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Thursday, October 27, 2016

Stocks Edge Lower on Mixed Data

Charles Schwab: On the Market
Posted: 10/27/2016 4:15 PM ET

Stocks Edge Lower on Mixed Data

U.S. stocks finished the regular trading session lower as domestic durable goods orders showed business spending fell more than expected. Treasury yields rallied, while the U.S. dollar, gold and crude oil prices were also higher. Bucking the general equity trend, healthcare stocks rose following upbeat results from Bristol-Myers Squibb and financials found some support on the rise in bond yields. Overseas, Europe showed some late-day resiliency, with U.K. GDP topping forecasts.

The Dow Jones Industrial Average (DJIA) decreased 30 points (0.2%) to 18,170, the S&P 500 Index was 6 points (0.3%) lower at 2,133 and the Nasdaq Composite lost 34 points (0.7%) to 5,216. In moderate volume, 962 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.54 to $49.72 per barrel, wholesale gasoline ticked $0.01 higher to $1.48 per gallon and the Bloomberg gold spot price advanced $2.55 to $1,269.65 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.3% higher at 98.91.

Tesla Motors Inc. (TSLA $204) reported 3Q earnings-per-share (EPS) of $0.71, excluding items that may impact comparability with the $0.32 FactSet estimate, as revenues surged 145.4% year-over-year (y/y) to $2.3 billion, compared to the projected $2.2 billion. TSLA pared solid gains to close modestly higher.

Ford Motor Co. (F $12) posted 3Q EPS ex-items of $0.26, above the expected $0.20, with revenues declining 5.8% y/y to $35.9 billion, versus the projected $33.8 billion. F maintained its full-year earnings outlook. North American and European profits topped forecasts, though South American and Asia Pacific bottomline results missed and its free cash flow was negative. Shares moved lower.

United Parcel Service Inc. (UPS $108) announced 3Q profits of $1.44 per share, in line with forecasts, as revenues rose 4.9% y/y to $14.9 billion, versus the estimated $14.7 billion. UPS reaffirmed its full-year EPS guidance. Shares closed to the downside.

Twitter Inc. (TWTR $17) reported 3Q earnings of $0.13 per share, topping the estimated $0.09, as revenues grew 8.0% y/y to $616 million, exceeding the projected $604 million. The social media company's total monthly active users came in slightly above expectations. TWTR issued stronger-than-expected full-year operating earnings guidance, while confirming the restructuring of 9.0% of its global workforce. Shares finished higher.

Bristol-Myers Squibb Co. (BMY $52) posted 3Q EPS ex-items of $0.77, above the forecasted $0.65, as revenues rose 21.0% y/y to $4.9 billion, north of the expected $4.8 billion. BMY raised its full-year profit outlook and announced a new $3.0 billion share repurchase program. Shares traded nicely higher. For analysis of the healthcare cost environment, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Vertigo: Effect of Spiking Healthcare Costs on Consumers, at and follow Liz Ann on Twitter: @lizannsonders.

Qualcomm Inc. (QCOM $70) announced an agreement to acquire NXP Semiconductors NV (NXPI $99) for $110.00 per share in cash, representing a total enterprise value of about $47.0 billion. Shares of both companies were higher.

Durable goods orders mixed, jobless claims dip

September preliminary durable goods orders (chart) dipped 0.1% month-over-month (m/m), compared to Bloomberg's estimate of a flat reading and August's upwardly revised 0.3% gain. Ex-transportation, orders rose 0.2% m/m, matching forecasts, and August's favorably revised 0.1% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 1.2%, versus projections of a 0.1% dip, and following the upwardly revised 1.2% rise in the month prior.

Weekly initial jobless claims (chart) declined by 3,000 to 258,000 last week, compared to forecasts of a decrease to 256,000, as the prior week's figure was upwardly revised by 1,000 to 261,000. The four-week moving average rose by 1,000 to 253,000, while continuing claims dropped 15,000 to 2,039,000, south of the estimated level of 2,052,000.

Pending home sales rose 1.5% m/m in September, versus projections of a 1.0% gain and following the downwardly revised 2.5% drop registered in August. Compared to last year, sales were 2.0% higher, versus forecasts of a 4.0% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose in September to the highest level since June

The Kansas City Fed Manufacturing Activity Index for October remained at September's 6 level, compared to forecasts of a decline to 3, with a reading north of zero depicting expansion.

Treasuries dropped with the yield on the 2-year note rising 1 bp to 0.88%, the yield on the 10-year note gaining 5 bps to 1.84%, and the 30-year bond rate advancing 6 bps to 2.60%. Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her article, Are Bond Yields About to Rise?, the shift to higher yields is likely to be slow, in our view, but markets don’t appear to be prepared for the change. We suggest investors prepare for a potential rise in bond yields by trimming exposure to bonds with either long durations or high credit risk. Read more at and follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will bring the first read (of three) on 3Q GDP, projected to show growth accelerated to an annualized quarter-over-quarter pace of 2.6%, after expanding by 1.4% in 2Q. Personal consumption is anticipated to have decelerated a bit to a 2.6% growth rate after 2Q's 4.3% jump. Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA informs us in his latest Schwab Sector Views: The Most Wonderful Time of the Year…Already?, that according to the U.S. Bureau of Economic Analysis, consumer spending makes up about 70% of U.S. economic activity—meaning not only is the holiday shopping season hanging on the status of the consumer, but to a large extent, so is the health of the U.S. economy. Read the whole article, as well as Brad's view on all 11 sectors at and follow Schwab on Twitter: @schwabresearch.

Additional reports on tap for tomorrow will include the 3Q Employment Cost Index, expected to show a 0.6% increase, matching the prior quarter's rise and the final University of Michigan Consumer Sentiment Index for October, expected to be revised modestly higher to 88.2 from the preliminary read of 87.9, but down from September's 91.2 level.

The markets continue to grapple with U.S. political uncertainty as the November election looms, and Schwab's Vice President of 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, where you can also find timely analysis of The Stock Market and Election Cycles. Be sure to follow Schwab on Twitter: @schwabresearch.

Europe shows some resiliency, Asia mixed

European equities battled back from early losses that stemmed from some disappointing earnings reports, while oil & gas issues led to the upside with crude oil prices recovering from a recent sell-off and financials also found support. A preliminary read on U.K. 3Q GDP showed growth unexpectedly accelerated to a 2.3% y/y pace, from the 2.1% expansion posted in 2Q, where economists had expected it to remain. Also, q/q, U.K. growth came in at 0.5%, from 0.7% in 2Q, but above the expected 0.3% increase. The report was delivered by the Office for National Statistics, which noted that there was "little evidence of a pronounced effect" from the late-June vote in the U.K. to exit the European Union, known as a Brexit, adding credence to the article by Schwab's Director of International Research, Michelle Gibley, CFA, Keep Calm and Carry On: The Brexit Shock That Wasn't at Both the euro and the British pound declined versus the U.S. dollar, while bond yields in the region gained ground. The global markets continued to grapple with political and monetary policy uncertainty, while Sweden's central bank kept its benchmark interest rate unchanged at a negative rate.

Stocks in Asia finished mixed with the continued drop in crude oil prices on Wednesday pressuring the energy sector, while the global markets remain focused on earnings season. For analysis of earnings and the stock markets, Schwab's Jeffrey Kleintop, CFA, offers an outlook for the stock markets and earnings growth his latest article, Three Reasons Stocks May Avoid Another Lost Decade, at Japanese equities declined despite some weakness in the yen, as traders grapple with the Bank of Japan's recent shift in monetary policy to targeting the yield curve. Stocks trading in mainland China and Hong Kong were mostly lower with oil & gas issues seeing pressure and a report showing growth in the nation's industrial profits decelerated solidly in September. Australian securities were led lower by weakness in basic materials and oil & gas issues. Indian equities rebounded from yesterday's decline that came on concerns about loan-loss provisions in the banking sector. Stocks in South Korea rose.

Tomorrow, the international economic docket will yield household spending and CPI from Japan and new home sales and PPI from Australia. Releases from across the pond will include advance 3Q GDP, PPI, CPI and consumer spending from France, CPI from Germany and consumer confidence for the Eurozone.

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