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Schwab Market Update

The Bulls Are Back In Town

Investors shrugged off yesterday's massive reversal, pushing U.S. equities to fresh record highs despite negative reactions to earnings results from Dow member Goldman Sachs and Bank of America. Industrial production finished the best year since 2010, and while homebuilder sentiment dipped from an 18-year high, it remained firmly entrenched in positive territory. Meanwhile, the afternoon release of the Fed's Beige Book showed continued economic growth and optimism. Treasury yields and the U.S. dollar were higher, as were crude oil prices, while gold slipped.   

The Dow Jones Industrial Average (DJIA) surged 323 points (1.3%) to 26,115, the S&P 500 Index rose 26 points (0.9%) to 2,803, and the Nasdaq Composite jumped 75 points (1.0%) to 7,298. In heavy volume, 913 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.24 higher to $63.97 per barrel and wholesale gasoline added $0.02 to $1.86 per gallon. Elsewhere, the Bloomberg gold spot price declined $10.26 to $1,328.15 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 90.68.

Dow member Goldman Sachs Group Inc. (GS $254) reported a Q4 loss of $5.51 per share, including the effects of Tax Legislation. Excluding the tax legislation impact, GS had earnings-per-share (EPS) of $5.68, compared to the $4.92 FactSet estimate. Revenues declined 4.0% year-over-year (y/y) to $7.8 billion, versus the projected $7.7 billion. Q4 revenues from its investment banking unit topped estimates, but its fixed income and equity trading revenues both came in below expectations. The company said last year it delivered higher revenue and stronger pre-tax margins despite a challenging environment for its market-making businesses. GS added that with the global economy poised to accelerate and new U.S. tax legislation providing tailwinds it is well positioned to make significant progress on the growth plan it outlined in September. Shares finished solidly lower. 

Bank of America Corp. (BAC $31) posted Q4 EPS of $0.20, or $0.47 excluding items that included a charge related to the Tax Cuts and Jobs Act, versus the projected $0.45. Adjusted revenues of $21.4 billion, came in a bit shy of the forecasted $21.5 billion. Net interest income and margin both topped forecasts, along with its fixed income and equity trading activity. Shares were slightly lower.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Taxman: Bringing Some Cheer in the New Year, the impact of the Tax Cuts and Jobs Act (TCJA) is already being felt by millions of workers—with the vast majority of the remainder getting a bump in their paychecks next month. More broadly, we should get a boost to consumption, GDP, capex and corporate earnings; but there are important offsets and considerations that suggest some enthusiasm-curbing may be in order given the later-stage in the cycle in which the TCJA was passed. Also, Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers investors analysis on the tax overhaul in his article, The Importance of Tax-Efficient Investing.

Ford Motor Co. (F $12) traded sharply lower after the automaker issued 2017 and 2018 EPS guidance that came in a bit shy of expectations. Separately, the company announced a supplemental Q1 cash dividend that equals $0.13 per share in addition to the $0.15 per share payout for the quarter.

Shares of Juno Therapeutics Inc. (JUNO $69) were up over 50% on a Wall Street Journal report that Celgene Corp. (CELG $102) was in talks to acquire the drugmaker. Neither company has commented on the report. CELG was lower. 

Industrial production rises more than expected, mortgage apps up despite jump in rates

The Federal Reserve's industrial production report (chart) showed a 0.9% rise month-over-month (m/m) in December, well above the Bloomberg estimate of a 0.5% gain, and November's downwardly revised 0.1% dip. Manufacturing production ticked 0.1% higher and mining output rose 1.6%, though utilities production jumped 5.6%. The Fed said industrial production posted its largest calendar-year gain since 2010. Capacity utilization rose to 77.9% from the prior month's upwardly revised 77.2% rate, and compared to forecasts of 77.4%. Capacity utilization is 2.0 percentage points below its long-run average.

Schwab's Liz Ann Sonders notes in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle, strong corporate profits and credit conditions are historically closely tied to the capital spending cycle, which has already picked up; but an even sharper recovery could be in the cards for 2018.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month dipped to 72, matching forecasts, from December's 74 level, which was the highest since 1999. The index still sits decisively above the 50 mark, the point of separation for good versus poor conditions. The NAHB said builders are confident that changes to the tax code will promote the small business sector and boost broader economic growth. The NAHB added that it members are excited about the year ahead, even as they continue to face building material price increases and shortages of labor and lots. 

Tomorrow, we will get a look at builder activity in December, with the release of housing starts and building permits (economic calendar). Starts are projected to decline 1.7% m/m to an annual rate of 1,275,000 units from November's pace that was fueled by the strongest level of single-family construction in over a decade. Permits are forecasted to decrease 0.6% to an annual rate of 1,295,000 units. Additionally, weekly initial jobless claims are slated for release, forecasted to fall to a level of 249,000 from the prior week's 261,000, as well as the Philly Fed Manufacturing Index, with economists expecting a level of 25.0 for January, down slightly from the 26.2 posted in December, but still well above the level of zero that separates expansion from contraction.    

The MBA Mortgage Application Index increased 4.1% last week, following the prior week's 8.3% jump. The solid growth came as a 4.4% rise in the Refinance Index was met with a 2.7% gain in the Purchase Index. The average 30-year mortgage rate gained 10 basis points (bps) to 4.33%.

At 2:00 p.m. ET, the Fed delivered its Beige Book, an anecdotal look at business activity across the nation used as a monetary policy preparation tool for the two-day meeting set to end January 31st. The report indicated that almost all districts reported modest to moderate growth in economic activity to start off the new year, as well as upbeat holiday sales, and that the outlook for 2018 remains optimistic. Most districts also reported wages were modestly higher amid a still-tight labor market, and that prices saw modest growth with some companies able to boost selling prices.

Treasuries were lower, as the yield on the 2-year note was 2 bps higher at 2.04%, the yield on the 10-year note gained 4 bps to 2.58, and the 30-year bond rate moved up by 3 bp to 2.85%. Treasury yields recovered from yesterday's downside reversal, while the U.S. Dollar Index has recovered some after being bogged down as of late. Despite yesterday's sharp reversal to the downside, the stock markets rebounded to post fresh record highs fueled by synchronized global economic growth and lingering U.S. tax reform optimism, while the markets continue to eye the ramp up of earnings season and signs that global central banks may be becoming a bit more hawkish. The Bank of Canada was the latest central bank to move a bit down the normalization path after announcing a 25 bp rate increase to 1.25%, while raising its economic growth estimate but offering a dovish tone on the inflation guidance. 

Schwab's Chief Fixed Income Strategist Kathy Jones offers a look at the bond markets in her video, What Could Fixed Income Investors Expect in 2018?, noting that we think 2018 will probably be more challenging for fixed income investors than 2017.

Europe lower on earnings and U.S. reversal, Asia mixed

European equities finished mostly lower, with the global markets eyeing yesterday's noticeable downside reversal in the U.S., which appeared to foster some reassessment of the rally in the world markets as of late. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, points out in his Five Global Risks for Investors in 2018, risk is usually the result of a very high degree of confidence among market participants in one particular outcome. Jeff discusses the five global risks for investors in 2018: geopolitics, chasing returns, private investment boom, return of inflation, and natural disasters, while adding that having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome is a key to successful investing.

Telecommunications issues led to the downside, while the euro dipped versus the U.S. dollar following some comments from European Central Bank officials that suggest the central bank is growing concerned about the recent rally in the euro. Bond yields in the region overcame early losses and finished slightly higher. The British pound gained ground versus the greenback. Earnings season was also in focus after some mixed banking sector results in the U.S. as well as some lackluster reports in the region. In economic news, EU new car registrations fell in December and eurozone consumer price inflation rose in line with forecasts for last month.

Stocks in Asia finished mixed with the markets shaken a bit by the sharp downside reversal in the U.S. yesterday, which appeared to cause some to assess the recent global rally as earnings season kicks into a new gear. Schwab's Chief Investment Strategist Liz Ann Sonders and Vice President of Trading and Derivatives Randy Frederick discuss the global rally in the video, How Much Longer Could the Bull Market Last?. Japanese equities declined with the yen choppy, and despite an unexpected jump in the nation's core machine orders—a gauge of capital spending—for November. Stocks traded in Hong Kong and mainland China advanced, led by gains in telecommunications and financial stocks, while markets in South Korea and Australia dropped, with the latter seeing pressure in materials issues. Meanwhile, stocks in India gained solid ground with earnings optimism helping the nation's benchmark index cross the 35,000 mark for the first time.

Items set for release on tomorrow's international economic calendar include Q4 GDP from China, labor statistics from Australia, industrial production from Japan, building permits from Germany and employment data from the Eurozone.   

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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