Stocks Mixed on a Sundry of News

Charles Schwab: On the Market

Posted: 12/4/2016 4:15 PM ET

Stocks Mixed on a Sundry of News

The Dow tacked on to its record ride, with financials continuing their rally on the run in Treasury yields, following some upbeat U.S. manufacturing reports, and with the surge in crude oil prices benefitting the energy sector. However, technology stocks weighed on the Nasdaq, and the broader S&P 500 Index lost ground, as the fading post-U.S. election rally yielded to flared-up Eurozone political uncertainty. On the equity front, Ford and General Motors rallied on their November sales, while Dollar General fell on its disappointing earnings report. The U.S dollar and gold were lower.

The Dow Jones Industrial Average (DJIA) rose 68 points (0.4%) to 19,192, the S&P 500 Index lost 8 points (0.4%) to 2,191 and the Nasdaq Composite tumbled 73 points (1.4%) to 5,251. In heavy volume, 1.1 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.62 to $51.06 per barrel and wholesale gasoline gained $0.07 to $1.55 per gallon. Elsewhere, the Bloomberg gold spot price fell $2.72 to $1,170.48 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.5% to 101.04.

Dollar General Corp. (DG $74) reported 3Q earnings-per-share (EPS) ex-items of $0.89, below the $0.93 FactSet estimate, as revenues rose 5.0% year-over-year (y/y) to $5.3 billion, compared to the projected $5.4 billion. 3Q same-store sales dipped 0.1% y/y, versus the expected 0.6% gain. The discount retailer said the challenging retail environment experienced in 2Q continued into 3Q. DG said it forecasts full-year earnings growth to be at the low end of its long-term range. Shares were solidly lower.

Guess Inc. (GES $14) posted 3Q EPS of $0.11, south of the estimated $0.14, as revenues increased 2.9% y/y to $536 million, below the forecasted $549 million. The clothing company issued softer-than-expected 4Q profit guidance, while lowering its full-year outlook, due to lower-than-expected results in its Americas retail segment during 3Q and based on 4Q results thus far. GES fell sharply.

Parker-Hannifin Corp. (PH $144) announced an agreement to acquire filtration company Clarcor Inc. (CLC $82) for $83.00 per share in cash, in a transaction totaling about $4.3 billion, including the assumption of debt. PH was nicely higher and CLC rallied over 15%.

PVH Corp. (PVH $108) announced 3Q profits ex-items of $2.60 per share, above the projected $2.40, as revenues grew 4.0% y/y to $2.2 billion, roughly in line with forecasts. The parent of Tommy Hilfiger and Calvin Klein raised its full-year EPS outlook and reaffirmed its revenue forecast. Shares gained ground.

The major automakers reported U.S. November sales today, with General Motors Co's (GM $37) sales rising 10.2% y/y, compared to the projected 9.5% increase. Fiat Chrysler Automobiles NV's (FCAU $8) Chrysler brand's sales dropped 14.3% y/y, compared to the expected 4.6% decline. Ford Motor Co(F $13) reported a 5.2% gain in sales, well above the expected 0.6% increase. GM and F rallied, while FCAU saw only a modest gain.

Manufacturing activity shows growth accelerated more than expected

The Institute for Supply Management (ISM) Manufacturing Index (chart) for November moved further into expansion territory (above 50) than projected after rising to 53.2 from October's 51.9 level, and compared to the Bloomberg forecast of a modest rise to 52.5. Growth in new orders, production and inventories all accelerated, while expansion in employment decelerated. The ISM said comments from the survey cited increasing demand, some tightness in the labor market and plans to reduce inventory by the end of the year.

The final Markit U.S. Manufacturing PMI Index was revised higher to 54.1 for November from the 53.9 preliminary level, where it was expected to remain. The index is up from the 53.4 level posted in October. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Manufacturing activity as of late has shown signs of accelerating growth, and Schwab's Chief Investment Strategist Liz Ann Sonders points out in her article, Emotional Rescue: What to make of the post-election surge?, that recent economic releases have also provided support for the post-election rally, suggesting that some of the lift in the economy was already happening, and isn't just a hope for next year under a Trump administration. Reflecting the better economic data and higher inflation, the Federal Open Market Committee (FOMC) is likely to raise rates at its December meeting. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

For a look at the markets amid elevated Fed rate hike expectations, see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Fixed Income Strategist, Kathy Jones, titled How Will Expected December Interest Rate Hike Affect Markets in 2017? at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Weekly initial jobless claims (chart) jumped by 17,000 to 268,000 last week, above forecasts calling for a slight increase to 253,000, as the prior week figure was unrevised at 251,000. The four-week moving average ticked higher by 500 to 251,500, while continuing claims rose by 38,000 to 2,081,000, north of the estimated level of 2,033,000.

Construction spending (chart) rose 0.5% month-over-month (m/m) in October, versus projections of a 0.6% advance, and following September's favorably revised flat reading. Residential spending was 1.8% higher, while non-residential spending dipped 0.3%.

Treasuries finished lower, as the yield on the 2-year note rose 2 basis points (bps) to 1.14%, the yield on the 10-year note gained 6 bps to 2.45%, and the 30-year bond rate jumped 7 bps to 3.10%. With bond yields continuing a post-election rally, bolstered by elevated December Fed rate hike expectations Kathy Jones offers her article, Change Is in the Air: A Post-Election Look at Bonds at www.schwab.com/onbonds, where you can also find Schwab's Director of Income Planning, Rob Williams' article, Can Bond Funds Make Sense When Interest Rates Rise?. Follow Schwab on Twitter: @schwabresearch.

Tomorrow, the heavy week of key economic data will culminate with the release of the November nonfarm payroll report, expected to show 180,000 jobs were added to payrolls, following October's 161,000 gain. Private sector job growth is estimated to grow by 170,000 after the prior month's 142,000 gain. The unemployment rate is forecasted to remain at 4.9%. Average hourly earnings are expected to rise 0.2% m/m following October's 0.4% increase. The report is the last broad look at the employment front before the December 14 FOMC monetary policy decision, with expectations running near 100% that there will be a rate hike. With job growth remaining steady, the wage component of the release will likely garner attention as the markets shift away from trying to determine if there will be a rate hike this month to forecasting the path of future rate increases.

As noted in the latest Schwab Market Perspective: Is the Fog Starting to Lift?, "full" employment is at least in sight, housing is recovering, economic growth has improved and inflation is heating up. A December rate hike may remove some uncertainty, but questions will remain as to the path and frequency of rate hikes in 2017 and beyond. We continue to believe the Fed will be able to go slow in normalizing rates, as they have stated they want to do, but signs of rising inflation could force its hand. Read more at www.schwab.com/marketinsight.

Europe mostly lower despite oil strength and data, Asia sees gains

European equities finished mostly lower as the global technology sector is pulling back from a post U.S.-election rally, despite strength in oil & gas issues on crude oil's surge in the wake of yesterday's surprising production cut agreement at yesterday's OPEC meeting. Political uncertainty flared back up ahead of this weekend's key Italian referendum as discussed by Schwab's Director of International Research, Michelle Gibley, CFA, in her latest article, Europe Votes: Could More Countries Reject the EU?. Michelle notes that the near-term risks to European stocks are heightened by the uncertainty posed by these votes. However, the resulting political uncertainty isn't sufficient reason to abandon global diversification. We believe having a diversified portfolio can set you up to participate if and when the trends switch. Read more at www.schwab.com/oninternational. The British pound rallied versus the U.S. dollar, amid eased hard Brexit concerns as U.K. Brexit Secretary Davis said the nation would consider making contributions to the EU in order to secure the best possible access to the single market. The markets shrugged off an upbeat read on eurozone manufacturing activity for November, which showed output from the sector accelerated m/m, along with an unexpected dip in the eurozone unemployment rate for October. However, reports showing growth in Italian manufacturing output accelerated more than expected and a slightly stronger-than-estimated rebound in y/y 3Q GDP may have helped Italian stocks extend to a three-day winning streak and buck the trend in the region.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Happy Unrecession: The Alice in Wonderland economy, noting that in our view, the modest gain in the stock market this year is not as misguided or illogical as it may at first seem. He adds that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. Read more at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop. The euro rose versus the U.S. dollar, and bond yields in the region mostly gained ground.

Stocks in Asia finished mostly to the upside, with the energy sector getting a boost from the surge in crude oil prices on yesterday's surprising production cut by OPEC. Also, some favorable Chinese manufacturing reports added to the recent string of upbeat U.S. data to likely bolster global economic optimism. Japanese equities gained ground, as some weakness in the yen joined the OPEC-deal boost, overshadowing a larger-than-expected drop in the nation's 3Q capital spending. China's official Manufacturing PMI unexpectedly improved to 51.7 in November, from 51.2 in October, and compared to the expected decline to 51.0. A reading above 50 denotes expansion. The Chinese government's key non-Manufacturing PMI also showed growth accelerated last month, giving stocks in mainland China and Hong Kong a boost. Schwab's Jeffrey Kleintop, CFA, offers analysis of the global economic landscape in his article, Recession Odds Pass Key Threshold, at www.schwab.com/oninternational. Meanwhile, shares in Australia jumped, as a surge in oil & gas issues was accompanied by a solid gain in basis materials stocks, South Korean securities finished flat following mixed reads on the nation's consumer price inflation and trade activity, and Indian listings declined amid some weakness in telecommunications stocks and following late-yesterday's softer-than-expected 3Q GDP growth.

Items on tomorrow’s international economic calendar include: trade data and GDP from South Korea, employment figures from Spain, construction activity from the U.K., and PPI from the Eurozone.