Stocks Shave Morning Losses

Charles Schwab: On the Market

Posted: 10/20/2016 4:15 PM ET

Stocks Shave Morning Losses

U.S. stocks closed just below the flatline, paring early losses that stemmed from a pullback in crude oil prices, which gave back nearly all of yesterday's gains. Also, traders weighed a jump in jobless claims, stronger-than-expected domestic new home sales data, some lackluster earnings reports and last night's final Presidential debate. Treasuries were mixed, the U.S. dollar gained ground and gold was lower.

The Dow Jones Industrial Average (DJIA) lost 40 points (0.2%) to 18,162, the S&P 500 Index shed 3 points (0.1%) to 2,141 and the Nasdaq Composite ticked 5 points (0.1%) lower to 5,242. In moderate volume, 776 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil decreased $1.19 to $50.63 per barrel, wholesale gasoline declined $0.02 to $1.49 per gallon and the Bloomberg gold spot price dipped $2.95 to $1,266.28 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 98.32.

Dow member American Express Co. (AXP $67) reported 3Q earnings-per-share (EPS) ex-items of $1.24, above the $0.97 FactSet estimate, as revenues declined 5.0% year-over-year (y/y) to $7.8 billion, north of the projected $7.7 billion. AXP raised its full-year profit outlook and reiterated its 2017 EPS guidance that was above expectations, and shares rallied.

Dow component Verizon Communications Inc. (VZ $49) posted 3Q profits ex-items of $1.01 per share, above the estimated $0.99, with revenues decreasing 6.7% y/y to $30.9 billion, below the projected $31.1 billion. VZ said it expects 2016 adjusted earnings to be at a level comparable to 2015. Shares were solidly lower.

Dow member Travelers Companies Inc. (TRV $1101) announced 3Q EPS ex-items of $2.40, exceeding the forecasted $2.38, as net written premiums rose 3.0% y/y to $6.4 billion, roughly in line with expectations. Shares saw solid pressure as the company's core loss ratio, a closely watched industry metric measuring the amount it is paying out in claims and expenses compared to premiums received, came in above expectations to cause some concern among analysts.

Walgreens Boots Alliance Inc. (WBA $81) reported fiscal 4Q earnings ex-items of $1.07 per share, above the expected $0.99, as revenues increased 0.4% y/y to $28.6 billion, compared to the forecasted $29.1 billion. WBA issued full-year EPS guidance that was roughly in line with estimates. Shares finished nicely higher.

eBay Inc. (EBAY $29) posted 3Q EPS ex-items of $0.45, one penny above forecasts, as revenues rose 6.0% y/y to $2.2 billion, mostly in line with estimates. EBAY issued 4Q guidance that was a bit shy of forecasts, while reaffirming its full-year EPS outlook and raising its revenue projection slightly. Shares fell sharply.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers an outlook for growth in earnings and the stock markets his latest article, Three Reasons Stocks May Avoid Another Lost Decade, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Existing home sales top forecasts, jobless claims jump

Existing-home sales in September increased 3.2% month-over-month (m/m) to a 5.47 million annual rate—the highest since June—compared to the Bloomberg forecast of a 5.35 million pace. August's figure was downwardly revised to a 5.30 million annual rate. Compared to last year, sales were 0.6% higher. The median existing-home price was up 5.6% y/y at $234,200. Housing supply came in at a 4.5-month pace at the current sales rate. All major regions saw an increase and distressed sales fell to a new low. National Association of Realtors (NAR) Chief Economist Lawrence Yun said the two-month slump in existing sales, which was impacted by competition for the minimal amount of homes for sale, reversed course convincingly in September. Yun added that there is hope the leap in sales to first-time buyers can stick through the rest of the year and into next spring.

As noted in the recent Schwab Market Perspective: Spinning Our Wheels, although we've seen some soft housing data lately, we continue to believe that a strong job market, low interest rates, and increasing in household formations will bolster the housing market and increase the already solid level of consumer confidence. For analysis of investing in real estate, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article Real Estate Sector: Marketperform. Read both articles at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Weekly initial jobless claims (chart) rose 13,000 to 260,000 last week, compared to forecasts of a rise to 250,000, as the prior week figure was upwardly revised by 1,000 to 247,000. The four-week moving average rose by 2,250 to 251,750, while continuing claims increased 7,000 to 2,057,000, north of the estimated level of 2,053,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) increased 0.2% m/m in September, matching projections, and compared to the prior month's 0.2% decline. Support came from the components pertaining to building permits, the yield curve, and jobless claims, while the index was bogged down by average workweek and stock prices.

The Philly Fed Manufacturing Index (chart) in October dipped but remained at a level depicting expansion (a reading above zero) after declining to 9.7 from 12.8 in September, compared to estimates of a decrease to 5.0.

Treasuries were mixed, with the yield on the 2-year note rising 2 basis points (bps) to 0.82%, the yield on the 10-year note ticking 1 bp higher to 1.75%, and the 30-year bond rate dipping 1 bp to 2.49%. 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 be void of any major releases, but will heat back up next week with more housing data with looks at the new and pending home sales reports. Other releases of note will include a preliminary read on services sector activity for October from Markit and durable goods orders for September.

The markets continue to grapple with the uncertain U.S. political landscape as the November election looms and following last night's third and final Presidential debate. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Where Do the Candidates Stand? Key Issues for Investors, 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. Also, for a look at the election and the potential impact on sectors, see Schwab's Brad Sorensen's, CFA, latest Schwab Sector Views: Election Special at www.schwab.com/marketinsight.

Europe overcomes early weakness, Asia ticks higher

European equities overcame early weakness and finished mostly higher, with the markets reacting to the unchanged monetary policy decision from the European Central Bank (ECB). Stocks found support as the customary press conference by ECB President Mario Draghi appeared to ease recently flared-up tapering concerns. Draghi noted that he thinks an abrupt ending to bond purchases is unlikely, while adding that a sudden stop is not present in anybody's mind, per Bloomberg. He also said the Governing Council did not discuss prolonging or tapering at this meeting and suggested it could be decided on at its December meeting when fresh economic projections are delivered. The euro reversed lower and the British pound lost ground versus the U.S. dollar, while bond yields in the region finished mostly lower.

Also, last night's final U.S. Presidential debate garnered attention, while financials received a boost from Draghi's comments, continuing to rebound on the heels of recent upbeat earnings from the group in the U.S. and a reprieve from elevated concerns toward the European banking sector. For analysis of the potential impacts of flare-up in the European banking sector uneasiness, see Schwab's Fixed Income Director Collin Martin's, CFA, article titled, European Bank Stress: What Does It Mean for the Preferred Securities Market? at www.schwab.com/marketinsight. Earnings season ramped up and results were mixed, with Nestle SA(NSRGY $75) posting softer-than-expected sales, while Deutsche Lufthansa AG(DLAKY $12) rallied after the airline raised its profit outlook. In other economic news, U.K. retail sales unexpectedly came in flat in September, missing forecasts of a modest gain. Schwab's 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.

Stocks in Asia finished mostly higher, with yesterday's rally in crude oil prices on some bullish U.S. government oil inventory data supporting the energy sector, while the yen gave back some of a recent advance and the global markets digested the third and final U.S. Presidential debate. The markets may have treaded with some caution ahead of today's monetary policy decision in Europe. Japanese equities advanced on the weakness in the yen, while mainland Chinese stocks finished flat and those traded in Hong Kong rose slightly. China's muted moves come on the heels of yesterday's plethora of economic data that flashed mixed signals as 3Q GDP grew 6.7% y/y to match expectations and ease concerns about a slowing of the world's second-largest economy, though a separate report showed September industrial production missed forecasts. 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)at www.schwab.com/oninternational.

South Korean stocks finished little changed and Indian securities gained ground, after yesterday's modest decline. Australian equities ticked higher, with an unexpected decline in the nation's September employment change likely keeping gains in check.

The international economic calendar for tomorrow will be light, yielding property prices from China and public sector net borrowing from the U.K.