Stocks Temper New Year Momentum

Charles Schwab: On the Market

Posted: 1/9/2017 4:15 PM ET

Stocks Temper New Year Momentum

U.S. equities finished mixed, softening from their bull run to start the New Year, as strength in technology issues was met with weakness in financials and energy issues as Treasury yields saw some pressure and crude oil prices dropped. Meanwhile, the U.S. dollar fell and gold prices jumped. M&A news dominated the equity front, headlined by an agreement that VCA will be acquired by Mars for about $7.7 billion and Japan's Takeda Pharmaceutical Co will purchase Ariad Pharmaceuticals for about $5.2 billion.

The Dow Jones Industrial Average (DJIA) fell 76 points (0.4%) to 19,887, the S&P 500 Index lost 8 points (0.4%) to 2,269 while the Nasdaq Composite advanced 11 points (0.2%) to 5,532. In moderate volume, 810 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.03 to $51.96 per barrel and wholesale gasoline fell $0.06 to $1.57 per gallon. Elsewhere, the Bloomberg gold spot price rose $10.00 to $1,182.63 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 101.95.

Urban Outfitters Inc. (URBN $27) announced that its same-store sales over the November through December period were up 1.5% year-over-year (y/y), versus the FactSet estimate of a 1.3% gain. However, the company said its expects gross margins to "deleverage" more than previously expected, primarily driven by a larger-than-expected shift in demand and a larger-than-anticipated shift in product mix that saw customers respond more favorably to lower margin items and categories. Shares were lower.

Mars Inc. announced an agreement to acquire pet care provider VCA Inc. (WOOF $91) for $93.00 per share in cash, or about $7.7 billion, excluding debt. WOOF traded sharply higher.

Japan's Takeda Pharmaceutical Co. Ltd. (TKPYY $22) announced an agreement to acquire Ariad Pharmaceuticals Inc. (ARIA $24) for $24.00 per share in cash, for a total enterprise value of about $5.2 billion. Shares of ARIA surged over 70%.

Fiat Chrysler Automobiles NV (FCAU $11) announced plans to invest $1.0 billion to retool and modernize plants in Michigan and Ohio, which is expected to create 2,000 new jobs. Shares moved higher.

Consumer credit surged in November

Consumer credit, released in the final hour of trading, showed consumer borrowing jumped by $24.5 billion during November, the largest increase in eight months, compared to the $18.4 billion forecast of economists polled by Bloomberg, while October's figure was adjusted upward to an increase of $16.2 billion from the originally reported $16.0 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $13.5 billion, while revolving debt, which includes credit cards, surged by $11.0 billion.

Treasuries finished higher, showing little reaction to the consumer credit report, as the yield on the 2-year note declined 3 basis points (bps) to 1.18%, the yield on the 10-year note dropped 5 bps to 2.37%, and the 30-year bond decreased 4 bps to 2.97%.

Bond yields and the U.S. dollar have moderated somewhat from elevated levels that came courtesy of post-election optimism, the string of upbeat economic data, and the Fed's December rate hike and a faster-than-previously-forecasted pace of rate increases for 2017. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? at www.schwab.com/insights. Kathy also addresses the potential changes facing the fixed income market and the jump in the greenback in her articles, Changing Conditions: A Bond Market FAQ and Will the U.S. Dollar Bull Market Continue in 2017?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

With the stock markets posting a sharp rally in the first week of 2017 and the potential for sideways movement and/or potential pullbacks in the New Year, see Senior Vice President of the Schwab Center for Financial Research, Mark Riepe's, CFA, latest podcast, 7 Principles for Investing Success, at www.schwab.com/insights.

This week will be the first full week of the New Year, and the U.S. economic calendar, albeit on the lighter side, will get rolling tomorrow, beginning with the NFIB Small Business Optimism Index, forecasted to rise to a level of 99.5 for December from the 98.4 registered in November, as well as the Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, expected to show 5.50 million jobs were available to be filled during November, down slightly from the 5.53 million posted in October. In addition, wholesale inventories will be reported, with economists anticipating a 0.5% increase for November, following the 1.4% increase the month prior. However, a highlight of the week will be that we will get our first glimpses at 4Q earnings season with  Bank of America Corp. (BAC $23), Dow member JPMorgan Chase & Co. (JPM $86), and Wells Fargo & Co. (WFC $54) set to deliver results on Friday.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Luminous Times: Looking Ahead With Optimism About 2017, corporate earnings have joined the economy in hitting an inflection point. Aggregate S&P 500 earnings spent four consecutive quarters in an earnings recession; with the third quarter of 2016 marking the turn from negative to positive. The jump in earnings growth to 12% currently expected for 2017 helps ease a valuation concern. We remain optimistic that this is an ongoing secular bull market in U.S. stocks; and the risk of it ending swiftly is low, but the trajectory of gains will likely not be as fierce as witnessed immediately post-election; and we do expect bouts of volatility. Read mote at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Europe mostly lower, Asia higher

European equities finished mostly to the downside, with oil & gas issues seeing some pressure as crude oil prices fell, while traders grappled with some mixed data in the region. German industrial production rose by a smaller amount than expected, while the nation's exports grew at a faster pace than projected. Eurozone investor confidence improved more than expected and the region's unemployment rate remained at 9.8% to match estimates. Italy's unemployment rate came in well above estimates. Financials traded lower, coming off last week's recovery from festering banking sector concerns, with bond yields losing ground. The British pound dropped sharply versus the U.S. dollar, helping buoy U.K. stocks along with a favorable read on the nation's home prices. The pound fell and U.K. stocks showed some resiliency in the face of flared-up concerns about a "hard" Brexit in the wake of comments from Prime Minister May over the weekend. The euro rose versus the U.S. dollar. For commentary on the Brexit vote fallout, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, Keep Calm and Carry On: The Brexit Shock That Wasn't at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

For timely analysis of the global landscape, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly higher following the solid global advance last week, with economic optimism buoying sentiment in the wake of a recent string of stronger-than-expected economic data. The data has added credence to Schwab's Jeffrey Kleintop's, CFA, view in his article, Happy Unrecession: The Alice in Wonderland economy, that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. However, volume was lighter than usual, with markets in Japan closed for a holiday. Mainland Chinese stocks and those traded in Hong Kong increased amid some strength in property developers, casino operators and energy stocks. Australian equities rallied following an upbeat read on the nation's November building approvals, despite some weakness in mining issues on some bearish forecasts for iron ore prices. South Korean listings finished flat, while India's markets dipped following late-Friday's 2017 GDP estimate, which showed growth is projected to slow to 7.1% from 7.6%, but topping forecasts of a 6.8% expansion. Schwab's, Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read the above articles 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.

Tomorrow's international economic calendar will offer investors a look at CPI and PPI from China, consumer confidence from Japan, retail sales from the U.K., as well as industrial and manufacturing production from France.

Markets Ring in New Year on Positive Note

Charles Schwab: On the Market

Posted: 1/3/2017 4:15 PM ET

Markets Ring in New Year on Positive Note

Though off the best levels of the day, U.S. equities started 2017 in the green amid a plethora of upbeat global manufacturing reports, headlined by a two-year high in U.S. output, and despite a tumble in crude oil prices. Treasuries finished mixed, while gold and the U.S. dollar were sharply higher. News on the equity front was light, though General Motors responded to a tweet about the automaker's Mexican production from President-elect Trump, and Ford canceled plans for a new $1.6 billion Mexican factory.

The Dow Jones Industrial Average (DJIA) increased 119 points (0.6%) to 19,882, the S&P 500 Index gained 19 points (0.8%) to 2,258 and the Nasdaq Composite added 46 points (0.9%) to 5,429. In heavy volume, 968 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.39 to $52.33 per barrel and wholesale gasoline shed $0.05 to $1.62 per gallon. Elsewhere, the Bloomberg gold spot price rose $10.47 to $1,157.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 0.9% higher to 103.18.

General Motors Co. (GM $35) was in focus after President-elect Donald Trump said today on Twitter that the automaker could face a "big border tax" if it does not make its Chevy Cruze automobiles in the U.S. GM responded by saying that it manufactures all Chevy Cruze sedans sold in the U.S. in Lordstown, Ohio, and it builds the Chevy Cruze hatchback for global markets in Mexico, with a small number sold in the U.S. Shares were higher.

Separately, Ford Motor Co. (F $13) announced that it is cancelling plans for a $1.6 billion new plant in San Luis Potosi, Mexico, and will invest $700 million to expand its Flat Rock plant in Michigan into a factory that will build autonomous and electric vehicles along with the Mustang and Lincoln Continental. Shares gained ground.

Revlon Inc. (REV $30) was nicely higher after the company announced restructuring actions in the wake of its merger with Elizabeth Arden that include the elimination of 350 jobs worldwide.

U.S. data joins positive global manufacturing sentiment

The Institute for Supply Management (ISM) Manufacturing Index (chart) for December moved further into expansion territory (above 50) than expected after rising to 54.7 from November's 53.2 level, and compared to the Bloomberg forecast of a modest rise to 53.8. Production and new orders both rose solidly to levels above 60, and growth in employment accelerated slightly, with all these posting new highs for 2016. Prices jumped to 65.5 and inventories declined further below 50. The ISM said forward-looking comments from the survey were largely positive.

The final Markit U.S. Manufacturing PMI Index was revised higher to 54.3 for December from the 54.2 preliminary level, where it was expected to remain. The index is up from the 54.1 level posted in November. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Both reports, notably the ISM's index hitting the highest level in two years, add to favorable December manufacturing data out of China, Eurozone and the U.K., bolstering global economic sentiment. The data adds credence to our view in the Schwab Market Perspective: Will the Momentum Continue Into 2017?, that the populist trend seen globally last year may not continue and investors should focus on market reactions in the face of political "shocks" and on the improving global manufacturing picture. Some of the enthusiasm since the election may have pulled some gains from 2017 into 2016, but we believe the economic momentum seen in the latter half of 2016 will continue into 2017. Read more at www.schwab.com/marketinsight, where you can also find Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, look at investing in the major sectors in the New Year in his latest Schwab Sector Views: Entering 2017 the Same Way as 2016.

Construction spending (chart) rose 0.9% month-over-month (m/m) in November, versus projections of a 0.5% advance, and following October's favorably revised 0.6% gain. Residential spending was 1.0% higher, and non-residential spending rose 0.8%.

Treasuries were mixed, as the yield on the 2-year note rose 1 basis point (bp) to 1.22%, while the yield on the 10-year note was flat at 2.44%, and the 30-year bond rate declined 2 bps to 3.05%.

Bond yields are getting back into rally mode as the global manufacturing reports add to a recent string of upbeat economic data. Rates have also been bolstered by high expectations for fiscal stimulus, tax reform and regulatory rollbacks as President-elect Donald Trump is set to take office and the Republicans gain control of Congress later this month. Also, the Fed's highly expected 25 bp increase to its target for the fed funds rate in December included a forecast for more rate hikes in 2017 than it had previously projected. Tomorrow, we will get details of the Fed's decision and 2017 estimates in the form of the minutes from the December meeting (economic calendar). Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? at www.schwab.com/insights, where you can also find her latest, Changing Conditions: A Bond Market FAQ. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Signs of rising inflation have also pressured bond prices and Schwab's Fixed Income Director, Collin Martin, CFA, discusses in his article, Inflation Is Rising: Time to Consider Treasury-Inflation Protected Securities? at www.schwab.com/onbonds.

In addition to the Fed minutes, tomorrow’s economic calendar will offer only MBA Mortgage Applications.

Europe and Asia move higher on global data

European equities mostly traded to the upside, with financials leading the way, bolstered by a recovery in the troubled Italian banking sector, while upbeat global economic data boosted sentiment and commodity-related issues. U.K. manufacturing output grew at the fastest pace since June 2014 and complemented today's upbeat U.S. reports out of the sector. Global economic optimism was bolstered by signs of continued expansion in the eurozone and China that were posted in the past few days. Also, inflation statistics in Germany heated up for December, joining a separate release showing German unemployment fell more than expected last month. The euro and the British pound lost ground versus the U.S. dollar, while bond yields in the region mostly moved to the upside. For timely analysis of the global landscape, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished higher following some upbeat Chinese manufacturing data, while volume was lighter than usual as markets in Japan were closed for a holiday. The Caixin China PMI Manufacturing Index improved to 51.9 in December from 50.9 in November, where it was expected to remain. The report followed China's official manufacturing and services sector reports over the weekend that showed growth continued to expand last month. Mainland Chinese stocks and those traded in Hong Kong gained ground following the data, which added to a recent string of data suggesting stabilization in the world's second-largest economy. For more on China, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017). The data also bolstered commodity-related issues, helping equities in Australia finish higher, while listings in South Korea and India also notched gains. Schwab's Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read both articles at www.schwab.com/oninternational, and be sure to check out our latest release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Markit’s Manufacturing PMI readings from across the globe will dominate tomorrow’s international economic calendar, while other reports slated for release include employment data from Spain, lending statistics from the U.K., and CPI from Italy.

Stocks Go Green with Energy and Tech Gains

Charles Schwab: On the Market

Posted: 11/15/2016 4:15 PM ET

Stocks Go Green with Energy and Tech Gains

U.S. stocks were able to stage an advance as the Dow overcame some early pressure to close higher for its seventh-straight session. The post-election rally for financials paused, while technology issues rebounded from some recent weakness. Retail sales for October rose, registering the second consecutive month of solid gains. Crude oil prices surged, recovering from a recent selloff despite the U.S. dollar continuing to gain modest ground. Treasuries and gold managed gains.

The Dow Jones Industrial Average (DJIA) advanced 54 points (0.2%) to 18,923, the S&P 500 Index gained 16 points (0.7%) at 2,180 and the Nasdaq Composite increased 57 points (1.1%) to 5,276. In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil surged $2.49 to $45.81 per barrel, wholesale gasoline was $0.06 lower at $1.34 per gallon and the Bloomberg gold spot price was $6.16 higher at $1,227.51 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 100.17.

Dow member Home Depot Inc. (HD $124) reported 3Q earnings-per-share (EPS) of $1.60, two cents north of the FactSet estimate, as revenues increased 6.1% year-over-year (y/y) to $23.2 billion, above the projected $23.0 billion. 3Q same-store sales rose 5.5% y/y, topping the expected 4.4% gain. The company raised its full-year EPS outlook, while reaffirming its revenue guidance. HD traded lower amid concerns regarding a potential cooling of home improvement activity as the company did not raise its full-year revenue outlook and its 3Q sales growth decelerated heading into the crucial 4Q.

TJX Companies Inc. (TJX $73) posted 3Q EPS ex-items of $0.91, above the forecasted $0.87, with revenues increasing 7.0% y/y to $8.3 billion, topping the expected $8.2 billion. Quarterly same-store sales grew 5.0% y/y, exceeding the estimated 3.4% increase. TJX issued softer-than-expected 4Q EPS and same-store sales guidance. Shares traded lower.

Advance Auto Parts Inc. (AAP $164) announced 3Q earnings ex-items of $1.73 per share, two pennies north of estimates, as revenues decreased 2.0% y/y to $2.3 billion, exceeding the expected $2.2 billion. 3Q same-store sales declined 1.0% y/y, versus the projected 3.5% drop. AAP also offered an update to its strategic initiatives. Shares rallied.

Retail sales top forecasts

Advance retail sales (chart) for October were up 0.8% month-over-month (m/m), above the Bloomberg forecast of a 0.6% increase, and compared to September's favorably revised 1.0% rise. Also, last month's sales ex-autos were higher by 0.8% m/m, topping expectations of a 0.5% gain, and following the upbeat revision to the 0.7% rise seen in the previous month. Sales ex-autos and gas rose 0.6% m/m, exceeding estimates of a 0.3% increase, and versus September's upward revision to a 0.5% gain. The retail sales control group, a figure used to help calculate GDP, was up 0.8%, compared to the projected 0.4% rise, and compared to the prior month's upwardly revised 0.3% rise.

The second-straight solid monthly advance in retail sales was broad-based with 11 of the 13 major categories rising, led by jumps in autos and nonstore retailers—which include online shopping. Food services and drinking places, along with furniture stores, were the two categories that declined.

The data adds credence to the latest Schwab Market Perspective: Is the Fog Starting to Lift?, that despite all the hand wringing over the election, the U.S. economy continues to grow. Although the solid acceleration in 3Q GDP growth was boosted by possible unrepeated catalysts, early fourth quarter data suggest that we won't give back all of the gains seen from the previous quarter. Auto sales rebounded after concerns that they may be in for a longer slump, and wages accelerated, while housing should continue to support both the economy and consumer confidence. For more on the consumer, which accounts for a large majority of U.S. economic output, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Refocusing. Read both articles as well as other timely articles from our experts at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The Import Price Index (chart) increased 0.5% m/m for October, compared to projections of a 0.4% increase and September's upwardly revised 0.2% increase. Compared to last year, prices were lower by 0.2%, versus forecasts of a 0.3% drop, and following September's downwardly revised 1.0% fall.

The Empire Manufacturing Index showed output from the New York region unexpectedly moved back into expansion territory (a reading above zero) for November. The index rose to 1.5 from October's unrevised -6.8 level, with forecasts calling for an improvement to -2.5.

Business inventories (chart) ticked 0.1% higher m/m in September, below forecasts of a 0.2% rise, and versus August's unrevised 0.2% gain.

Treasuries were mostly higher, with the yield on the 2-year note little changed at 1.00%, while the yield on the 10-year note declined 3 basis points (bps) to 2.24% and the 30-year bond rate decreased 4 bps to 2.97%.

Bond yields on the longer end of the curve are pulling back from the recent surge in the wake of President-elect Donald Trump's surprising victory in last week's election, which also saw the Republicans maintain control of the House and Senate. For our latest analysis of the bond markets following the surprise election results, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, Change Is in the Air: A Post-Election Look at Bonds. Kathy notes that bond yields rose on news of Donald Trump's election win, in expectation of increased government spending. We believe higher inflation and interest rates are likely over the longer term, but the potential for protectionist trade policies and a stronger dollar could offset the effects of increased growth and inflation. We believe the likelihood of a Federal Reserve rate hike in December has diminished due to heightened market volatility, but market indicators suggest that a rate hike is expected. We suggest investors continue to maintain a short-to-intermediate duration portfolio with a focus on high credit-quality bonds. Read more at www.schwab.com/onbonds, and follow Kathy on Twitter: @kathyjones.

For more analysis of the election, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Trump Pulls Off an Upset, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find his latest article, Could Tax Cuts Really Happen in 2017?. Follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will commence with the weekly MBA mortgage applications report, which will be followed by the Producer Price Index, expected to have increased 0.3% m/m. Prior to the opening bell, we will get the latest report from the Federal Reserve on industrial production and capacity utilization, while after the regular session begins, the docket will deliver the NAHB Housing Market Index for November.

Europe ticks higher and Asia mostly lower on continued U.S. election focus and data

European equities finished mostly to the upside, with the global markets continuing to digest the implications of last week's surprise U.S. election victory for Donald Trump, after which volatility has ramped up, bolstered by rallies in bond yields and the U.S. dollar. Amid the backdrop of heightened global market volatility, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop. Financials remained in rally mode and oil & gas issues rebounded amid a recovery from a sharp selloff in crude oil prices. Preliminary eurozone 3Q GDP growth came in at a 1.6% y/y rate, matching estimates and 2Q's pace, despite softer-than-expected growth out of Germany. German investor confidence improved much more than expected for November, while U.K. consumer price inflation came in cooler than projected in October. The euro was little changed and the British pound fell versus the U.S. dollar, while bond yields in the region gave back some of a recent jump.

Stocks in Asia finished mostly lower, with the global markets pausing from a recent bout of volatility that has come in the wake of the surprising U.S. Presidential election results, while U.S. Fed rate hike expectations remain elevated. Bond yields and the U.S. dollar have rallied since last Tuesday's election. Financials and healthcare issues extended a recent run as global bond yields rallied and concerns eased about tighter regulations in the sectors, bolstered by some upbeat banking sector results in Japan, though technology stocks added to recent declines. Oil & gas issues also rebounded as crude oil prices gain back some of a recent plunge, while basic materials gave back a recent jump.

Japanese equities finished flat, with the yen recovering slightly from a recent drop. Mainland Chinese stocks dipped and those traded in Hong Kong advanced. Australian securities decreased, while the minutes from the Reserve Bank of Australia's unchanged monetary policy decision earlier this month showed inflation expectations stabilized. South Korean equities declined and Indian stocks fell after being closed yesterday for a holiday. After the closing bell, India reported slightly hotter than expected consumer price inflation and an acceleration in export growth for October. Emerging markets have come under pressure in the wake of the U.S. election results, and Schwab's Jeffrey Kleintop, CFA, offers his latest article, President Trump and Global Trade: How Will Campaign Promises Play Out?, at www.schwab.com/oninternational.

The international economic docket for tomorrow will be light, yielding housing loans from Japan, leading indicators, the Wage Price Index and vehicle sales from Australia and employment data from the U.K.

Stocks Fall Short of Continuing Gains

Charles Schwab: On the Market

Posted: 11/14/2016 4:15 PM ET

Stocks Fall Short of Continuing Gains

Domestic stocks finished mixed, while the U.S. dollar and Treasury yields extended post-election rallies. Financials issues were standout winners and technology listings were the biggest laggards. Though the economic calendar was dormant today, tomorrow the domestic docket will commence a busy week with the release of retail sales. In some M&A news, Samsung agreed to acquire Harman International and German engineering company Siemens inked a deal to purchase Mentor Graphics. Gold and crude oil prices were slightly lower.

The Dow Jones Industrial Average (DJIA) gained 21 points (0.1%) to 18,869, the S&P 500 Index was nearly unchanged at 2,164 and the Nasdaq Composite dipped 19 points (0.4%) to 5,218. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.09 to $43.32 per barrel, wholesale gasoline was $0.03 lower at $1.28 per gallon and the Bloomberg gold spot price was $8.39 lower at $1,219.25 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 1.0% higher at 100.03.

Samsung Electronics Co. Ltd (SSNLF $1,250) announced an agreement to acquire Harman International Industries Inc. (HAR $110) for $112.00 per share in cash, for a total equity value of about $8.0 billion. Samsung said the transaction will give it a significant presence in the connected technologies market, especially in automotive electronics. HAR traded sharply higher.

German engineering company Siemens AG (SIEGY $118) announced an agreement to acquire design automation and industrial software provider Mentor Graphics Corp. (MENT $36) for $37.25 per share in cash, representing an enterprise value of about $4.5 billion. MENT rallied.

Bond yields continue to rally with economic front quiet

Treasuries were lower, with the economic calendar void of any major reports today. The yield on the 2-year note rose 7 basis points (bps) to 0.99%, the yield on the 10-year note gained 9 bps to 2.24%, and the 30-year bond rate advanced 6 bps to 3.00%. Bond yields remain in rally mode as the markets grapple with President elect Donald Trump's surprising victory in last week's election, which also saw the Republicans maintain control of the House and Senate.

For our latest analysis of the bond markets following the surprise election results, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, Change Is in the Air: A Post-Election Look at Bonds. Kathy notes that bond yields rose on news of Donald Trump's election win, in expectation of increased government spending. We believe higher inflation and interest rates are likely over the longer term, but the potential for protectionist trade policies and a stronger dollar could offset the effects of increased growth and inflation. We believe the likelihood of a Federal Reserve rate hike in December has diminished due to heightened market volatility, but market indicators suggest that a rate hike is expected. We suggest investors continue to maintain a short-to-intermediate duration portfolio with a focus on high credit-quality bonds. Read more at www.schwab.com/onbonds, and follow Kathy on Twitter: @kathyjones.

For more analysis of the election, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Trump Pulls Off an Upset, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016. Michael also joins Schwab's Liz Ann Sonders in the video titled, Election 2016: The Votes Are In, so Now What?, at www.schwab.com/insights. Follow Schwab on Twitter: @schwabresearch.

This week, the U.S. economic docket will be headlined by reads on industrial production and capacity utilization, the Consumer Price Index, the Producer Price Index, housing starts and building permits, the Leading Index and regional manufacturing reports. Tomorrow, the busy economic week will kick off with the release of October retail sales, projected to match September's 0.6% month-over-month (m/m) gain. Excluding autos, sales are projected to rise 0.5%, in line with the prior month's increase. Stripping out autos and gas, sales are anticipated to rise 0.3%, matching September's gain, and the control group—a figure used to help calculate GDP—is estimated to grow 0.4%, after ticking 0.1% higher in the previous month.

The report will also be accompanied by a plethora of earnings reports out of the retail sector. In a post-election analysis of the major stock market sectors, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Refocusing, the consumer looks to be coming into the crucial holiday shopping season relatively healthy, in our view, and may gain some confidence from the election being over. But the American consumer continues to present a mixed picture to us. Wages are starting to rise, but caution still seems to permeate much of the consumer landscape. Tight margins and rising wage costs for retailers leave us with a marketperform rating on the consumer discretionary sector. Read more at www.schwab.com/marketinsight.

Additional economic reports set for release tomorrow include the Import Price Index, expected to show a 0.4% m/m increase during October following September's 0.1% rise, as well as the Empire Manufacturing Index, anticipated to have improved to a reading of -2.5 for November, from the previous report's -6.8, with a reading below zero indicating contraction in manufacturing activity. Business inventories are also due out tomorrow, forecasted to tick 0.2% higher in September, matching the rise seen in August.

Europe mostly higher, Asia mixed

European equities finished mostly higher, with the U.S. Presidential election remaining in the spotlight as the markets digest the unexpected Trump victory and the implications for the global economy. Crude oil prices continued to drop to pressure the oil & gas sector, while utilities remain hampered amid the global stock market rally following the U.S. election. However, financials extended a jump, with bond yields resuming a rally. The markets also grappled with some mixed economic data out of China and a stronger-than-expected 3Q GDP report out of Japan. Eurozone industrial production declined by a smaller amount than anticipated for September. The euro and British pound fell versus the U.S. dollar. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the recent movement in the global yield curve in his latest article, Recession Odds Pass Key Threshold at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed with the global markets continuing to digest the implications of last week's surprising U.S. Presidential victory for Donald Trump. Traders also weighed a plethora of economic data out of China and Japan. China's industrial production and retail sales both rose at smaller-than-expected amounts for October, while the nation's fixed asset investment topped forecasts. The data follows late-Friday's softer-than-expected October lending statistics. Japan's preliminary 3Q GDP grew at a quarter-over-quarter annualized 2.2% rate, well above the 0.8% expansion that was expected and an acceleration from the 0.7% rise posted in 2Q. Schwab's Jeffrey Kleintop, CFA, offers a World Tour: An Around The World Look At the Economic Landscape, at www.schwab.com/oninternational.

Mainland Chinese stocks rose as the softer-than-expected economic data appeared to suggest stability in the world's second largest economy. However, listings trading in Hong Kong fell with property-related issues dropping on flared-up concerns toward the real estate sector amid the recent government crackdown and a rally in bond yields. Japanese equities rallied with the upbeat GDP data being met with a solid drop in the yen. Australian securities declined with technology and basic materials issues seeing some pressure. Stocks in South Korea traded to the downside as the country deals with its own multifaceted political uncertainties and as emerging markets remained under pressure following the U.S. election results. Finally, Indian markets were closed for a holiday.

The international economic docket for tomorrow will yield machine tool orders from Japan, wholesale prices from India and consumer confidence from Australia. European releases will include CPI and PPI from the U.K., the Zew business climate survey and 3Q GDP from Germany and the trade balance and 3Q GDP for the Eurozone.

With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?

Charles Schwab: With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?

By

Kathy A. Jones

- July 20, 2016

Key Points

• Bond yields in major countries have rebounded after plummeting to all-time lows in recent weeks, leading some to conclude that the bond bull market is over.
• However, the end of the bull market doesn't mean a bear market is starting, as slow global growth, deflationary pressures abroad, a firm dollar and demographic trends are likely to keep yields low.
• Investors should focus less on short-term changes in the market and more on structuring a fixed income portfolio that can work for them over the long run.

The bull market in U.S. Treasuries looks set to mark its 35^th anniversary this fall—assuming it continues. It has been a good run, with investors enjoying attractive returns from their bond portfolios over the years. Ten-year U.S. Treasury yields peaked at 15.84% on September 30, 1981 and fell to a modern-era low of 1.36% on July 8, 2016. (Remember, falling yields reflect rising prices.)

But yields have since bounced back, rising to 1.59% in mid-July. Is this a sign the bull market has run its course? Pundits have repeatedly declared the end of the bond bull market over the years, but, to paraphrase Mark Twain, news of its death has always been premature.

Ten-year Treasury yields, 1970-present

Source: Bloomberg. 10-Year Treasury Constant Maturity Rate (USGG10YR). Data as of 7/15/ 2016. Past performance is no guarantee of future results.

We're not willing to declare the bond bull market over, but we will concede that the recent drop in Treasury yields looked overdone in light of the solid U.S. economic data reported over the past few months. Looking at the U.S. economy in isolation, one would expect investors to be more sanguine. Economic growth is running at a steady 2.0% to 2.5% pace, and inflation is edging higher. Excluding volatile food and energy components, inflation is already above the Federal Reserve's 2% target by some measures. The unemployment rate—at less than 5%—is near where most economists believe the "full 'employment" threshold lies and wages are edging higher for most workers.

Normally, yields fall when the outlook for the economy is uncertain. There is little in the data cited above to support the recent drop.

Moreover, the market probably went too far in reducing expectations for the pace of rate hikes by the Fed. In the immediate aftermath of Britain's vote in June to leave the European Union—better known as the Brexit vote—market expectations for an increase in the federal funds rate this year fell to just 15%. They have since rebounded above a 40% likelihood of a rate hike, which seems more realistic to us.

Implied probability of a Fed rate hike

Source: Bloomberg, World Interest Rate Probability. Data as of 7/15/2016.

Why bond yields will likely stay low

However, bond yields are determined in the global market, and forces outside the U.S. are likely to keep U.S. bond yields low, in our view. The market may have overreacted to the actual Brexit vote, but the specter of rising nationalism and a potential increase in trade barriers suggested by the vote also exacerbated long-standing concerns about global growth. Global trade volumes have fallen to half their long-term historical level in recent years. Since trade is highly correlated with global growth, any indications that the free movement of goods, labor or capital across borders might slow tend to stoke concerns about the global economy.

Gross Domestic Product (GDP) versus Trade Volume – World

Source: International Monetary Fund, World Economic Outlook Database, world gross domestic product and world trade volume of goods and services, annual data as of 12/31/ 2015. Shaded areas indicate recessions.

Consequently, central banks around the globe have been easing monetary policies by pushing short-term interest rates to historically low or even negative levels and expanding bond buying programs. The Bank of England has already indicated it is likely to cut rates in August due to the negative impact that the "Brexit" vote is expected to have on its economy. The European Central Bank has pushed short-term interest rates into negative territory and expanded its bond-buying program to include corporate bonds.

The Bank of Japan is even said to be moving toward dropping "helicopter money" to stimulate its economy. (Helicopter money refers to a concept originating with economist Milton Friedman, whereby the central bank provides money directly to citizens—as if dropping it from a helicopter—in order to increase spending and prevent deflation. In practice it is likely to take the form of the government issuing perpetual debt.) With major central banks already holding large portions of outstanding government bonds on their balance sheets, the potential for higher bond yields appears limited, in our view.

Central banks' holdings of government bonds as share of outstanding debt

Source: Federal Reserve Board (U.S. Fed), European Central Bank (ECB) and Bank of Japan (BOJ) data as of 3/31/ 2016. *Holdings including government debt of Germany and other eurozone countries as of 3/31/2016.

Meanwhile, demand for yield remains strong, especially in countries with aging populations. Pension funds, insurance companies and retirees are all seeking some sort of positive yield to help generate income. With more than $10 trillion bonds priced with negative yields to maturity, investors have driven up the prices of all types of bonds—even the riskiest, such as high-yield corporate and emerging market bonds. As paltry as they are, U.S. bond yields are significantly higher than yields in most other major countries, leading foreign investors desperate for positive yields to the U.S. bond market.

U.S. yields are by far more attractive than yields in other major countries

Source: Bloomberg. Data as of 7/18/2016.

The inflow of foreign capital into the U.S. has boosted the dollar by more than 3% on a trade-weighted basis since the Brexit vote. The biggest increase has been against the British pound, which fell 11% against the dollar, but the euro is down about 3% and even the Chinese yuan is 2% lower. A strengthening dollar tends to hold down growth by making U.S. exports less competitive and reduces inflation because it causes import prices to fall. The trend in the dollar is a key indicator we watch since it often has the same impact as a Fed rate hike—slowing growth and lowering inflation.

The dollar is trying to do the Fed's job for it

Source: Bloomberg, daily data as of 7/18/2016. The U.S. Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies. Past performance is no guarantee of future results.

What to do now:

 

We've always believed that the bond bull market would end with a whimper instead of a bang. Yields may have hit generational lows, but it's unlikely they will rise sharply or substantially any time soon. The forces holding yields down—slow growth, deflationary pressure from abroad, a firm dollar and demographic trends—are likely to remain intact for the foreseeable future.

We are concerned that in response to these factors, yield-starved investors are stretching too far into low-quality bonds and/or long maturity bonds without getting compensated for the risks. When evaluating a fixed income portfolio here are a few considerations to take into account and some resources to help:

Start with realistic expectations. We don't expect rates to rise soon, but we also don't expect returns for fixed income investors to be as strong in the next year as they have been in the past year. This article explains why market returns may not be as good in the future.

Match your bond holdings to your investment needs. Treasuries and investment grade bonds tend to add stability to a portfolio, while bonds with more credit risk can add income but carry a higher risk of loss. This article explains how to include an appropriate allocation to each, based on what you want to achieve.

Consider a laddered bond portfolio. Bond ladders—an investment strategy in which you purchase individual bonds with staggered maturities, spreading investments across a particular time horizon—are a way to avoid trying to time interest rate changes. The goal of a ladder is to have bonds maturing at set, but staggered, intervals. Short-term bonds provide stability and create opportunities to reinvest if rates rise, while the longer-term "rungs" of the ladder generate income. This article provides more details on how they work.

See the opportunity. Higher interest rates could spell the end of the bull market, as prices tend to fall when rates rise. But higher interest rates would also be a welcome change for investors seeking income in a low-yield world: Rising interest income would be a boon for investors with a longer time horizon. Consult a Schwab representative to get an evaluation of your current bond holdings and help with constructing a portfolio that meets your needs.

FINANCIAL REVIEW

Greek Drama

Sinclair Noe — January 6, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW – 130 = 17,371
SPX – 17 = 2002
NAS – 59 = 4592
10 YR YLD – .08 = 1.96%
OIL – 2.23 = 47.81
GOLD + 14.20 = 1220.30
SILV + .36 = 16.65

The 114th Congress convened today for the first time. Mitch McConnell was selected as Senate Majority Leader. John Boehner was elected to a third term as Speaker of the House. The good news is that it won’t take much effort to outperform the 113th Congress; that bar was set pretty low.

Let’s quickly cover the economic data. Commerce Department report factory orders dropped 0.7% in November. Orders for durable goods fell 0.9%, while orders for non-durable goods fell 0.5%. The setback was paced by declining demand for business equipment such as electronics and industrial machinery.

The Institute for Supply Management said its nonmanufacturing index fell to 56.2% from 59.3% in November. Yet readings over 50% signal that more businesses are expanding instead of contracting and the index is coming off a nine-year high, so some cool down might be inevitable. Retailers, hotels and restaurants topped the list of the 12 non-manufacturing industries that reported growth in December, another sign that gains in employment and cheaper gasoline are giving American households a boost. Cheaper fuel helped drive down the index of prices paid at service providers to 49.5, the first time since September 2009 that more companies reported costs were falling than rising.

Cheaper fuel doesn’t really describe what is happening with oil prices; it’s more like a collapse, or a meltdown, at least for the past few days. Yesterday WTI crude dropped about 5%, and today almost 5%.

Today, Saudi King Abdullah said his country would deal with lower prices with a “firm will”, meaning they have no plans to cut production to prop up prices. Other oil producing countries such as Russia, Venezuela, and Libya can’t afford to unilaterally cut production; same deal for frackers and oil shale players in the US.

Lower fuel prices are deflationary, as confirmed today by the prices paid index, and that was reflected in the bond market, as the 10-year treasury yield dropped below 2% for the first time since May of 2013. Lower bond yields translate into higher bond prices and carry some benefits for the economy. Lower bond yields mean lower mortgage rates, a boon for homeowners looking to refinance their home loans at lower rates, and lower rates on other loans to consumers and businesses. Lower yields are not so great for banks, which face a tighter margin on their loans, and today the shares of major bank stocks moved lower. Also, lower rates are a challenge for savers and people on fixed incomes.

And don’t forget, the lower yields are set against a backdrop of the Federal Reserve’s continued warnings that they plan to start tightening monetary policy to force rates higher. Maybe the Fed will move forward with tightening because lower oil prices are acting as a $1.6 trillion quantitative easing program for the world economy. But the bond market is also telling us the global economy is weak.

And it’s not just the US; the yield on the German 10-year government bonds fell to a record low of 0.44% while Japan hit a new nadir of 0.28% and the UK reached 1.58%. Now, you might be wondering why Germany pays about 150 basis points less on their 10-year bonds than US 10-year bonds. Are US treasuries riskier than German bunds? No. US Treasury bonds are about as safe as you can get. The United States is not at risk of default, and in the doom and gloom scenario where the US might default on its debt you wouldn’t find German or Japanese or French debt to be a safe harbor. German bonds are denominated in euros, while US bonds are denominated in dollars. So, higher US rates don’t reflect fear of default; they reflect the expectation that the dollar will fall against the euro over the decade ahead. And the reasoning behind that is because right now the Eurozone is dealing with very low inflation, right on the edge of deflation; while the US is dealing with inflation at almost 2%. If you look at the expected inflation implied by yields on inflation-protected bonds relative to ordinary bonds, they seem to imply roughly 1.8% inflation in the US over the next decade versus half that in the euro area, which means that the inflation differential explains about 60% of the interest rate differential.

Also, right now the US economy is strong; certainly stronger than the Eurozone, but the bond market is forward looking, and the expectation is that over the long term, say 10 years, the 2 major economies will revert to a more normal, more level playing field, which means the dollar would fall and the euro would rise relative to each other. Or another way of looking at it; the US economy is sprinting and will eventually need to pause and catch its breath, while the Eurozone will eventually manage to dig itself out of the hole it is in.

Of course that notion is based on the idea that the Eurozone will not splinter on the periphery and that they will actually stop digging a deeper hole. This has been the topic of heated debate ahead of the January 25 elections in Greece. Euro Union officials have been meeting in Brussels and they say Greece will stay in the Union; the matter is settled. Still, the democratic process in Greece is a threat for Germany and its allies. We’ve seen this before. In 2011, Greece announced a referendum to determine if the Greek people wished to adopt the Euro Union imposed austerity program. The Greek Prime Minister Papandreou was forced from office and replaced by a Euro Union selected bureaucrat, a former vice president of the European Central Bank. Democracy failed and the Euro bankers and German austerity prevailed.

How did that work out? Well, 3 years later more than one million Greeks have lost their jobs; unemployment is at 25%; youth unemployment is over 50%; one-third of businesses have failed; the economy has contracted by about 25%; pensions have been cut in half; the health care system has collapsed and infant mortality has shot up by more than 40%; the Greek economy is caught in deflation; and austerity has managed to increase public debt from 130% of GDP to 175% of GDP. The election later this month is not so much about the Greeks wanting to leave the Euro Union, as it is about the Greeks wanting to put an end to austerity programs that have not worked.

Austerity has been tried elsewhere. Two years ago France was labeled the problem child of the Eurozone. The Austrians were certain that France would explode in hyperinflation unless they were forced to tighten their belts and cut their debt. Some pundits called France worse than Greece. The big difference is that France was much bigger than Greece and they refused to take their marching orders from the Troika or the Germans; and the result is that today the French economy has better economic growth than Britain since 2007, and the French government can borrow with an interest rate of 0.8%, just a smidge more than Germany, and less than the US. France still has economic weakness, but it did not implode and the Eurozone did not disintegrate.

Der Spiegel reports that Angela Merkel thinks Greece can be ejected safely from the euro, if the anti-austerity Syriza party wins the elections on January 25 and carries out its pledge to tear up Greece’s hated “memorandum” with the EU-IMF “Troika”. It was revealed last week that Germany offered Greece a “friendly” return to the drachma in 2011. The leaked minutes of an IMF board meeting in May 2010 admitted that what took place was not a “rescue”: Greece should have been given debt relief, but was instead sacrificed to save the euro – and the banks. It is the failure of Brussels and Berlin to acknowledge this that makes Greeks so bitter, and this crisis so politically explosive. This time, Berlin seems almost eager to finish the job and push Greece out of the Union. Syriza says it doesn’t want to exit the EU, but it will exit the bailout and demand a 50% cut in outstanding debt.

Meanwhile, European Central Bank President Mario Draghi has been saying that he wants to stimulate the Eurozone with a trillion-euro of quantitative easing to head off deflationary forces that threaten to bog down the Eurozone. And if Draghi’s stimulus plan is big enough to make any difference it would involve the purchase of sovereign debt. The next ECB meeting is scheduled for January 22. The Greek snap election is scheduled for January 25. The question is whether Draghi will agree to buy Greek bonds 3 days before the possible election of an anti-austerity, anti-bailout party that has vowed to not pay that same debt. Any bond buying announcement could be seen as interfering in the election. And Draghi can’t just announce a huge bond buying program that excludes Greece’s bonds from the purchases; not unless he wants to throw the democratic process under the bus; and it would likely lead to the very Greek bond sell-off that the ECB wishes to avoid.

And the battle is not just Greece versus Germany. Italy’s debt ratio has spiked from 116 per cent of GDP to 133 per cent, despite austerity and meeting EU deficit rules. The Bank of Italy warns that any further drift towards deflation could have “extremely grave consequences”. Italy, Spain, Portugal, and even France could side with the Greeks. The southern European nations have gone through crisis only to see their debt burden increase while GDP has been flat or even contracting; the more they cut spending to balance the books, the more the economy contracts.

Draghi might just delay any decision, but meanwhile the Eurozone is tipping into outright deflation, and delays would be seen as a sign of weakness, and exacerbating that problem you have low energy prices, which have a deflationary impact. In the past few weeks, the ECB has been trying to downplay the deflation problem.

So, even if Greece votes against austerity, there is hope that cooler heads will prevail and the Union will remain intact, and over time the Eurozone will dig out of its current hole. That is the likely plot, but there will be a big Greek drama played out over the next 3 weeks and nobody is quite certain how the story ends.