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Wednesday, May 24, 2017

Stocks Stretch Win Streak to Five after Last Wednesday's Dive

Charles Schwab: On the Market
Posted: 5/24/2017 4:15 PM ET

Stocks Stretch Win Streak to Five after Last Wednesday's Dive

U.S. stocks continued to trend higher following the afternoon release of the minutes from the Fed's last meeting, which made reference to balance sheet normalization and after showing some early resiliency in the wake of a disappointing April existing-home sales report and a sovereign credit downgrade of China. Gold was higher, while the U.S. dollar, crude oil prices and Treasury yields were lower. In equity news, Dow member GE, along with Lowe's and Tiffany released some lackluster earnings reports, while Intuit, the maker of TurboTax, rallied sharply after announcing its quarterly results.

The Dow Jones Industrial Average (DJIA) increased 75 points (0.4%) to 21,012, the S&P 500 Index added 6 points (0.2%) to 2,404, and the Nasdaq Composite gained 24 points (0.4%) to 6,163. In moderately-light volume, 797 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.11 lower to $51.36 per barrel and wholesale gasoline was $0.01 lower at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price increased $5.93 to $1,257.15 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 97.12.

Lowe's Companies Inc. (LOW $80) reported Q1 earnings-per-share (EPS) of $0.70, or $1.03 ex-items, as revenues rose 10.7% year-over-year (y/y) to $16.9 billion, versus the projected $17.0 billion. Q1 same-store sales grew 1.9% y/y, below the forecasted 3.1% gain. LOW lowered its full-year profit outlook, while reaffirming its revenue and same-store sales guidance. Shares closed solidly lower.

Tiffany & Co. (TIF $85) posted Q1 EPS of $0.74, compared to the expected $0.70, with revenues rising 1.0% y/y to $900 million, below the projected $915 million. Q1 same-store sales declined 3.0% y/y, versus the estimated 1.6% increase. The upscale retailer said higher fashion and designer jewelry sales contrasted with softness in other categories. TIF maintained its earnings guidance for the year. Shares traded decisively lower.

Intuit Inc. (INTU $138) announced fiscal Q3 earnings of $3.70 per share, or $3.90 ex-items, versus the estimated $3.87, as revenues rose 10.3% y/y to $2.5 billion, roughly in line with projections. The maker of TurboTax said a "hard-fought" tax season delivered the revenue as it promised and its QuickBooks franchise saw continued momentum. INTU issued Q4 guidance that topped expectations and raised its full-year EPS and revenue outlooks. Shares rallied.

Dow member General Electric Co. (GE $28) saw some pressure after it reaffirmed its full-year EPS guidance, while Chief Executive Officer Jeffrey Immelt warned that its 2018 earnings estimate is at the high end of expectations where markets are today and hitting goals will require additional cost contingencies.

Existing home sales fall more than expected, Fed meeting minutes released 

Existing-home sales in April decreased 2.3% month-over-month (m/m) to a 5.57 million annual rate compared to the Bloomberg forecast of a 5.65 million pace, and down from March's negatively revised 5.70 million rate, which was the fastest pace since February 2007. Sales of single-family homes declined 2.4% m/m and purchases of multi-family structures decreased 1.6%, but both were up y/y. The median existing-home price was up 6.0% y/y at $244,800. Unsold inventory came in at a 4.2-month pace at the current sales rate, up from March's 3.8 months pace and the 4.6 months rate a year ago. Inventory of homes for sale is up 7.2% y/y. Sales declined in all regions except for the Midwest. Existing home sales are based on contract closings instead of signings and account for the majority of the housing sales market.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said, "Demand is easily outstripping supply in most of the country and it's stymieing many prospective buyers from finding a home to purchase." The report follows yesterday's disappointing new home sales report, but as noted in the latest Schwab Market Perspective: Sell in May…or Settle In?, after a long downturn, we're starting to see an encouraging uptick in both home ownership and household formations. This suggests that consumer confidence is starting to translate into some economy-boosting action. Read more on the Markets & Economy page at www.schwab.com.

The MBA Mortgage Application Index rose 4.4% last week, following the previous week's 4.1% decline. The increase came as a 10.5% surge in the Refinance Index more than offset a 0.8% dip for the Purchase Index. The average 30-year mortgage rate dropped 6 basis points (bps) to 4.17%.

At 2:00 p.m. ET, the minutes from the Fed's May 2nd-3rd monetary policy meeting were released. The minutes noted that "members agreed that the slowing in growth during the first quarter was likely to be transitory," and after assessing current conditions Committee members agreed to maintain the target range for the federal funds rate at 3/4 to 1 percent. Additionally, the participants discussed issues pertaining to potential changes to the Committee's policy regarding reinvesting principal payments from securities in its System Open Market Account. Most policymakers favored an approach where the Committee would determine a set of slowly but surely increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month and to only allow the amounts of the repayments that exceeded the caps to be reinvested each month, with the final value of the caps to be maintained until the size of the balance sheet is normalized. It was agreed that discussions of potential changes to the Committee's reinvestment policy will be continued in its June 13th-14th meeting.

Schwab’s Chief Investment Strategist Liz Ann Sonders points out in her video, June Rate-Hike Highly Likely?, on the Insights & Ideas page at www.schwab.com, with Vice President of Trading and Derivatives, Randy Frederick, that shrinking the Fed balance sheet is a form of policy tightening and we are probably going to hear a lot more about a transition from quantitative easing (QE) to quantitative tightening (QT). Liz Ann addresses the question of why shrink the balance sheet now in her latest article, Gimme Three Steps … and a Stumble?, noting that allowing the balance sheet to shrink gives ammunition back to ease policy when the next recession occurs. But the Fed is navigating uncharted waters in trying to shrink such a gargantuan balance sheet; which is why the process is likely to be very gradual, but also why periods of market volatility could ensue. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

Tomorrow, the U.S. economic calendar will include wholesale inventories, expected to have increased 0.2% to match the previous month's rise, weekly initial jobless claims, forecasted to have ticked higher to level of 238,000 from 232,000 and the Kansas City Fed Manufacturing Index, anticipated to have increased to a level of 10 from April's 7, with a level above 0 indicating expansion in activity.

Treasuries traded higher, with the yields on the 2-year and 10-year notes declining 3 bps to 1.29% and 2.25%, respectively, while the 30-year bond rate ticked 2 bps lower to 2.92%. 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 Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? Follow Kathy and Schwab on Twitter: @kathyjones and @schwabresearch.

Europe mostly lower, Asia mostly higher

European equities finished mostly to the downside, with caution appearing to prevail ahead of today's release of the Fed's May meeting minutes in the U.S. and tomorrow's OEPC meeting, which is highly-expected to result in an extension of production cuts. Crude oil prices were choppy following a recent rally in anticipation of the extended production cuts, while oil inventories in the U.S. fell more than expected again. For a look at the energy sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Is Energy an Opportunity or a Trap?, on the Markets & Economy page at www.schwab.com. The markets digested the credit rating downgrade of China by Moody's Investor Service, which was accompanied by a change to the country's outlook to stable from negative. Basic materials were slightly lower on the downgrade. Germany reported another favorable sentiment gauge, as the nation's consumer confidence unexpectedly improved for June. The euro and British pound declined modestly versus the U.S. dollar and bond yields in the region traded mixed.

Political and geopolitical uncertainty lingered ahead of elections in the eurozone and U.K. later this year, while U.S. President Donald Trump continues his first international trip, and in the wake of this week's deadly terrorist attack in the U.K. and last weekend's missile test by North Korea. 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, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly to the upside, with conviction being held in check ahead of today's May meeting minutes from the Fed in the U.S., and tomorrow's OPEC meeting that is expected to deliver an extension of production cuts. The markets shrugged off the downgrade of China's credit rating by Moody's Investor Service, which noted a possible "material rise" in economy-wide debt and the potential for economic growth to slow. However, Moody's changed its outlook for the country to stable from negative. Shares trading in both mainland China and Hong Kong ticked higher amid a late-session rebound. For a discussion on China and the emerging market landscape, see Schwab's Director of International Research, Michelle Gibley's CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017) on the International Investing page at www.schwab.com, as well as her latest, Different Drivers: Why Emerging Market Stocks Aren't All the Same on the Insights & Ideas page at www.schwab.com. Japanese equities rose, aided by some weakness in the yen. Australian and South Korean securities advanced, while Indian stocks declined, retreating modestly from near record highs, amid some recent mixed earnings reports.

The international economic docket for tomorrow will be light, yielding industrial orders from Italy and GDP and business investment from the U.K.

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