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Thursday, April 20, 2017

Stocks Rise amid Earnings and Tax Reform Hopes

Charles Schwab: On the Market
Posted: 4/20/2017 4:15 PM ET

Stocks Rise amid Earnings and Tax Reform Hopes

U.S. stocks gained solid ground amid a plethora of mostly upbeat earnings reports and comments from the Treasury Secretary that tax reform is still a top priority for the Trump administration, which plans to release its proposal soon. Treasury yields extended a recovery to aid sentiment and financial stocks, while crude oil prices remained sluggish. Gold ticked slightly higher and the U.S. dollar was nearly unchanged. In economic news, leading indicators topped forecasts, but jobless claims rose more than expected.

The Dow Jones Industrial Average (DJIA) advanced 174 points (0.9%) to 20,579, the S&P 500 Index increased 18 points (0.8%) to 2,356, and the Nasdaq Composite increased 54 points (0.9%) to 5,917. In moderate volume, 866 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.14 to $50.71 per barrel and wholesale gasoline was $0.01 higher at $1.67 per gallon. Elsewhere, the Bloomberg gold spot price increased $0.97 to $1,280.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 99.82.

Dow member Verizon Communications Inc. (VZ $48) reported 1Q earnings-per-share (EPS) of $0.84, or $0.95 ex-items, below the $0.96 FactSet estimate, as revenues decreased 7.3% year-over-year (y/y) to $29.8 billion, south of the projected $30.4 billion. VZ reaffirmed its full-year guidance. Shares traded lower.

Dow component Travelers Companies Inc. (TRV $119) posted 1Q profits of $2.17 per share, or $2.16 ex-items, versus the forecasted $2.37, as net premiums written rose 5.0% y/y to $6.5 billion, above the estimated $6.3 billion. TRV raised its quarterly dividend 7.5% to $0.72 per share, while authorizing an additional $5.0 billion in share repurchases. Shares saw pressure.

Dow member American Express Co. (AXP $80) announced 1Q EPS of $1.34, above the expected $1.28, with revenues declining 2.0% y/y to $7.9 billion, compared to the forecasted $7.8 billion. AXP reaffirmed its full-year outlook and shares were nicely higher.

eBay Inc. (EBAY $33) reported 1Q earnings of $0.94 per share, or $0.49 ex-items, versus the estimated $0.48, as revenues rose 4.0% y/y to $2.2 billion, roughly in line with expectations. EBAY issued 2Q guidance that missed forecasts, while it reaffirmed its full-year outlook. Shares finished lower.

Qualcomm Inc. (QCOM $52) posted fiscal 2Q EPS of $0.50, or $1.34 ex-items, versus the projected $1.19, as revenues increased 8.0% y/y to $6.0 billion, above the forecasted $5.9 billion. QCOM issued 3Q guidance with midpoints slightly below the Street's estimates. Shares closed modestly lower.

CSX Corp. (CSX $50) announced 1Q profits of $0.39 per share, or $0.51 ex-items, compared to the projected $0.43, with revenues rising 10.0% y/y to $2.9 billion, above the estimated $2.8 billion. Separately, the first major rail company to report earnings reported stronger-than-expected full-year EPS guidance, an 11.0% increase in its quarterly dividend to $0.20 per share, and a new $1.0 billion share repurchase program. CSX rallied.

Foot Locker Inc. (FL $77) rallied after the company noted that although 1Q was challenging, March sales rebounded well and it is now having a strong Easter selling period, with April same-store sales likely up low double digits. The upbeat commentary overshadowed its preannounced 1Q EPS results that missed forecasts.

Jobless claims rise, leading indicators top forecasts

Weekly initial jobless claims (chart) rose by 10,000 to 244,000 last week, above the Bloomberg forecast of 240,000, with the prior week’s figure being unrevised at 234,000. The four-week moving average dropped by 4,250 to 243,000, while continuing claims fell by 49,000 to 1,979,000, south of estimates of 2,024,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for March rose 0.4% month-over-month (m/m), above projections of a 0.2% increase. Support came from the components pertaining to the yield curve, ISM new orders, building permits, stock prices, and consumer expectations, while jobless claims and average workweek weighed on the index.

The Philly Fed Manufacturing Index (chart) in April declined but remained solidly at a level depicting expansion (a reading above zero) after declining to 22.0 from 32.8 in March, and compared to estimates of a decline to 25.5.

Treasuries were lower, with the yields on the 2-year note and the 30-year bond gaining 2 basis points (bps) to 1.19% and 2.89%, respectively, while the yield on the 10-year note increased 3 bps to 2.24%.

Bond yields and the U.S. dollar have been under pressure as of late amid heightened geopolitical and political risks, comments about a strong dollar from President Donald Trump, and as "hard" economic data has continued to lag the "soft" data (confidence/survey-based), notably some cooler-than-expected inflation figures.

For a look at the moves in the bond markets despite Fed rate hikes and expectations of the Central Bank normalizing its balance sheet, see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Senior Fixed Income Research Analyst, Collin Martin's, CFA, video What's Driving the Ongoing Drop in Long-Term Bond Yields? on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

Also, for analysis of the economic data divergence and elevated geopolitical concerns, see our latest article, Data Divide: Are People Too Enthusiastic About the Economy? on the Insights & Ideas page at www.schwab.com, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com. Follow Schwab and Jeff on Twitter: @schwabresearch and @jeffreykleintop.

Tomorrow, the U.S. economic calendar will culminate for the week with releases expected to include the preliminary Markit Manufacturing PMI Index for April, with economists forecasting a slight uptick to 53.8 (a reading above 50 indicates expansion in activity) from the 53.3 registered for March's final read. The March existing home sales report will round out the day, with expectations of a 2.2% month-over-month (m/m) rise to an annualized rate of 5.6 million units.

Europe gains ground and Asia mostly higher

European equities finished mostly higher, as the markets sifted through mostly positive earnings reports on both sides of the pond. Also, bond yields in the region continued to show some signs of a reprieve in the recent pressure which appeared to underpin sentiment. However, oil & gas issues modestly extended weakness on the recent softness in crude oil prices. The markets showed some resiliency amid remaining political uncertainty as the U.K. heads for an election in June, while Brexit negotiations have begun, France is expected hold the first round of its key Presidential election this weekend, and a German election later this year looms. For more on the political front in the region, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? on the Insights & Ideas page at www.schwab.com. Also, check out our article, Brexit Begins: What's Next for the U.K.?, on the Insights & Ideas page at www.schwab.com, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. In economic news, eurozone construction output rose solidly in February. The euro and British pound were higher versus the U.S. dollar.

Stocks in Asia finished mostly higher, showing some resiliency in the face of the recent weakness in crude oil prices and festering geopolitical and political uncertainty as a key French election looms and the U.K. approved a surprising snap election for June. The markets digested the mostly upbeat earnings reports in the U.S., while the yen held onto yesterday's rebound and Japan posted stronger-than-expected trade figures that added to recent upbeat Chinese economic data. Equities trading in Japan and mainland China finished flat, while shares in Hong Kong, South Korea, Australia and India gained ground. For analysis of the global landscape, see Jeffrey Kleintop's, CFA, article, Top Five Trade Issues Investors Should Be Watching. Get both these articles on the International Investing page at www.schwab.com.

The international economic docket for tomorrow will yield the Nikkei Manufacturing PMI Index and the Tertiary Industry Index from Japan, retail sales from the U.K., industrial orders from Italy and preliminary Markit Manufacturing PMI reads for France, Germany and the Eurozone.

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