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Wednesday, October 26, 2016

Equities Disagree on Direction Despite Deluge of Data

Charles Schwab: On the Market
Posted: 10/26/2016 4:15 PM ET

Equities Disagree on Direction Despite Deluge of Data

U.S. stocks finished mixed as upbeat results from Boeing lent some support to the divergent Dow, while a read on services sector activity growth accelerated more than expected. Crude oil prices finished lower after a brief spike following a bullish government oil inventory report. In other developments, corporate earnings results continued to roll in and new home sales missed expectations for September. Treasury yields advanced, gold was lower and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) increased 30 points (0.2%) to 18,199, the S&P 500 Index was 4 points (0.2%) lower at 2,139 and the Nasdaq Composite lost 33 points (0.6%) to 5,250. In moderate volume, 866 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.78 to $49.18 per barrel, wholesale gasoline ticked $0.02 lower to $1.47 per gallon and the Bloomberg gold spot price shaved $7.23 to $1,266.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was mostly flat at 98.70.

Dow member Apple Inc. (AAPL $116) reported fiscal 4Q earnings-per-share (EPS) of $1.67, one penny ahead of the FactSet estimate, as revenues declined 8.9% year-over-year (y/y) to $46.9 billion, compared to the expected $47.0 billion. Apple's 2016 revenues declined 7.7% y/y to $215.6 billion, the first annual sales decline since 2001. Shipments of iPhones and iPads both exceeded forecasts, while Mac shipments missed estimates. AAPL issued 1Q revenue guidance that topped forecasts, while its gross margin outlook came in a bit shy of expectations. Shares traded lower on the margin guidance and as analysts suggested that the company was not yet able to fully capitalize on Samsung Electronics Co. Ltd's (SSNLF $1,250) decision earlier this month to halt production and sales of its Galaxy Note 7 smartphone due to its batteries overheating and catching fire.

Dow component Boeing Co. (BA $146) posted 3Q EPS ex-items of $2.81, north of the projected $2.61, with revenues decreasing 8.0% y/y to $23.9 billion, exceeding the expected $23.6 billion. BA raised its full-year earnings and revenue guidance. Shares moved nicely higher.

Dow member Coca-Cola Co. (KO $42) announced 3Q profits of $0.49 per share, one cent north of estimates, with revenues declining 7.0% y/y to $10.6 billion, versus the forecasted $10.5 billion. KO noted that the U.S., Japan and Western Europe delivered standout performances. The company reaffirmed its full-year organic revenue guidance, while its EPS outlook had a midpoint that was slightly below expectations. KO traded slightly lower.

Comcast Corp. (CMCSA $63) reported 3Q EPS ex-items of $0.92, one penny above expectations, as revenues increased 14.2% y/y to $21.3 billion, compared to the forecasted $21.2 billion. Shares finished solidly lower.

New home sales miss forecasts, growth in services sector activity jumps

New home sales (chart) rose 3.1% month-over-month (m/m) in September to an annual rate of 593,000, but below the Bloomberg forecast of 600,000 units. The median home price increased 1.9% y/y to $313,500. The supply of new home inventory dipped to 4.8 months at the current sales pace. Sales surged in the Northeast m/m, and rose solidly in the South and Midwest, while sales in the West dropped. Compared to last year, sales in all regions were sharply higher. New home sales are based on contract signings instead of closings. For a look at investing in the real estate sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The preliminary Markit U.S. Services PMI Index for October rose to 54.8 from September's reading of 52.3, compared to forecasts of a modest rise to 52.5, with a reading above 50 indicating expansion. Markit said new order volumes rose at the quickest rate seen so far in 2016, while service providers reported the strongest business optimism since August 2015. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and its index components are weighted differently.

The MBA Mortgage Application Index decreased 4.1% last week, after rising 0.6% in the previous week. The decline came as the Refinance Index dropped 2.3% and the Purchase Index fell 6.9%. The average 30-year mortgage rate decreased 2 basis points (bps) to 3.71%.

The advance goods trade deficit unexpectedly shrank to $56.1 billion in September, from the downwardly revised $59.2 billion in August, versus projections calling for the deficit to widen to $60.5 billion.

Treasuries were lower, with the yield on the 2-year note increasing 2 bps to 0.87%, the yield on the 10-year note gaining 3 bps to 1.78% and the 30-year bond rate advancing 4 bps to 2.54%. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her latest article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will begin with a look at manufacturing demand with the September durable goods orders report, projected to show no change m/m, while the ex-transportation component is forecasted to rise 0.2% m/m and nondefense capital goods orders excluding aircraft—a gauge of business spending—is expected to dip 0.1% after August's solid 0.9% gain. Also prior to the open, we will receive weekly initial jobless claims, anticipated to decrease by 5,000 to a level of 255,000. Once trading commences the docket will deliver pending home sales, expected to have risen 1.0% m/m in September, and the Kansas City Fed Manufacturing Index, forecasted to decline to 3 during October from the 6 registered the month prior, though a reading above zero denotes expansion in manufacturing activity.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Vertigo: Effect of Spiking Healthcare Costs on Consumers, households remain in relatively good shape, with wages and incomes rising and debt levels/debt servicing costs low. But this upward pressure on inflation bears watching. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

With political uncertainty festering as the November election looms, Schwab's Vice President, Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Final Clinton-Trump Debate Sets Up a Sprint to the Finish Line, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles. Be sure to follow Schwab on Twitter: @schwabresearch.

Europe and Asia mostly lower

European equities finished lower, with basic materials issues leading the way, along with energy issues as crude oil prices continued to see pressure following a short-lived recovery on some bullish U.S. government oil inventory data. Sentiment was hampered by some lackluster earnings results on both sides of the pond. Results from the financial sector in the region were mixed, while German consumer confidence unexpectedly dipped for November. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscape at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop. The global markets continued to grapple with uncertainty toward the monetary policy and political fronts. The euro and British pound moved higher versus the U.S. dollar, while bond yields in the region gained ground.

Stocks in Asia finished mostly to the downside as the global markets grapple with ramped up earnings season, with a plethora of mixed reports yesterday leading the U.S. markets lower, while the continued pressure on crude oil prices hampered the energy sector. Equities trading in mainland China and Hong Kong decreased with energy issues seeing pressure, while Indian stocks traded lower amid concerns about loan-loss provisions in the banking sector. South Korean securities decreased as local reports of travel agencies in China being told to reduce the number of tourists visiting South Korea weighed on the market, per CNBC. Australian equities fell on the weakness in oil & gas issues and as a hotter-than-expected read on the nation's consumer price inflation hamstrung sentiment.

However, Japanese stocks bucked the trend amid some upbeat earnings results as the nation's reporting season gears up to overshadow some recent strength in the yen. For analysis of earnings and the stock markets, Schwab's Jeffrey Kleintop, CFA, offers an outlook for the stock markets and earnings growth in his latest article, Three Reasons Stocks May Avoid Another Lost Decade, at www.schwab.com/marketinsight.

Tomorrow's international economic calendar will yield industrial profits from China and trade data from Australia. Reports from across the pond will include advance 3Q GDP and the Index of Services from the U.K. and consumer confidence and wage data from Italy.

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