Stocks Add to Record Highs

Charles Schwab: On the Market

Posted: 9/18/2017 4:15 PM ET

Stocks Add to Record Highs

U.S. equities extended recent record highs, continuing to show resiliency against lingering geopolitical and political concern, as well as monetary policy uncertainty ahead of decisions from the Fed and Bank of Japan this week. Treasury yields extended last week's run and the U.S. dollar was higher amid softer-than-expected home-builder sentiment, while gold was lower and crude oil prices gained slight ground.

The Dow Jones Industrial Average (DJIA) increased 63 points (0.3%) to 22,331, the S&P 500 Index gained 4 points (0.2%) to 2,504, and the Nasdaq Composite increased 6 points (0.1%) to 6,455. In moderate volume, 821 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.02 higher to $49.91 per barrel and wholesale gasoline gained $0.01 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price declined $11.73 to $1,308.46 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 92.08.

Northrop Grumman Corp. (NOC $262) announced an agreement to acquire aerospace and defense technology company, Orbital ATK Inc. (OA $132), for $134.50 per share or about $7.8 billion in cash plus the assumption of $1.4 billion in net debt. NOC said the deal is expected to be accretive to earnings-per-share (EPS) in the first full year after the deal closes, which is expected in the first half of 2018. NOC was nicely higher and OA rallied sharply.

Home-builder sentiment drops to kick off economic week headlined by Fed

The National Association of Home Builders (NAHB) Housing Market Index showed home-builder sentiment this month fell to 64, versus the Bloomberg forecast calling for it to match August's downwardly-revised 67 level. However, the index sits well above the 50 mark, the point of separation for good versus poor conditions. The NAHB said the recent hurricanes have intensified its members' concerns about the availability of labor and the cost of building materials, but once the rebuilding process is underway builder confidence is expected to return to the high levels seen this spring.

Tomorrow, we will get a look at August housing construction activity in the form of housing starts and building permits, with starts projected to rebound 1.7% month-over-month (m/m) to an annual rate of 1,174,000 units after July's 4.8% drop (economic calendar). Permits are expected to dip 0.8% to an annual rate of 1,220,000 units following the prior month's 4.1% fall. Also on tap is the Import Price Index, forecasted to have increased 0.4% m/m during August following the 0.1% rise seen in July.

Schwab's Chief Investment Strategist Liz Ann Sonders points out in her article, Trying to Reason with Hurricane Season: The Aftermath of "Harma", that we expect to see a dip in economic activity in the short-term, followed by a boost associated with the recovery/rebuilding efforts. She adds that real estate has been one of most consistent beneficiaries in the subsequent three-to-twelve months following the 10 costliest U.S. hurricanes. We believe the impact will unlikely dent the Fed's plans to continue monetary policy normalization. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter:@lizannsonders.

Treasuries were lower, as the yield on the 2-year note ticked 1 basis point (bp) higher to 1.39%, while the yields on the 10-year note and the 30-year bond gained 3 bps to 2.23% and 2.80%, respectively.

Bond yields rebounded sharply last week after hitting levels not seen since November and the U.S. dollar recovered modestly from multi-year lows, as an ongoing positive economic backdrop was met with consumer price inflation accelerating in August to keep the possibility of a December Fed rate hike in play. Also, The Bank of England (BoE) and European Central Bank (ECB) has signaled they may start to tighten highly accommodative monetary policy, the markets shrugged off another missile test by North Korea, and economic cost estimates of Hurricane Irma appeared to be less than feared.

Schwab's Chief Fixed Income Strategist, Kathy Jones, and Vice President of Trading and Derivatives, Randy Frederick, provide analysis of the bond markets in the video, The Economy is Picking Up, But Bond Yields Are Falling—What's That About?, on the Insights & Ideas page and follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks, investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. Read more on the International Investing page at www.schwab.com.

This sets the stage for Wednesday's monetary policy decision from the Federal Open Market Committee (FOMC) (economic calendar). As noted in the latest Schwab Market Perspective: A Cat and Mouse Fall, the Fed is playing their own internal cat and mouse game with some officials citing low inflation as a reason to delay further tightening; while others want to stay on the steady path toward normalization, due to the tighter labor market. We continue to believe that the start to the slow winding down of the Fed's massive balance sheet will be announced this week; but that an additional rate hike before year end remains in question. We continue to believe the Fed's "quantitative tightening" (QT) could be the cause of some heightened volatility. Read more on the Markets & Economy page at www.schwab.com.

Europe and Asia move higher to begin the week

European equity markets traded higher, continuing to shrug off lingering geopolitical concerns, while monetary policy decisions from the Fed and Bank of Japan this week were in focus but appeared to not stymie conviction. The British pound gave back some of last week's surge against the U.S. dollar as the Bank of England (BoE) signaled that it may raise rates in the coming months. The pound lost ground despite BoE Governor Carney reiterating that a rate hike could be in the offing. The euro gave up modest gains and dipped late in the session even as the European Central Bank is expected to announce the start of dialing back its stimulus measures this fall. Bond yields in the region were mostly higher, except for in Portugal, which fell sharply after the nation received an upgrade of its credit rating to investment grade by Standard & Poor's. In economic news, eurozone consumer price inflation rose in line with expectations for August.

For a look at global investing, see Schwab's Jeffrey Kleintop's, CFA, article, U.S. vs international: what do earnings tell us about what may be ahead?, on the Markets & Economy page at www.schwab.com, and his video with Randy Frederick, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page.

Stocks in Asia finished higher amid the recent global market resiliency in the face of festering North Korean tensions and monetary policy uncertainty, though attention on this week's Fed and Bank of Japan decisions ramped up. The yen continued to lose ground on the U.S. dollar, but markets in Japan were closed for a holiday. Mainland Chinese stocks rose modestly and those traded in Hong Kong rallied, as late-Friday's stronger-than-expected lending statistics were met with today's report showing August home prices cooled to ease concerns about further government efforts to curb housing activity. Markets in Australia advanced, led by financials, South Korean listings jumped and Indian equities gained ground in the wake of the nation's upbeat August trade report after Friday' close. Both South Korean and Indian markets moved back to near record highs and Schwab's Jeffrey Kleintop, CFA, offers his article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over, on the Markets & Economy page at www.schwab.com.