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Saturday, May 20, 2017

Stocks Continue Previous Day's Advance

Charles Schwab: On the Market
Posted: 5/19/2017 4:15 PM ET

Stocks Continue Previous Day's Advance

Closing out the week, U.S. stocks continued to rebound from Wednesday's drop that stemmed from a spike in volatility as political concerns ramped up. The global markets appeared to stabilize to help extend gains, along with some upbeat earnings reports, headlined by Deere & Co. Treasuries were slightly higher and the U.S. dollar continued to slide, while gold and crude oil prices moved higher.

The Dow Jones Industrial Average (DJIA) increased 142 points (0.7%) to 20,805, the S&P 500 Index added 16 points (0.7%) to 2,382, and the Nasdaq Composite gained 29 points (0.5%) to 6,084. In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.01 to $50.67 per barrel and wholesale gasoline was $0.04 higher at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price increased $7.89 to $1,254.96 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 97.14. Markets were lower for the week, as the DJIA declined 0.5%, the S&P 500 Index lost 0.4%, and the Nasdaq Composite decreased 0.6%.

Deere & Co. (DE $121) posted fiscal Q2 earnings-per-share (EPS) of $2.49, well above the FactSet estimate of $1.65, with net sales of equipment growing 2.2% year-over-year (y/y) to $7.3 billion, roughly in line with expectations. The company said it is seeing modestly higher demand for its products, with farm machinery sales in South America experiencing a strong recovery. DE raised its full-year profit outlook and shares rallied.

Gap Inc. (GPS $22) reported Q1 EPS of $0.36, above the estimated $0.29, on previously reported revenues of $3.4 billion, with same-store sales rising 2.0% y/y, topping the projected 1.4% gain. Old Navy same-store sales jumped to more than offset declines at its Gap and Banana Republic locations. The company reaffirmed its full-year earnings and same-store sales outlooks, while raising its first-half EPS guidance. Shares gave up early gains and finished lower as analysts appeared disappointed by the reaffirmed guidance and the lackluster results out of Gap and Banana Republic.

Applied Materials Inc. (AMAT $44) announced fiscal Q2 earnings of $0.76 per share, or $0.79 ex-items, versus the estimated $0.75, with revenues rising 45.0% y/y to $3.6 billion, exceeding the forecasted $3.5 billion. The chip equipment maker issued full-year guidance that topped expectations. AMAT ticked higher.

Salesforce.com Inc. (CRM $87) reported a Q1 loss of $0.01 per share, or a profit of $0.28 ex-items, versus the expected $0.26, as revenues rose 25.0% y/y to $2.4 billion, roughly in line with estimates. The company issued Q2 guidance that was mostly above forecasts, while raising its full-year outlook. Shares gained ground early but finished trading lower. 

Foot Locker Inc. (FL $59) posted Q1 earnings of $1.36 per share, below the expected $1.39, as revenues increased 0.7% y/y to $2.0 billion, roughly in line with forecasts. Q1 same-store sales increased 0.5% y/y, missing the expected 1.4% gain. The company said the slow start to February, which it believes was largely due to the delay in income tax refunds, was not fully offset by much stronger sales in March and April. FL fell sharply.

Stabilization appears after midweek shake up

Treasuries finished slightly higher as the U.S. economic calendar void of any major releases today. The yields on the 2-year and 10-year notes were nearly unchanged at 1.27% and 2.23%, respectively, while the 30-year bond rate ticked 1 basis point (bp) lower to 2.89%.

The markets appear to have stabilized following a midweek jump in volatility on exacerbated U.S. political concerns that fostered increased uncertainty regarding President Trump's ability to implement pledged pro-growth policies. The U.S. dollar fell sharply this week, along with bond yields on the mid-to-long-end of the curve, while crude oil prices moved higher amid optimism of a longer-than-expected extension of global oil production cuts. Results from Dow members Wal-Mart Stores Inc. (WMT $79) and Home Depot Inc. (HD $156), along with Target Corp. (TGT $56), were highlights in the retail sector and a waning Q1 earnings season. Also, we saw upbeat reads on homebuilder sentiment and industrial production and capacity utilization, which offset a disappointing housing starts and building permits report. Amid the choppiness and despite the rebounds in the past two sessions, the domestic stock markets traded lower on the week.

For a look at the action in the stock markets after this week's relative increase in volatility, see the latest articles, Is The Stock Market Just Quiet Or Is It Too Quiet? from Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Liz Ann Sonders', Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com. Follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch.

Along with likely continued focus on the political front, next week's economic docket will bring looks at the housing sector with the releases of new and existing home sales. Moreover, manufacturing and business activity will likely be scrutinized, with Markit's preliminary Manufacturing and Services PMIs, along with the second read on Q1 GDP and preliminary durable goods orders.

Finally, the release of the Fed's May meeting minutes could command attention as the markets grapple with the path of future rate hikes and the expected beginning of the paring of the Central Bank's bloated balance sheet. For analysis, see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at www.schwab.com, where Randy and Chief Investment Strategist Liz Ann Sonders also offer the video, June Rate-Hike Highly Likely? Follow Randy, Kathy and Liz Ann on Twitter: @randyafrederick, @kathyjones and @lizannsonders.

International reports due out next week include: China—industrial profits. Japan—trade balance and consumer price inflation. Eurozone—Markit's business activity reports, along with German Q1 GDP and business sentiment. U.K.—Q1 GDP.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Is Energy an Opportunity or a Trap, world economic growth has improved, according to Markit’s PMI surveys, which have largely moved into positive territory around the world. That should help to bolster demand. But the correlation between economic growth and growth in oil demand may be changing, as other sources of energy are becoming more viable, and we are maintaining our neutral outlook for the energy sector. Read more on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Europe rebounds and Asia mostly higher as global markets stabilize

European equities rebounded from a two-day slide, as the global markets appeared to stabilize from a flare-up in U.S. political uncertainty that caused concerns that pro-growth policies could be jeopardized. The gains came despite the continued drop in the U.S. dollar that boosted the euro and British pound. The heightened political uncertainty in the U.S. joins looming elections in the U.K., Germany and Italy, as well as continued Brexit negotiations. For analysis of the political uncertainty see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. Bond yields in the region finished mixed.

Stocks in Asia finished mostly to the upside, with the U.S. markets rebounding somewhat from Wednesday's selloff that came courtesy of a flare-up in U.S. political risk concerns, though action remained choppy as uncertainty remained. Japanese equities gained ground with the yen giving back some recent gains. Chinese stocks nudged higher, amid some signs of stabilization from recent pressure stemming from resurfacing economic concerns and uneasiness toward heightened regulatory crackdowns. Indian and South Korean shares ticked slightly higher, though Australian securities declined amid continued weakness in the financial sector. As noted in the latest Schwab Market Perspective: Sell in May…or Settle In?, another potential concern for the market is coming in the form of a potential Chinese slowdown, which could lead to a near-term retrenchment in emerging market equities. Read more on the Markets & Economy page at www.schwab.com. For a look at emerging markets, check out Schwab's Director of International Research, Michelle Gibley's CFA, article, Different Drivers: Why Emerging Market Stocks Aren't All the Same on the Insights & Ideas page at www.schwab.com.

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