Stocks Snap Out of Recent Funk

Charles Schwab: On the Market

Posted: 8/22/2017 4:15 PM ET

Stocks Snap Out of Recent Funk

The U.S. equity markets joined their foreign counterparts in a global rally, courtesy of reports suggesting signs of tax reform progress that helped to tamp down omnipresent geopolitical worries. Treasury yields were higher and the U.S. dollar was flat amid another low-key economic calendar, as well as Friday's looming speeches from Fed Chief Yellen and ECB President Draghi at the key symposium in Jackson Hole, Wyoming. Meanwhile and crude oil prices gained modest ground and gold was lower.

The Dow Jones Industrial Average (DJIA) advanced 196 points (0.9%) to 21,900, the S&P 500 Index was 24 points (1.0%) higher at 2,453, and the Nasdaq Composite jumped 84 points (1.4%) to 6,297. In light-to-moderate volume, 688 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.30 higher to $47.83 per barrel and wholesale gasoline was up by $0.01 to $1.59 per gallon. Elsewhere, the Bloomberg gold spot price decreased $6.77 to $1,285.11 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.55.

Toll Brothers Inc. (TOL $37) reported fiscal Q3 earnings-per-share (EPS) of $0.87, above the $0.69 FactSet estimate, as revenues rose 18.0% year-over-year (y/y) to $1.5 billion, roughly in line with forecasts. The luxury homebuilder issued full-year revenue guidance with a midpoint just shy of the Street's estimates, while narrowing its outlook for deliveries for the year. Shares of TOL came under pressure.

DSW Inc. (DSW $18) posted Q2 EPS of $0.35, or $0.38 ex-items, versus the projected $0.29, with revenues growing 3.3% y/y to $680 million, above the estimated $666 million. The shoe retailer's Q2 same-store sales rose 0.6% y/y, compared to the expected 2.2% drop. DSW reaffirmed its full-year guidance, while announcing a new $500 million share repurchase program. Shares rallied.

Medtronic PLC. (MDT $82) announced fiscal Q1 earnings of $0.74 per share, or $1.12 ex-items, compared to the forecasted $1.08, as revenues rose 3.0% y/y to $7.4 billion, mostly matching estimates. MDT reaffirmed its full-year guidance. MDT traded lower.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA points out in his latest article, Earnings may be about to do something they've never done before, the earnings estimates for the world's companies have risen back to $30 again for the fourth time in 10 years. Without a rise in earnings above $30, stock prices may find it difficult to move any higher. Thanks to solid global growth supporting all the major regions of the world a break out above $30 now appears more likely than it has in a decade. Read more on the Markets & Economy page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.

Macy's Inc. (M $20) was nicely higher after the retailer announced restructuring plans, in addition to the appointment of former Senior Vice President of eBay North America, Hal Lawton, as President, effective September 8. 

Regional manufacturing report continues to show solid growth

The Richmond Fed Manufacturing Activity Index remained at July's unrevised 14 level in August, versus the Bloomberg expectation of a decline to 10, with a reading above zero denoting expansion.

Treasuries are lower with the yields on the 2-year and 10-year notes, along with the 30-year bond, rising 2 basis points to 1.32%, 2.20% and 2.78%, respectively.

Treasury yields and the U.S. dollar are gaining ground and action remains choppy as the markets grapple with monetary policy uncertainty in the face of mostly upbeat economic data and persistent low inflation, while the Fed is expected to begin to reduce its behemoth balance sheet. This sets the stage for Friday's key Fed symposium in Jackson Hole, Wyoming, where Fed Chief Janet Yellen and European Central Bank (ECB) President Mario Draghi are expected to speak.

As noted in the latest Schwab Market Perspective: Volatility Returns!, the Federal Reserve is likely to embark on its quantitative tightening (QT) plan, in order to slowly unwind its bloated balance sheet. We have confidence that the Fed has little desire to jolt the financial markets, but it and the market are in uncharted territory as unwinding a $4.5 trillion balance has never been done historically. We continue to believe this will be an additional volatility-driver. Read more on the Markets & Economy page at www.schwab.com.

Tomorrow, the preliminary Markit Manufacturing and Services PMI Indexes with don the economic calendar, with economists anticipating readings of 53.5 and 55.0, respectively, while housing data will be released in the form of new home sales, forecasted to be flat m/m during July at an annual rate of 610,000 units, and weekly MBA Mortgages Applications will also be reported.

Europe higher despite data and looming ECB speech, Asia up in cautious trading

European equities finished mostly higher, with the euro and British pound losing ground on the U.S. dollar, and as basic materials issues led the way. The markets shrugged off lingering geopolitical concerns, and caution ahead of speeches by Fed Chair Yellen and ECB President Draghi in Jackson Hole, Wyoming, on Friday. A disappointing read on German investor sentiment, which deteriorated for a third-straight month in August, also did not derail the advance in the region. Bond yields in the region mostly moved to the upside. Schwab's Jeffrey Kleintop, CFA points out in his article, What are fund flows telling us about trends and risks in the global stock market?, the trends in money flows this year show a change to a rising overall inflow of money as investors take note of better overall stock market performance and a preference for ETF that invest in non-U.S. markets. The underlying distribution of money flows appears to be driven by fundamentals or diversification, rather than purely by performance or geopolitical risk aversion, suggesting a trend that is more deeply rooted (although some markets may be vulnerable in the event of an escalation of geopolitical risk). Investors may want to consider these trends as they consider the global diversification in their own portfolio. Read more on the Markets & Economy page at www.schwab.com.

Stocks in Asia finished mostly higher though the markets appeared to remain cautious ahead of this week's speeches from central bank leaders in the U.S. and Europe. Also, focus on the Korean peninsula remained amid heightened tensions between North Korea and the U.S., with the latter conducting its annual joint military drills with South Korea. South Korea's markets moved modestly higher. For more on the geopolitical front, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the International Investing page at www.schwab.com, as well as Schwab's Chief Investment Strategist Liz Ann Sonders' latest commentary, Twist and Shout: United States Takes on North Korea … Implications for Stocks on the Markets & Economy page. Follow Liz Ann on Twitter: @lizannsonders. Mainland Chinese stocks inched higher, while those traded in Hong Kong gained solid ground. Meanwhile, markets in Australia advanced and Indian securities nudged to the upside, but Japanese equities dipped modestly, extending a recent losing streak even as the yen pared some of a recent gain.

The Markit Manufacturing PMI Indexes from across the globe will dominate tomorrow's international economic calendar, while consumer confidence from the Eurozone is also on tap.