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Friday, May 26, 2017

Stocks Finish Flat Ahead of Holiday Weekend

Charles Schwab: On the Market
Posted: 5/26/2017 4:15 PM ET

Stocks Finish Flat Ahead of Holiday Weekend

U.S. stocks finished trading mostly flat on light volume, ending the recent six-session winning streak ahead of the extended Memorial Day holiday weekend. Traders digested mixed Q1 GDP and durable goods orders reports, while Costco and Ulta Beauty announced some upbeat earnings data. Crude oil prices rebounded somewhat from yesterday's tumble, Treasury yields dipped and the U.S. dollar and gold gained ground. Overseas, equities in Asia and Europe finished mixed.

The Dow Jones Industrial Average (DJIA) decreased 3 points to 21,080, the S&P 500 Index added 1 point to 2,416, and the Nasdaq Composite ticked 5 points (0.1%) higher to 6,210. In light volume, 683 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.90 to $49.80 per barrel and wholesale gasoline was $0.03 higher at $1.63 per gallon. Elsewhere, the Bloomberg gold spot price increased $11.76 to $1,267.44 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 97.45. Markets were solidly higher for the week, as the DJIA jumped 1.3%, the S&P 500 Index rallied 1.4%, and the Nasdaq Composite surged 2.1%.

Costco Wholesale Corp. (COST $178) reported fiscal Q3 earnings-per-share (EPS) of $1.59, or $1.40 ex-items, compared to the $1.31 FactSet estimate, as revenues increased 8.0% year-over-year (y/y) to $28.9 billion, above the projected $28.6 billion. Q3 same-store sales rose 5.0% y/y, north of the expected 4.7% increase. Shares were nicely higher.

Ulta Beauty Inc. (ULTA $302) posted Q1 EPS of $2.05, or $1.91 ex-items, versus the forecasted $1.80, with revenues growing 22.5% y/y to $1.3 billion, roughly in line with expectations. Q1 same-store sales jumped 14.3% y/y, exceeding the estimated 11.0% gain. ULTA issued Q2 guidance that was a bit shy of expectations, while raising its full-year EPS and same-store sales outlooks. Shares gained solid ground.

GameStop Corp. (GME $22) announced Q1 earnings of $0.58 per share, or $0.63 ex-items, versus the forecasted $0.53, as revenues increased 3.8% y/y to $2.1 billion, above the projected $2.0 billion. Q1 same-store rose 2.3% y/y, compared to the expected 4.2% decline. The company reaffirmed its full-year EPS outlook, while issuing same-store sales guidance that was just below estimates. Shares traded lower as the Street showed some concern regarding GME's y/y decline in new video game software sales, a lower gross margin and lackluster mobile revenues.

Big Lots Inc. (BIG $50) reported Q1 EPS of $1.15, topping the expected $0.99, as revenues declined 1.2% y/y to $1.3 billion, roughly in line with estimates. Q1 same-store sales declined 0.9% y/y, versus projections of a 0.9% gain. BIG issued Q2 EPS guidance that exceeded estimates and raised its full-year profit outlook. Shares traded higher.

Amid the plethora of earnings reports from the consumer discretionary sector, check out Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Don't Cut the Cord Just Yet, on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Durable goods orders miss, Q1 GDP growth revised higher

April preliminary durable goods orders (chart) declined 0.7% month-over-month (m/m), compared to the Bloomberg estimate of a 1.5% decline, though March's 1.7% gain was revised to a 2.3% rise. Ex-transportation, orders were 0.4% lower m/m, compared to forecasts of a 0.4% gain and versus March's upwardly revised 0.8% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, came in flat, versus projections of a 0.5% increase, and matching the downwardly revised reading in the month prior.

Orders for the volatile component of transportation weighed on the headline figure as a slight gain in autos and a solid rise in defense aircraft and parts were more than offset by a drop in nondefense aircraft and parts. Weakness was also seen in demand for machinery, electrical equipment and appliances, and fabricated metals. However, a bright spot was a solid gain in orders for computers and electronic products.

The data, notably the back-to-back flat readings for the proxy for business spending in the durable goods report, may have fostered concerns about whether Q1's soft patch was transitory as recent history and the Fed have suggested. Schwab’s Chief Investment Strategist Liz Ann Sonders discusses this in her article, ½ Full: Seeing Through a Weak Q1, pointing out that the average GDP growth for the subsequent quarters over the past 10 years has been 1.8%, but hard data has been stubbornly weak relative to soft data. So for now, Liz Ann is seeing the glass half full, concluding that we are likely just experiencing yet another "soft patch" in an ongoing expansion. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

The second look (of three) at Q1 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.2%, up from the first release's 0.7% gain. Forecasts called for an adjusted 0.9% pace of expansion. Q4 GDP grew by an unrevised 2.1% rate. Personal consumption came in at a 0.6% gain for Q1, up from the preliminary estimate of a 0.3% increase, and compared to the expectations of a 0.4% increase. Personal consumption grew by an unrevised 3.5% in Q4.

On inflation, the GDP Price Index was revised to a 2.2% gain, versus forecasts of an unrevised 2.3% increase, while the core PCE Index, which excludes food and energy, was adjusted to a 2.1% rise, compared to expectations of an unrevised 2.0% gain.

The final May University of Michigan Consumer Sentiment Index (chart) was revised to 97.1 from the preliminary level of 97.7, versus forecasts of 97.5. However, the index was up slightly compared to April's level of 97.0. Compared to last month, the expectations component improved, while the current conditions component declined. The 1-year inflation outlook remained at April's 2.6% rate, while the 5-10 year forecast ticked higher to 2.4% from 2.3%.

Treasuries were mostly higher in an abbreviated session, with the yield on the 2-year note flat at 1.29%, while the yields on the 10-year note and the 30-year bond dipped 1 basis point to 2.25% and 2.91%, respectively. For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, where you can also find 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? Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones. Also, for more on the Fed, see Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, Gimme Three Steps … and a Stumble?, where she discusses the transition from quantitative easing (QE) to quantitative tightening (QT) on the Markets & Economy page at www.schwab.com. Follow Liz Ann on Twitter: @lizannsonders.

Please note: All U.S. markets will be closed on Monday in observance of the Memorial Day holiday.

Europe and Asia mixed amid political uncertainty and continued energy weakness

European equities finished mixed, with oil & gas issues remaining a drag on the markets as crude oil prices tumbled yesterday amid apparent disappointment from the highly-anticipated extension of production cuts by OPEC. Political and geopolitical uncertainty lingered to hamper conviction, with polls showing U.K. Prime Minister Theresa May losing ground ahead of next month's election as Brexit negotiations continue. However, the British pound fell to help buoy the U.K. markets. Also, the markets eyed U.S. President Trump's first international trip as he wraps up in Europe with G-7 leaders gathering in Italy. For analysis, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, as well as Jeff's article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. The euro declined versus the U.S. dollar and bond yields in the region lost ground. In light economic news, Italian economic, manufacturing and consumer sentiment reports all declined for May.

Stocks in Asia finished mixed with the energy sector getting pressured as oil prices tumbled yesterday in reaction to the highly-expected extension of production cuts by OPEC. Japanese equities declined, with the yen gaining ground late in the session, while a read on the nation's core consumer price inflation came a bit cooler than expected. Chinese shares took a breather after a strong weekly advance and stocks in Hong Kong finished flat. Australian securities fell amid a drop in oil & gas issues and weakness out of the basic materials sector. However, South Korean and Indian equities hit record highs for a second session. Schwab's Director of International Research, Michelle Gibley CFA, offers some timely commentary of the global markets in her latest article, Different Drivers: Why Emerging Market Stocks Aren't All the Same on the Insights & Ideas page at www.schwab.com.

Stocks string together gains to post weekly rally

U.S. stocks posted a six-session winning streak before Friday's pause, extending a rebound from last week's selloff and spike in volatility on Wednesday that stemmed from a flare-up in domestic political concerns that called pro-growth policy pledges into question. President Trump embarked on his first trip overseas, which appeared to take some of the focus off domestic political issues, likely helping foster the rebound. Also, he struck some defense and aerospace deals in Saudi Arabia to boost the stocks in the sector. Technology stocks continued to rally, while some relative upside surprises by retailers, headlined by Best Buy Co. Inc. (BBY $60), boosted the consumer discretionary sector. The Fed's May meeting minutes seemed to foster a dovish takeaway to help ease concerns about the pace of future rate hikes after June's highly-anticipated move. However, the energy sector took a hit as crude oil prices gave back a rally that led up to this week's widely-expected OPEC extension of production cuts that looked to disappoint the markets. The divergence between hard and soft economic data also festered, with new and existing home sales both falling more than expected in April to exacerbate concerns about the impact of demand easily outstripping supply. Treasury yields nudged higher, along with the U.S. dollar.

Although next week's economic calendar will be truncated by Monday's holiday, the docket will bring plenty of data to digest ahead of the Fed's monetary policy meeting later in June. Personal income and spending, and Consumer Confidence will get the ball rolling, followed by the Fed's Beige Book, the ISM Manufacturing Index and monthly auto sales. The week will culminate with Friday's key May nonfarm payroll report.

As noted in the latest Schwab Market Perspective: Unprecedented! Or Maybe Not?, U.S. markets were roiled by so-called "unprecedented" political issues but bounced back quickly. Investing based on political winds is not likely to be a successful strategy and we urge focus on economic and earnings fundamentals. The U.S. economy is bouncing back from the weak first quarter while the labor market continues to tighten. A June rate hike by the Federal Reserve remains on the table for now. Global growth has picked up, but the recent slowdown and inversion of the yield curve in China are causing some concerns. Read more on the Markets & Economy page at www.schwab.com.

Next week's international economic reports worth noting include: Australia—building approvals and retail sales. China—industrial profits and Manufacturing and non-Manufacturing PMIs. India—Q1 GDP. Japan—household spending, retail sales, and industrial production. Eurozone—consumer price inflation and consumer confidence, along with German retail sales and unemployment change. U.K.—Markit's PMI Manufacturing Index.

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