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.

Thursday, April 17, 2014 - The Growth Industry for the Next 20 Years

Financial Review with Sinclair Noe

DOW – 16 = 16,408
SPX + 2 = 1864
NAS + 9 = 4095
10 YR YLD + .08 = 2.72%
OIL + .83 = 104.59
GOLD – 7.60 = 1295.60
SILV + .02 = 19.75

Stocks ended a holiday-shortened week with mixed results. Stock markets will be closed tomorrow in observance of Good Friday. The S&P 500 had its best week since last July. For the week, the Dow rose 2.4%, the S&P 500 added 2.7% and the Nasdaq advanced 2.4%.

With less than one-fifth of S&P 500 companies having reported results so far, about 63% have topped earnings expectations and 52% have topped revenue expectations. Of course that’s part of the dance between corporations and analysts, but it does move stock prices. For example, Goldman Sachs reported an 11% drop in quarterly profit and revenue fell 8%, but the results were better than estimates and share price was higher on the day.  Among the other earnings related movers today, Google, IBM, Mattel, and United Health were down on poor earnings news, while Morgan Stanley, GE and Pepsi moved higher.

The number of Americans filing new claims for unemployment benefits rose less than expected in the latest week and came near pre-recession levels. The Labor Department also reports weekly earnings of the typical full-time worker rose 3% in the first quarter compared to a year earlier, the fastest pace since 2008. Median earnings came in at $796, that’s the point where half of all workers made more and half made less. This means that earnings growth is now outpacing inflation in consumer prices, which increased at 1.4%. Earnings that rise faster than costs mean workers will have more money to spend on discretionary purchases, or maybe to shore up their personal finances.

This might indicate that the labor market is getting tighter, or at least working through some of the slack, as companies have to pay a bit more to retain or attract workers. Consumers that spend more, boost business profits, which means companies respond by producing more, which means more hiring and an even tighter labor market, which leads to higher worker earnings. Of course, this is just one report, and one report does not make a trend.

One of the reasons it might not be a trend is that the income is not evenly distributed. Recent Labor Department research shows that the top 20% of earners accounted for more than 80% of the rise in household income from 2008-2012. Income fell for the bottom 20%. That had a direct impact on spending. The top households increased spending by about $2,300 from 2008-2012, notably on health care, transportation and education. The 20% of households with the lowest incomes cut spending by about $150.

Top diplomats from Ukraine, Russia, the European Union and the United States have agreed on a set of measures to ease mounting tensions in eastern Ukraine. In Geneva today, Secretary of State John Kerry said the measures include disarming pro-Russian militants occupying buildings in eastern Ukraine and the return of the buildings to their legitimate owners. A joint statement from the four powers says amnesty will be granted to protesters who surrender weapons and leave the buildings, except for those found guilty of capital crimes.

Speaking at the White House, President Obama said he hopes Russia will honor the agreement but he also said that given past practices, there are no assurances of cooperation from Moscow. He said the administration is holding talks with European allies about possible new sanctions if Russia reneges on the deal.  The agreement does not specifically require Moscow to withdraw 40,000 troops massed on its border with Ukraine, and does not reference Russia's annexation of Ukraine's Crimean peninsula last month. It also does not obligate Moscow to hold direct talks with the interim government in Kiev. Peace monitors will be put in place and dialogue will continue, but this is a very real diplomatic move toward de-escalation. That’s good.

This has been a most unusual geopolitical act of aggression in Ukraine; it has revealed the use of sanctions as an economic weapon going up against the threat of cutting off natural gas supplies as an energy weapon.

In Russia, the economic costs have been masked by recent patriotic fervor but could soon haunt the Kremlin, as prices rise, wages stall and consumer confidence erodes; the major Russian stock market index dropped 10% in March; by some accounts, more than $70 billion in capital has fled the country so far this year; key interest rates jumped to 7% from 5.5% to combat inflation and support the ruble, a step that could slow growth; and unemployment has spiked. Beyond the whipped up patriotic fervor there isn’t much reason for Russians to feel good about their situation. The only thing positive for the Russian economy is its energy supplies.

And when Russia intervened in Crimea, they threatened to turn off the energy supply to Ukraine and Europe. The clock is ticking. Europe has about 6 months before the cold weather returns, to wean themselves from dependence on Russian nat gas.

One way to replace Russian gas is through home-grown renewable energy production. Today, the Ukrainian embassy in Washington DC hosted officials from the renewable energy industry to try and lure investment in green energy such as solar, wind, and biofuels. It will be interesting to see where this goes.

The oil industry would like to take the crisis in Ukraine and use it as an opportunity to flood the European market with fracked-in-the-USA natural gas. For this ploy to work, it's important not to look too closely at details. Like the fact that much of the gas probably won't make it to Europe because any gas fracked in the US would actually be sold on the world market to any country belonging to the World Trade Organization.

Plus, it would require massive infrastructure bailout in Ukraine and Europe; a single LNG terminal can cost $7 billion and it still requires massive infrastructure beyond the terminal. There could be a couple of very cold winters in Europe before those massive industrial projects are up and running.

Plus, there is the environmental problem of even more fracking in the US; Americans might put up with fracking in their own back yard if it results in energy independence and more jobs, but when you switch the argument to energy security for Ukraine and Europe, it becomes a tougher sell.

Plus, there is the concern about expanding fracking in light of the recent studies coming out in very plain and blunt language stating the climate is changing and fracking and burning carbon based fuels is a huge culprit. The gas industry itself, in 1981, came up with the clever pitch that natural gas was a "bridge" to a clean energy future. That was 33 years ago. That’s a long bridge.., to nowhere.

The answer is in renewable energy sources. If Russia wasn’t threatening to take away the nat gas, nobody would pay any attention to Putin. Real energy independence is also energy security, and it will be impossible to achieve as long as we rely on the oil and gas industry. So, how long would it take to become energy independent? Less than you might imagine.

It would take a big change in thinking and in political will, but we’ve done it before. During World War II, the US retooled automobile factories to produce 300,000 aircraft, and other countries produced 485,000 more. In 1956 the US began building the Interstate Highway System which eventually extended more than 47,000 miles and changed commerce and society. Clean technology is the answer, and not just because fossil fuels are cooking the planet but because the clean tech is more efficient.

Today the maximum power consumed worldwide at any given moment is about 12.5 trillion watts, according to the US Energy Information Administration. The agency projects that in 2030 the world will need almost 17 trillion watts of power as the global population and living standards rise, with almost 3 trillion watts being consumed by the US. That forecast is based on the idea that we continue with the current mix of energy sources we use today, which is heavily dependent on fossil fuels.

If, however, the planet were powered by clean technology, with no fossil fuel or biomass combustion, an intriguing savings would occur. Global power demand would only be about 11.5 trillion watts and the US demand would drop to only about 1.8 trillion watts. That means that in 2030, we would need less wattage than we need today; and that decline occurs because, in most cases, electrification is a more efficient use of energy. For example, less than 20% of the energy in gasoline is used to move a vehicle and the rest is wasted as heat, whereas 85% of electricity delivered to an electric vehicle is used to provide motion.

Of course clean technology would require massive infrastructure investment as well. The good news is that it is not money handed out by government or consumers but rather an investment that is paid back through the sale of electricity and energy, and because of the efficiencies and the advances in the technologies, it is cheaper than fossil fuel based energy. Energy will be the growth industry of the next 20 years; it is essential for a growing population and a standard of living; and as Putin’s intervention in Crimea has reminded us, it is essential for geopolitical stability.