Markets Notch Solid Weekly Gains

Charles Schwab: On the Market

Posted: 12/15/2017 4:15 PM EST

Markets Notch Solid Weekly Gains

 

U.S. equities finished out the week solidly in the green on optimism surrounding reports that final-hour tweaking of the tax reform bill appears to be enough to pass it after yesterday's uncertainty. Treasury yields were mixed as industrial production missed expectations but the prior month's jump was revised higher, crude oil prices also diverged, while the U.S. dollar and gold finished higher. Upbeat results from Costco and yesterday's jump in retail sales upped the consumer outlook.

The Dow Jones Industrial Average (DJIA) increased 143 points (0.6%) to 24,652, the S&P 500 Index was 24 points (0.9%) higher at 2,676, and the Nasdaq Composite jumped 80 points (1.2%) to 6,937. In heavy volume due to quadruple witching, or the simultaneous expiration of options and futures contracts, 2.4 billion shares were traded on the NYSE and 3.2 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.26 to $57.30 per barrel and wholesale gasoline lost $0.02 to $1.65 per gallon. Elsewhere, the Bloomberg gold spot price moved $2.84 higher to $1,255.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 93.93. Markets were higher for the week, as the DJIA increased 1.3%, the S&P 500 Index rose 0.8%, and the Nasdaq Composite advanced 1.4%.

Costco Wholesale Corp. (COST $193) reported fiscal Q1 earnings-per-share (EPS) of $1.45, or $1.36 ex-items, versus the $1.34 FactSet estimate, as revenues rose 13.2% year-over-year (y/y) to $31.8 billion, above the projected $31.1 billion. Q1 same-store sales grew 10.5% y/y, versus the expected 10.2% gain. Shares were nicely higher.

Oracle Corp. (ORCL $48) posted fiscal Q2 EPS of $0.52, or $0.70 ex-items, compared to the projected $0.68, with revenues rising 6.0% y/y to $9.6 billion, roughly in line with forecasts. ORCL increased its share repurchase plan by $12 billion, but the company issued Q3 guidance that was below expectations. Shares saw solid pressure.

Adobe Systems Inc. (ADBE $177) announced Q4 EPS of $1.00, or $1.26 ex-items, versus the expected $1.16, as revenues grew 25.0% y/y to $2.0 billion, mostly matching estimates. The company issued Q1 and 2018 revenue guidance that matched forecasts, while its Q1 EPS outlook was above expectations. Shares were higher.

CSX Corp. (CSX $53) announced that its Chief Executive Officer (CEO) Hunter Harrison is on medical leave due to unexpected complications from a recent illness. The board has named Chief Operating Officer James Foote as acting CEO. Shares finished decisively lower.

Shares of Sirius XM Holdings Inc. (SIRI $5) fell after announcing a decision by the Copyright Royalty Board (CRB) of the Library of Congress that will require the royalty rate it has to pay for a five-year period starting January 1, 2018 to increase. The rate will rise to 15.5% of gross revenues from its current rate of 11.0% and well above expectations.

Industrial production slightly misses, but prior month's strong gain revised higher

Industrial production (chart) rose 0.2% month-over-month (m/m) in November, slightly below the Bloomberg estimate of a 0.3% gain, but October's solid 0.9% rise was upwardly revised to a 1.2% jump. Manufacturing production ticked higher and mining output jumped, though utilities production dropped. Capacity utilization ticked higher to 77.1% from the prior month's unrevised 77.0% rate, and compared to forecasts of 77.2%. Capacity utilization is 2.8 percentage points below its long-run average.

The Empire Manufacturing Index showed output from the New York region slowed more than expected but remained solidly at a level depicting expansion (a reading above zero) for December. The index decreased to 18.0 from November's unrevised 19.4 level, with forecasts calling for a decline to 18.7.

Treasuries were mixed, as the yield on the 2-year note rose 3 basis points (bps) to 1.84% and the yield on the 10-year note was flat at 2.35%, while the 30-year bond rate dipped 3 bps to 2.68%. In her video, What Could Fixed Income Investors Expect in 2018?, Schwab's Chief Fixed Income Strategist Kathy Jones offers three reasons we think investors might want to be a bit more cautious about where they look for yield in 2018.

The Treasury yield curve continues to flatten and the U.S. dollar found support after yesterday's jump in retail sales followed Wednesday's highly-expected Fed rate hike as discussed by Schwab's Senior Fixed Income Research Analyst, Collin Martin, CFA, in his article, Fed Raises Rates, Projects More to Come in 2018, as well as Schwab's Chief Investment Strategist Liz Ann Sonders' and Vice President of Trading and Derivatives Randy Frederick's video, How Will Rate Hike Affect Investors?.

Tax reform continued to be in focus and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend analyzes in his latest commentary, Tax Plan Set for Final Vote, the deal reached on Capitol Hill regarding a massive tax package that would cut the corporate tax rate and make sweeping changes to individual taxes. Late-yesterday's flared up uncertainty regarding if the bill has enough support is being calmed by headlines suggesting final-hour adjustments to the bill will likely be enough ahead of next week's expected vote. Also, Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of what investors should be paying attention to, in his article, Tax Reform: What Investors Should Know, while also addressing questions regarding how the potential tax overhaul may affect you as an investor in his article, Tax Reform: Frequently Asked Questions. Moreover, as you conduct your year-end tax planning, check out our latest article, Tax Reform: 11 Questions to Ask Your Advisor.

Europe and Asia mixed on U.S. tax reform uncertainty

European equity markets traded mixed, with the euro giving back early gains versus the U.S. dollar amid choppy trading to help provide some late-day support and help offset a flare-up in U.S. tax reform uncertainty ahead of an expected vote sometime next week. Technology issues remained hamstrung, and consumer discretionary stocks led to the downside. Bond yields in the region pared losses to help financials limit a downside move and German markets finished higher, while the nation's central bank upped its economic growth forecast. The U.K. markets rose as the British pound fell, pressured by increased Brexit uncertainty as talks move on to the next stage but revolve around trade, which is seen to be a tougher hurdle to overcome than previous negotiations that have been contentious. In economic news, the eurozone trade surplus narrowed more than expected for October.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his, 2018 Global Market Outlook: Three Actions to Take for the Year Ahead, in which he says stay invested: with 2018 global stock market gains potentially being in the double-digits and go global: as international stocks may outperform U.S. stocks in 2018. Jeff also urges investors to rebalance: with rebalancing back to target allocations important as 2018 gains in stocks may result in a higher risk asset allocation ahead of a potential recession and bear market.

Stocks in Asia finished mixed as the scrutiny of the deal reached on tax reform by lawmakers in the U.S. heats up as it moves closer to a final vote. Also, the markets are digesting this week's Fed rate hike that was followed by unchanged monetary policy decisions from the European Central Bank and the Bank of England yesterday. The yen moved higher to pressure Japanese equities, and while the nation's Q4 Tankan Large Manufacturing Index improved more than expected, suggesting sentiment is improving, the Tankan outlook component came in a bit below forecasts. Stocks in mainland China and Hong Kong fell amid some continued paring of solid gains seen this year amid the market uncertainty. The Global markets have been bolstered by the broadest economic growth in a decade and is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks. Meanwhile, stocks in Australia declined, but South Korean listings rose, and markets in India advanced amid some supporting exit polls that suggested continued support for Prime Minister Modi's party, per Bloomberg. After the closing bell, India reported a sharp jump in the country's exports for November.

Stocks move higher as tax reform and data bolster fresh record highs

Stock markets moved back to record high territory this week amid optimism tax reform successfully scaled the reconciliation hurdle clearing a way to a final vote, while a jump in retail sales suggested the health of the all-important U.S. consumer was strong. Moreover, Dow member Walt Disney Co's (DIS $111) $52 billion agreement to acquire a large portion of Twenty-First Century Fox Inc. (FOXA $35) fueled a positive M&A sentiment. The telecommunications sector extending its recent run, and consumer-related stocks rallied to lead a broad-based advance, which saw technology issues regain some of its momentum that has led the year's decisive rally as the tax-reform sector rotation out of the group seemed to ease. However, the utilities sector was the lone group in the red after the Fed's highly-expected rate hike and forecast for more to come in 2018.

Outside the stock market trading was choppy as the Fed's hike was followed by unchanged monetary policy decisions from the European Central Bank, Bank of England and Swiss National Bank. The Treasury yield curve continued to flatten, with the 2-year rate rallying but the 10-year note finished little changed and the 30-year bond yield slipped. The U.S. dollar was extending last week's gain but following a mid-week slide and flared-up tax reform uncertainty the greenback lost momentum and finished little changed to slightly down. Crude oil prices rallied early on amid exacerbated supply concerns on a key pipeline crack and a gas plant explosion overseas, but lost ground and finished near the unchanged mark on the heels of mixed oil & gas inventory data.

Next week will the last before the Christmas holiday and the economic calendar will hopefully bring more gifts than coal, with a fully-loaded sleigh of releases including: the NAHB Housing Market Index, housing starts and building permits, existing home sales, the final revision of Q3 GDP, the Leading Index, personal income and spending, durable goods orders, new home sales, and the final December University of Michigan Consumer Sentiment Index.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in our 2018 Market Outlook: U.S. Stocks and Economy, animal spirits are keeping business optimism alive and well: U.S. growth broadly—and capex and productivity specifically—should remain healthy in 2018. Late cycle tendencies should be on investors’ radar screen: A tight labor market augurs for higher wage growth, higher inflation and tighter monetary policy. Tax reform would be a plus, but skepticism is warranted: Failure to pass tax reform would dent business and investor confidence, but not necessarily actual growth or corporate earnings.

International reports due out next week include: China—property prices. Japan—trade balance and the Bank of Japan's monetary policy decision. Eurozone—consumer price inflation and German business confidence. U.K.—consumer confidence and final read on Q3 GDP.