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Friday, November 04, 2016

Mild Morning Gains Fade by Friday Afternoon

Charles Schwab: On the Market
Posted: 11/4/2016 4:15 PM ET

Mild Morning Gains Fade by Friday Afternoon

U.S. stocks finished lower, though a steady October nonfarm payroll report that was highlighted by stronger-than-expected wage growth stirred a modest early advance. The morning gains for stocks faded as December Fed rate hike expectations remain elevated and political uncertainty continues to linger ahead of next week's Presidential election. Treasuries advanced, crude oil prices and the U.S. dollar were lower and gold was mildly higher.

The Dow Jones Industrial Average (DJIA) declined 42 points (0.2%) to 17,888, the S&P 500 Index decreased 3 points (0.2%) to 2,085 and the Nasdaq Composite lost 12 points (0.2%) to 5,046. In moderately-heavy volume, 899 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil declined by $0.59 to $44.07 per barrel, wholesale gasoline lost $0.04 to $1.38 per gallon and the Bloomberg gold spot price moved $2.31 higher to $1,305.12 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 96.95. Markets were lower for the week, as the DJIA lost 1.5%, the S&P 500 Index decreased 1.9% and the Nasdaq Composite was 2.8% lower.

Starbucks Corp. (SBUX $53) reported fiscal 4Q earnings-per-share (EPS) of $0.56, one penny above the FactSet estimate, as revenues grew 16.0% year-over-year (y/y) to $5.7 billion, roughly in line with forecasts. 4Q same-store sales rose 4.0% y/y, below the expected 4.9% increase. SBUX issued full-year EPS guidance that came in below estimates. Separately, the coffee chain raised its quarterly dividend by 25.0% to $0.25 per share. Shares finished solidly higher.

Activision Blizzard Inc. (ATVI $42) posted 3Q EPS ex-items of $0.52, north of the expected $0.42, with revenues rising 58.4% y/y to $1.6 billion, matching expectations. ATVI issued 4Q guidance that missed forecasts, while raising its full-year outlook. Shares were solidly lower.

Kraft Heinz Co. (KHC $84) announced 3Q earnings ex-items of $0.83 per share, versus the expected $0.74, as revenues rose 2.4% y/y to $6.3 billion, due to the merger of Kraft and Heinz, roughly in line with forecasts. KHC traded lower.

CBS Corp. (CBS $57) reported 3Q EPS of $1.05, north of the projected $0.98, with revenues increasing 4.0% y/y to $3.4 billion, above the estimated $3.3 billion. Shares moved nicely higher.

Shares of Whole Foods Market Inc. (WFM $29) reversed solidly to the upside following a Bloomberg report, citing people familiar with the matter, that the company's largest shareholder has met with potential activist investors to discuss making sweeping changes to the upscale grocer, including replacing management and exploring a sale of the company. Per the report, a Whole Foods spokeswoman responded that it values the strong and open relationships it has with its shareholders, and as discussed on yesterday's earnings call, "we are focused on pursuing the right strategies to position the company to produce strong results and returns for our shareholders over the long term."

October job growth steady and wage gains top estimates

Nonfarm payrolls (chart) rose by 161,000 jobs month-over-month (m/m) in October, versus the Bloomberg forecast of a 173,000 increase. September's gain was upwardly revised to 191,000 jobs. The total upward revision to job gains in August and September was 44,000. Private sector payrolls increased by 142,000, versus the forecasted 170,000 rise, after increasing by an upwardly revised 188,000 in September. The Labor Department noted that employment continued to trend up in healthcare, professional and business services, and financial activities, while adding that Hurricane Matthew affected parts of the East Coast during the month.

The unemployment rate dipped to 4.9% from 5.0%, in line with estimates, while average hourly earnings grew by 0.4% m/m, topping projections of a 0.3% increase, and September's upwardly adjusted 0.3% gain. Wages are up 2.8% y/y/, the largest gain since June 2009. The labor force participation rate dipped to 62.8% from 62.9%, but was up from the 62.5% rate a year ago. Finally, average weekly hours remained at September's unrevised 34.4 hours level, matching forecasts.

The report preserved elevated December Fed rate hike expectations, while the stronger-than-expected wage growth figures are likely fostering optimism that the consumer, which makes up the lion's share of U.S. economic output, could be poised to support the impact of a rate increase from an abnormally low level. As noted in the recent Schwab Market Perspective: Looking Past the Election, economic data continues to support a sluggish growth narrative, although there are glimmers of hope that we could see at least a modest acceleration in 2017. The U.S. consumer appears to be gaining some confidence and wage growth has already shown signs of picking up as the economy approaches full employment. We believe, after several false starts, the Fed will actually follow through on a rate hike this time around. Perhaps equally as important will be the message the Fed sends regarding what it may be looking to do into 2017. Read more at www.schwab.com/marketinsight.

The trade balance (chart) showed that the deficit came in at $36.4 billion in September, compared to the $38.0 billion estimate. August's deficit was revised to $40.5 billion from the $40.7 billion posted earlier. Exports rose 0.6% m/m to $189.2 billion, while imports fell 1.3% to $225.6 billion.

Treasuries were higher, with the yield on the 2-year note declining 2 basis points (bps) to 0.78%, while the yields on the 10-year note and the 30-year bond fell 4 bps to 1.77% and 2.56%, respectively. Bond yields remain choppy in the wake of a recent rally that has come courtesy of some upbeat economic data that has bolstered the case for a December rate hike, which was also preserved with Wednesday's unchanged monetary policy decision from the Federal Open Market Committee (FOMC). Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis of the FOMC's decision in her article, The Fed Plays It Safe, December Hike Likely, at www.schwab.com/insights, while also offering her article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds. Follow Kathy on Twitter: @kathyjones.

Europe and Asia lower as U.S. political uncertainty festers

European equities finished broadly lower, with the markets digesting the stable U.S. October labor report, while political uncertainty in the nation remained elevated with polls indicating a tight race ahead of next week's election. Financials saw pressure amid some lackluster earnings reports out of the sector. The British pound extended yesterday's rally versus the U.S. dollar that came amid eased "hard" Brexit concerns after a court ruled that the U.K. government would have to request parliamentary approval to trigger Article 50 and start official negotiations with the European Union (EU) regarding its vote to leave the EU, known as a Brexit. For more analysis of the Brexit fallout, Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article, Keep Calm and Carry On: The Brexit Shock That Wasn't. In economic news, the final Markit Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised lower to 53.3 in October, from the 53.7 preliminary report, where it was expected to remain, and up versus the 52.6 level recorded in September. The euro ticked higher versus the greenback, while bond yields in the region were mixed. 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. Read these articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished lower, with the looming U.S. Presidential election continuing to stymie global conviction and foster caution, while the extended selloff in crude oil prices remained a drag on the energy sector. Japanese equities fell, returning to action after yesterday's holiday break, with the yen continuing to strengthen on risk aversion bolstered by the heightened U.S. political risk. Australian securities dropped, with heavyweight financial, basic materials and oil & gas sectors all seeing pressure. Stocks trading in mainland China and Hong Kong dipped, reversing early gains amid the political uneasiness and some disappointing earnings reports weighing on sentiment. Indian equities traded lower with drugmakers falling on persistent uneasiness regarding to impact of the election on the U.S. healthcare sector, which overshadowed strength in consumer-related companies on continued optimism over the nation's recent tax reform measures. South Korean stocks ticked to the downside.

Amid the continued global market volatility, Schwab's Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think at www.schwab.com/oninternational.

Stocks fall as U.S. election nears

The equity markets fell solidly on the week, with an apparent tightening of the U.S. Presidential race bolstering political uncertainty and stymieing global conviction, with the healthcare sector continuing to get crushed. Crude oil prices extended a tumble to pressure the energy sector. Upbeat economic reads on personal spending and manufacturing activity, culminating with Friday's October labor report, along with the Federal Open Market Committee's (FOMC) monetary policy statement, preserved December rate hike forecasts. The real estate sector led a broad-based decline. The U.S. dollar slipped and Treasury yields modestly gave back some of a recent rally. Earnings season turned the corner to home stretch, and results were mixed, with Facebook Inc. (FB $121) disappointing with its warning of a meaningful revenue growth deceleration, while Electronic Arts Inc. (EA $81) topped profit projections and issued upbeat full-year earnings guidance. Thus far, of the 422 companies in the S&P 500 that have reported results, about 56.0% have exceeded sales expectations and approximately 76.0% have bested earnings estimates.

Next week, the NFIB Small Business Optimism Index, JOLTS Job Openings and the preliminary University of Michigan's Consumer Sentiment Index will headline a light U.S. economic docket, while earnings season downshifts. However, the political front will garner the most attention and volatility is set to remain as the results from Tuesday's Presidential election, including how the House and Senate races play out, are digested and scrutinized by the markets.

As noted in the Schwab Market Perspective, given the polling numbers and betting markets, the stock market appears to be expecting a Clinton win and continued gridlock, with at least the House remaining in Republican hands. If the results are quite different than expectations, market volatility could surge, but we suggest investors hold tight. Much as we saw following the Brexit vote, reacting in a kneejerk fashion can be detrimental to longer term performance. Read more at www.schwab.com/marketinsight. For more analysis on the election, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Election Night: How to Watch the Returns, 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.

International report due out next week that deserve a mention include: Australia—consumer confidence. China—trade balance, CPI and PPI, and lending statistics. Japan—machine orders. Eurozone—retail sales. U.K.—industrial and manufacturing production, and trade balance.

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