4%) higher to 6,101. In moderately-heavy volume, 830 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.70 to $46.22 per barrel and wholesale gasoline increased $0.02 to $1.50 per gallon. Elsewhere, the Bloomberg gold spot price added $1.13 to $1,229.29 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 98.56. Markets were higher for the week, as the DJIA advanced 0.3%, the S&P 500 Index gained 0.6%, and the Nasdaq Composite increased 0.8%.

Dow member International Business Machines Corp. (IBM $155) saw pressure after Billionaire investor Warren Buffett told CNBC that his company Berkshire Hathaway Inc. (BRK/B $167) had sold about a third of its stake in the tech giant.

Cigna Corp. (CI $160) reported Q1 earnings-per-share (EPS) of $2.30, or $2.77 ex-items, versus the $2.45 FactSet estimate, as revenues rose 5.0% year-over-year (y/y) to $10.4 billion, above the forecasted $10.1 billion. CI raised its full-year profit and revenue guidance. The company noted continued strong growth in its Commercial Healthcare and Global Supplemental Benefits segments, partially offset by contraction, as expected, in its Seniors business. Shares traded higher.

Activision Blizzard Inc. (ATVI $54) posted Q1 EPS of $0.56, or $0.31 ex-items, compared to the projected $0.21, with revenues rising 31.7% y/y to $1.2 billion, versus the expected $1.1 billion. The game maker issued Q2 EPS guidance that missed estimates, while raising its full-year profit outlook that remains below expectations. Shares gained modest ground.

CBS Corp. (CBS $65) announced Q1 profits of $1.09 per share, or $1.04 ex-items, compared to the estimated $0.95, as revenues declined 6.8% y/y to $3.3 billion, roughly in line with expectations. Shares advanced on analyst optimism about the company's revenue diversification amid negative advertising revenue trends seen by some of its peers in the traditional pay-TV segment.

April nonfarm payroll report tops forecasts

Nonfarm payrolls (chart) rose by 211,000 jobs month-over-month (m/m) in April, compared to the Bloomberg forecast of a 190,000 increase. The rise of 98,000 seen in March was revised to a gain of 79,000 jobs. The total downward revision to the job gains in March and February was 6,000. Excluding government hiring and firing, private sector payrolls increased by 194,000, versus the forecasted gain of 190,000, after increasing by 77,000 in March, revised from the 89,000 rise that was initially reported. The report was led by job gains in leisure and hospitality, healthcare, professional and business services, financial activities and mining, while retail services job growth rebounded. Employment in construction and manufacturing remained sluggish.

The unemployment rate unexpectedly fell to 4.4% from 4.5%, hitting the lowest level since May 2007, versus forecasts to tick higher to 4.6%, while average hourly earnings rose 0.3% m/m, matching projections. However, y/y wage growth slowed to a 2.5% pace, missing the 2.7% projection, from the negatively revised 2.6% rise in March after the m/m gain was downwardly revised to 0.1%. Finally, average weekly hours came in at 34.4 from March's unrevised 34.3 rate, in line with estimates.

Despite the mixed wage picture, the jobs data adds credence to Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, view in his latest Schwab Sector Views: Is Retail Really Dead?, that the status of the U.S. consumer looks to us to be quite solid and is showing signs of improving.

The report may be easing concerns about the slowing of Q1 GDP growth, which the Fed characterized as likely being transitory as it keep its monetary policy stance unchanged on Wednesday. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, ½ Full: Seeing Through a Weak Q1, that leading indicators say a lot more about the economy prospectively than backward-looking measures like GDP, and they remain quite healthy. Liz Ann concludes that we are likely just experiencing yet another "soft patch" in an ongoing expansion; so for now, "I am seeing the glass as half full." Read both these articles on the Markets & Economy page at www.schwab.com. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Consumer credit, released in the final hour of trading, showed consumer borrowing advanced by $16.4 billion during March, well above the $14.0 billion forecast of economists polled by Bloomberg, while February's figure was adjusted lower to an increase of $13.7 billion from the originally reported $15.2 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, climbed by $14.5 billion, while revolving debt, which includes credit cards, increased by $2.0 billion.

Treasuries finished mostly higher in choppy action as the yield on the 2-year note was unchanged at 1.31%, while the yields on the 10-year note and the 30-year bond dipped 1 basis point (bp) to 2.35% and 2.99%, respectively. For analysis of the interest rate environment, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, where you can also find our latest commentary, Cash: What to Consider in the New Rate Environment. Follow Schwab on Twitter: @schwabresearch.

Finally, the political front remained in focus in the wake of yesterday's passage in the House of an Affordable Care Act replacement bill, which now faces the Senate. For commentary on the political front, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's video, Washington Overview: Budget Deals, Tax Reform, and Trump's 100-Day Mark, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

Europe higher, Asia lower 

European equities finished higher, with basic materials and oil & gas issues rebounding amid recoveries from the recent slides in metals and crude oil prices, while the markets digested the favorable U.S. employment report. Commodity prices have tumbled amid some softness in economic data out of China and the U.S., along with exacerbated oil supply concerns. For a look at the sectors, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, articles, Materials Sector Rating: Marketperform and Energy Sector Rating Marketperform, on the Markets & Economy page at www.schwab.com.

Meanwhile, stocks appeared to shrug off lingering political uncertainty ahead of this weekend's second round of the French Presidential election, while Brexit negotiations continue with a looming U.K. election in June, which will be followed by a German election later this year. For analysis of the political uncertainty see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. Eurozone business activity in the retail sector moved back to a level depicting expansion. The euro and British pound ticked higher versus the U.S. dollar and bond yields in the region finished mixed.

Stocks in Asia finished lower, with the recent drop in commodity prices, notably metals and crude oil prices, pressuring the basic materials and energy sectors, while the markets were likely cautious ahead of today's U.S. labor report. Also, China remained hamstrung by recent soft economic data and uneasiness toward regulatory crackdowns in the financial system. Shares trading in mainland China and Hong Kong fell, while securities in Australia and India also declined. Volume remained lighter than usual as markets in Japan remained closed for a holiday, while South Korea also took a holiday break. With political and geopolitical uncertainty festering, Schwab's Jeffrey Kleintop, CFA, offers the articles, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Stocks glide after digesting a plethora of mixed market sustenance

Coming off back-to-back solid weekly gains, stocks treaded water amid a plethora of divergent events. Political uncertainty on both sides of the pond lingered ahead of this weekend's French Presidential election and as the House passed a bill aimed at repealing and replacing the U.S. Affordable Care Act. The Fed kept its policy stance unchanged as expected but the markets seemed to continue to grapple with the prospect of the Central Bank trimming its bloated balance sheet. Friday's stronger-than-expected labor report was preceded by an upbeat ISM non-Manufacturing Index that showed key services sector activity grew faster than expected, but another disappointing monthly auto sales report exacerbated worries about hard data being soft. Commodity prices fell, headlined by a drop to multi-month lows for crude oil prices to weigh on the energy sector, though technology stocks continued to rally, shrugging off a mixed earnings report from Dow member Apple Inc. (AAPL $148), and financials led the way as Treasury yields continued a recovery. Earnings season reached the home stretch, continuing to mostly top elevated expectations. About 65% have bested revenue forecasts and 78% have exceeded profit projections out of the 410 companies that have reported thus far from the S&P 500, per data compiled by Bloomberg.

With earnings season well past the apex, the economic front will likely garner more attention next week, delivering April inflation readings such as the Import Price Index, Producer Price Index (PPI) and Consumer Price Index (CPI). Also, the all-important U.S. consumer will be on display, courtesy of the releases of April retail sales and the preliminary May University of Michigan Consumer Sentiment Index.

As noted in the latest Schwab Market Perspective: Should Sharp Sentiment Shifts Mean a Change in Strategy?, a shift in sentiment has led to a sharp reversal in market action recently, with leadership shifting back toward cyclical areas of the market. We continue to believe the bull market will continue due to decent economic growth and a good profits picture, but there will likely be sentiment-driven dips and surges to come. We urge investors to remain disciplined and focus on longer-term horizons and the underlying fundamentals of the economy. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next week that deserve a mention include: Australia—building approvals and retail sales. China—trade balance, CPI and PPI, and lending statistics. India—trade balance, CPI and industrial production. Japan—trade balance. Eurozone—industrial production, along with German factory orders, trade balance and Q1 GDP. U.K.—industrial and manufacturing production, trade balance and the Bank of England's monetary policy decision.

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