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Thursday, May 18, 2017

Stocks Reclaim Part of Previous Decline



Charles Schwab: On the Market
Posted: 5/18/2017 4:15 PM ET

Stocks Reclaim Part of Previous Decline

U.S. stocks finished broadly to the upside, though only able to recover a fraction of yesterday's selloff as shares were led higher by technology and consumer discretionary listings with investors weighing whether the Trump administration will be successful in implementing its promised pro-growth policies. In earnings news, Wal-Mart topped estimates, while fellow Dow component Cisco was under pressure after announcing its results. Treasury yields were mixed and the U.S. dollar was higher, while reports on jobless claims and regional manufacturing surprised to the upside and leading indicators rose. Gold was lower and crude oil prices were higher. Overseas, stocks in Asia and Europe were widely lower.

The Dow Jones Industrial Average (DJIA) increased 56 points (0.3%) to 20,663, the S&P 500 Index added 9 points (0.4%) to 2,366, and the Nasdaq Composite jumped 44 points (0.7%) to 6,055. In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.28 to $49.35 per barrel and wholesale gasoline was $0.01 higher at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price declined $12.43 to $1,248.93 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 97.83.

Dow member Wal-Mart Stores Inc. (WMT $78) reported Q1 earning-per-share (EPS) of $1.00, versus the $0.96 FactSet estimate, as revenues grew 1.4% year-over-year (y/y) to $117.5 billion, slightly below the projected $117.7 billion. Q1 U.S. same-store sales rose 1.4% y/y, in line with forecasts. WMT issued Q2 EPS guidance that was roughly in line with expectations and domestic same-store sales growth that was modestly north of projections. Shares finished nicely higher.

Dow component Cisco Systems Inc. (CSCO $31) posted fiscal Q3 profits of $0.50 per share, or $0.60 ex-items, compared to the estimated $0.58, with revenues dipping 1.0% y/y to $11.9 billion, roughly in line with expectations. CSCO issued Q4 guidance that came in a bit shy of the Street's forecasts. Separately, the company announced that it will reduce its workforce by an additional 1,100 employees as an extension of its restructuring plan. Shares were solidly lower.

L Brands Inc. (LB $50) announced Q1 EPS of $0.33, versus the forecasted $0.29, on previously announced revenues of $2.4 billion, with same-store sales decreasing 9.0% y/y, compared to the projected 8.7% decline. LB raised its full-year profit guidance. Shares gained ground.

Jobless claims and regional manufacturing activity favorably surprise, LEI gains ground

Weekly initial jobless claims (chart) declined by 4,000 to 232,000 last week, below the Bloomberg forecast of 240,000, with the prior week’s figure unrevised at 236,000. The four-week moving average decreased by 2,750 to 240,750, while continuing claims fell by 22,000 to 1,898,000, south of estimates of 1,950,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for April rose 0.3% month-over-month (m/m), versus projections of a 0.4% increase. Support came from the components pertaining to the yield curve, jobless claims, consumer expectations and average workweek, while building permits weighed on the index.

The Philly Fed Manufacturing Index (chart) in May jumped further into a level depicting expansion (a reading above zero) after rising to 38.8 from 22.0 in April, and compared to estimates of a decline to 18.5.

Treasuries were mixed, with the yield on the 2-year note rising 2 basis points (bps) to 1.26%, while the yield on the 10-year note was nearly unchanged at 2.23% and the 30-year bond rate decreased 1 bp to 2.90%. For analysis of the bond markets, 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.

For a look at the action in the stock markets after yesterday's spike 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.

Tomorrow, the U.S. economic calendar will be void of any major releases.

Europe extends selloff on political concerns, Asia pressured lower

European equities extended yesterday's broad-based selloff, with the U.S. political turmoil taking center stage and exacerbating concerns about President Trump's pro-growth policy implementation. The heightened political uncertainty in the U.S. comes as elections loom in the U.K., Germany and Italy, while Brexit negotiations continue. 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?. Oil & gas and financials were lower amid the recent drop in global bond yields and choppy action in crude oil prices. Automakers led the markets lower, with shares of Fiat Chrysler Automobiles NV (FCAU $10) lower amid reports that the European Commission launched an investigation of Italy over the nation's handling of accusations of emission test cheating and a report that the U.S. Department of Justice is preparing a lawsuit against the company if talks fail to resolve alleged violations of clean-air rules by diesel vehicles, per Bloomberg. In economic news, U.K. retail sales rose much more than expected. The euro was lower and the British pound gained ground on the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished broadly lower following yesterday's drop in the U.S. and Europe yesterday as U.S. political risk concerns ramped up to foster uncertainty about President Trump's pro-growth policy implementation. Japanese equities fell, with the yen strengthening amid the uneasy sentiment. The political concerns overshadowed a report that showed Japan's Q1 GDP grew at an annualized 2.2%, topping expectations of a 1.7% gain and accelerating from Q4's 1.4% expansion. Stocks traded in mainland China and Hong Kong declined with the dampened global mood being met with reports showing the country's home prices moderated further amid stepped up government restrictions on home purchases, while a late-day read on foreign direct investment fell. Australian securities traded lower, with the banking sector continuing to see pressure and healthcare issues falling, while South Korean shares also declined. Finally, Indian equities joined the regional trend, retreating from record high territory. 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.

Tomorrow, the international economic docket will be light, offering PPI from Germany and the current account for the Eurozone.

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