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Wednesday, January 13, 2016

Charles Schwab: On the Market
Posted: 1/13/2016 4:15 PM ET
Bulls' Appetite Sours

Early hopes of continuing yesterday's upward momentum were quickly dashed, as U.S. equities reversed course to finish with solid declines, despite a mostly positive Fed Beige Book, continued stability in the Chinese yuan and a relatively favorable China trade report. Meanwhile, crude oil prices saw increased volatility on the heels of the Department of Energy's inventories data, finishing mixed as a result of a surge in gasoline inventories. Elsewhere, equity news was mostly upbeat, as General Motors upped its outlook and dividend, Yum Brands saw a rise in China same-store sales, and MetLife said it is looking to separate its U.S. retail segment. Treasuries and gold were higher, while the U.S. dollar was nearly flat.

The Dow Jones Industrial Average (DJIA) sank 365 points (2.2%) to 16,151, the S&P 500 Index tumbled 48 points (2.5%) to 1,890, and the Nasdaq Composite plunged 160 points (3.4%) to 4,526. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.04 higher to $30.48 per barrel, but wholesale gasoline lost $0.03 to $1.05 per gallon, while the Bloomberg gold spot price rose $8.14 to $1,094.70 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 98.94.

Ford Motor Co. (F $12) announced that it expects record 2015 pre-tax profit to be in the upper half of its previous guidance and estimates 2016 earnings to be flat or higher year-over-year (y/y). Also, the company announced a $1.0 billion supplemental cash dividend that its equal to $0.25 per share, in addition to its regular 1Q dividend of $0.15 per share. Shares were solidly lower amid concerns regarding the automaker's 2016 guidance.

General Motors Co. (GM $31) increased its earnings outlook for 2016, while announcing an increased share buyback program by $4.0 billion and a 6.0% rise of its quarterly dividend to $0.38 per share. GM was higher.

CSX Corp. (CSX $22) was the first major rail company to post 4Q results, reporting earnings-per-share (EPS) of $0.48, two cents north of the FactSet estimate, as revenues declined 13.0% y/y to $2.8 billion, versus the projected $2.9 billion. The company said with negative global and industrial market trends projected for 2016, full-year EPS are expected to be down compared to 2015. CSX lost solid ground.

MetLife Inc. (MET $43) announced a plan to pursue the separation of a substantial portion of its U.S. retail segment, evaluating structural alternatives such as a public offering of shares, a spin-off, or a sale. MET said the plan is expected to create a more competitive, nimble U.S. retail franchise, which will reduce capital requirements and provide a sharper focus. MET was nicely higher.

Yum Brands Inc. (YUM $69) reported that its December same-store sales for its China division—which it is in the process of spinning off—rose 1.0% y/y, led by a 5.0% gain at its KFC segment, more than offsetting an 11.0% drop at its Pizza Hut restaurants. YUM was nearly flat.

Mortgage applications jump, Fed report indicated continued moderate growth

The MBA Mortgage Application Index surged 21.3% last week, after dropping 11.6% in the previous week. The sharp increase came as a 23.8% jump in the Refinance Index was met with a 17.8% rise for the Purchase Index, while the average 30-year mortgage rate fell 8 basis points (bps) to 4.12%.

The Federal Reserve released its Beige Book—a summary of business activity across the nation used as a tool to prepare for its two-day monetary policy meeting ending January 27. The report showed that the U.S. economy expanded across most of the country at a moderate pace, "overall price pressures were minimal", while job growth continued to improve, even as most districts reported "little overall change" in wage increases. Schwab's Chief Investment Strategist, Liz Ann Sonders notes in our 2016 Schwab Market Outlook, the path of future rate hikes continues to point to slow and gradual—which likely would be a positive for risk assets such as stocks. Inflation and the U.S. dollar are both key for Federal Reserve policy, and a faster pace of rate increases suggests the Fed is acting to combat an inflation problem or an overheating economy (or both). Neither scenario is good for the stock market. Read more under the "White Papers" tab at, and be sure to follow Liz Ann on Twitter: @lizannsonders.

Europe posts modest gain after paring advance
European equities finished mostly higher for the second-straight session, led by strength in oil & gas issues, though stocks came well off the best levels of the day as crude oil prices gave up early gains and the euro showed some late-day resiliency versus the U.S. dollar. Also, basic materials issues got a boost from a relatively favorable Chinese trade report and continued signs of stability in China's currency. Italian banks found support from M&A chatter in the sector. Bond yields in the region were mostly lower. In economic news, eurozone industrial production for November fell more than expected. Despite the data, Schwab's Director of International Research, Michelle Gibley, CFA, discusses Why Our Outlook for European Stocks Is Positive, at, and be sure to follow us on Twitter: @schwabresearch.

Stocks in Asia finished mostly higher following the advances in Europe and the U.S. yesterday, aided by continued stability in the Chinese yuan, which has tumbled recently to pummel the global markets to begin the New Year. Schwab's Chief Fixed Income Strategist, Kathy Jones, discusses Why the Chinese Currency Decline is Rattling Markets, while the Schwab Center for Financial Research offers its article, Chinese Stock Market Selloff: What's New, What's Not. Read both at and follow Kathy and Schwab on Twitter: @kathyjones and @schwabresearch. Stocks in Japan gained ground, posting an advance for the first time this year with the yen weakening late in the session, while strength in oil & gas and financials led Australian equities higher. South Korea listings saw gains, while stocks in India also rose, despite late-yesterday's disappointing industrial production and consumer price inflation reports. Stocks in Hong Kong finished higher, but a late-day slide pressured the mainland Chinese equities, even as the nation posted a relatively better-than-expected December trade balance report.

Economic reports slated for release overseas tomorrow include: employment data from Australia, retail sales from Japan, GDP from Germany and industrial production from Italy. In central bank action, the Bank of Korea will meet, with no change to its policy expected.

Schwab Center for Financial Research - Market Analysis Group

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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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