Markets Break Out of Two-Day Slide

Charles Schwab: On the Market

Posted: 6/1/2017 4:15 PM ET

Markets Break Out of Two-Day Slide

Upbeat manufacturing, auto sales, and employment reports helped the U.S. equity markets to escape a two-day losing streak, ahead of tomorrow's highly-anticipated nonfarm payroll report. Treasury yields and the U.S. dollar gained modest ground, while gold saw slight pressure. Crude oil prices finished nearly flat, as gains that came amid some bullish oil inventory data were tempered in late-day action. Meanwhile, Deere & Co agreed to acquire Wirtgen Group for about $5.2 billion, while Hewlett Packard Enterprise disappointed with its guidance.

The Dow Jones Industrial Average (DJIA) rose 136 points (0.7%) to 21,144, the S&P 500 Index increased 18 points (0.8%) to 2,430, and the Nasdaq Composite moved 48 points (0.8%) higher to 6,247. In heavy volume, 973 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.04 higher to $48.36 per barrel and wholesale gasoline was unchanged at $1.60 per gallon. Elsewhere, the Bloomberg gold spot price declined $1.16 to $1,267.76 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 97.20.

Deere & Co. (DE $125) announced an agreement to acquire German-based privately-held road construction equipment company, Wirtgen Group in an all-cash transaction totaling about $5.2 billion. DE gained solid ground.

Hewlett Packard Enterprise Co. (HPE $18) reported a Q2 loss of $0.37 per share, or earnings-per-share (EPS) of $0.25 ex-items, compared to FactSet's projected profit of $0.35, on revenues of $9.9 billion, above the projected $9.7 billion. The company said it faced margin pressure during the quarter, though it expects improvement through the remainder of the year as it mitigates commodities cost pressure and eliminates costs associated with spin-mergers and acquisitions. HPE issued Q3 EPS guidance that was below forecasts, while reaffirming its full-year profit outlook. Shares finished lower.

Dollar General Corp. (DG $78) reported Q1 earnings of $1.02 per share, or $1.03 ex-items, versus the expected $1.00, as revenues increased 6.5% year-over-year (y/y) to $5.6 billion, roughly in line with estimates. Q1 same-store sales gained 0.7% y/y, matching projections. DG reaffirmed its full-year earnings and same-store sales outlook, while raising its revenue forecast. Shares were nicely higher.

The major automakers reported May's sales today, with General Motors Co's (GM $34) sales declining 1.3% y/y, compared to FactSet's projected 4.2% increase, while noting that it remains on track to achieve its year-end guidance. Fiat Chrysler Automobiles NV's (FCAU $11) Chrysler sales were 0.9% lower, compared to the expected 4.2% fall. Ford Motor Co (F $11) reported a 2.2% rise in sales, versus the expected decline of 0.5%. Toyota Motor Corp (TM $108) announced a 0.5% decrease in sales, compared to the 1.0% drop that was expected. There was one more selling day this year compared to the prior year. Shares of all four automakers were higher.

Manufacturing activity tops forecasts, ADP payroll report jumps

The Institute for Supply Management (ISM) Manufacturing Index (chart) for May unexpectedly ticked further into expansion territory (above 50) after rising to 54.9 from 54.8 in April, where the Bloomberg forecast called for it to remain. New orders and employment growth both accelerated, while expansion in production and new export orders decelerated. The ISM said comments from the survey generally reflected stable to growing business conditions.

The final Markit U.S. Manufacturing PMI Index was revised to 52.7 for May from the preliminary reading of 52.5 for April, where it was expected to remain, but was slightly lower from the 52.8 level posted in April. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Weekly initial jobless claims (chart) increased by 13,000 to 248,000 last week, above the Bloomberg forecast of 238,000, with the prior week’s figure being revised higher by 1,000 to 235,000. The four-week moving average rose by 2,500 to 238,000, while continuing claims declined by 9,000 to 1,915,000, south of estimates of 1,920,000.

The ADP Employment Change Report showed private sector payrolls rose by 253,000 jobs in May, well above forecasts of a 180,000 gain, while April's increase of 177,000 jobs was revised to a gain of 174,000.

Construction spending (chart) fell 1.4% month-over-month (m/m) in April, versus projections of a 0.5% advance, but following March's solid upward revision to a 1.1% gain from the previously reported 0.2% decline. Residential spending declined 0.9%, while non-residential spending fell 1.7%.

Today’s plethora of mostly upbeat data, notably the ADP jobs report and the employment component of the ISM's release, comes ahead of tomorrow's broader May nonfarm payroll report, expected to show an increase of 180,000 jobs to the headline rate and 173,000 to private sector payrolls (economic calendar). The unemployment rate is forecasted to remain at 4.4%, and average hourly earnings are projected to rise 0.2% month-over-month (m/m). The only other item on tomorrow’s docket is the April trade balance, forecasted to show the deficit widened to $46.1 billion.

As noted in the latest Schwab Market Perspective: Unprecedented! Or Maybe Not?, leading indicators continue to show a growing economy, bouncing back from the weak first quarter, while the labor market continues to tighten, and globally, we are seeing improving growth. This should help the bull market continue. Read more on the Markets & Economy page at www.schwab.com.

Treasuries were lower, as the yields on the 2-year and 10-year notes, along with the 30-year bond, rose 2 basis points to 1.30%, 2.22% and 2.88%, respectively. For analysis of the bond markets amid the expected Fed interest rate action, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, as well as Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Fixed Income page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Amid elevated expectations of a Fed rate hike later this month and its potential beginning of the process of shrinking its bloated balance sheet later this year, Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Gimme Three Steps … and a Stumble?, noting that reducing the gargantuan balance sheet is a form of tightening and the transition from quantitative easing (QE) to quantitative tightening (QT) begs the question whether we are heading into another period of heightened volatility. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Europe mostly higher, Asia mixed amid uncertainties and plethora of data 

European equities finished mostly higher, following upbeat economic data in the U.S., and as the euro lost ground versus the U.S. dollar. The markets showed some resiliency in the face of elevated political uncertainty on both sides of the Atlantic, as well as lingering uncertainty regarding the timing of when the European Central Bank may begin to rein in its highly accommodative monetary policy. Polls have suggested the race is narrowing in the U.K. ahead of next week's election as Brexit negotiations continue, while votes loom in Germany and Italy later this year. The British pound overcame early weakness and finished flat versus the greenback. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick offer the 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?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Spanish stock markets lagged behind amid a flare-up in the country's banking sector uneasiness, amid a drop in Banco Popular Espanol SA (BPESY $2) on concerns it may need to be wound down if it does not find a buyer. In economic news, the final Markit Eurozone Manufacturing PMI Index was unrevised at 57.0 in May, up from the 56.7 level posted in April, with a reading above 50 denoting expansion. Bond yields in the region traded mixed.

Stocks in Asia finished mixed as the markets digested a flood of economic data, while continuing to grapple with festering political uncertainty in the U.S. and Europe. Japanese securities rose sharply, with the yen giving back some recent gains, while reports showed the nation's Q1 capital spending rose more than expected and manufacturing output continued to expand in May. Mainland Chinese stocks and those traded in Hong Kong also gained ground, as the yuan was set at the strongest level in seven months, per Reuters, while the Caixin China PMI Manufacturing Index fell to a level depicting contraction in May for the first time in 11 months. The report contrasted yesterday's official government manufacturing release, which showed continued expansion out of the sector. Meanwhile, Australian equities advanced modestly on the heels of a stronger-than-expected April retail sales report, while South Korean stocks dipped after the nation reported a larger-than-forecasted deceleration in export growth for last month, and India's markets finished flat in the wake of late-yesterday's Q1 GDP report that showed growth unexpectedly slowed.

For a look at the global markets and economy, see Schwab's Jeffrey Kleintop's, CFA, article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the Markets & Economy page at www.schwab.com, as well as his video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com.

Tomorrow’s international economic calendar will be fairly light, with reports slated for release to include GDP from South Korea, consumer confidence from Japan, employment data from Spain, and PPI from the Eurozone.

Fed Report Unravels Job Data Gains

Charles Schwab; On the Market

Posted: 4/5/2017 4:15 PM ET

Fed Report Unravels Job Data Gains

Early gains for U.S. equities that came courtesy of another batch of stronger-than-expected ADP employment data dissolved, after the minutes from the Fed's March meeting showed support among members to begin shrinking the central bank's balance sheet later this year, as well as the potential of no fiscal stimulus until 2018. Adding to the uncertainty were late-day comments from Speaker of the House Ryan regarding tax reform. Treasury yields declined following the Fed report, while some disappointing reads on the services sector also tempered conviction. Meanwhile, crude oil prices ticked slightly higher, despite an unexpected rise in oil inventories, while gold and the U.S. dollar lost modest ground.

The Dow Jones Industrial Average (DJIA) fell 41 points (0.2%) to 20,648, the S&P 500 Index moved 7 points (0.3%) lower to 2,353, and the Nasdaq Composite declined 34 points (0.6%) to 5,864. In heavy volume, 942 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.12 to $51.15 per barrel and wholesale gasoline was unchanged at $1.72 per gallon. Elsewhere, the Bloomberg gold spot price decreased $3.50 to $1,252.78 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 100.46.

Shares of Panera Bread Co. (PNRA $313) rallied over 14% after announcing an agreement to be acquired by JAB for $315 per share in cash, in a transaction valued at about $7.5 billion, including the assumption of approximately $340 million in debt. JAB is an investor in several companies in the consumer goods category, including owning controlling stakes in Keurig Green Mountain, Krispy Kreme, Peet's Coffee & Tea, and Caribou Coffee Company.

Walgreens Boots Alliance Inc. (WBA $81) reported fiscal 2Q earnings-per-share (EPS) of $0.98, or $1.36 ex-items, versus the $1.37 FactSet estimate, as revenues declined 2.4% year-over-year (y/y) to $29.4 billion, compared to the projected $30.2 billion. WBA reaffirmed its full-year EPS outlook. Separately, the company announced a share repurchase program for up to $1.0 billion. Shares were lower.

Monsanto Co. (MON $115) posted fiscal 2Q EPS of $3.09, or $3.19 ex-items, compared to expectations of $2.79, as revenues rose 12.0% y/y to $5.1 billion, above the forecasted $4.7 billion. MON said it expects full-year earnings to be at the high end of its previous guidance and shares gained ground.

ADP report trounces forecasts, services data misses, Fed minutes rouse cation

The ADP Employment Change Report showed private sector payrolls rose by 263,000 jobs in March, well above the Bloomberg forecast of a 185,000 gain, while February's increase of 298,000 jobs was revised to a gain of 245,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader March nonfarm payroll report, expected to show an increase of 180,000 jobs (economic calendar). The unemployment rate is forecasted to remain at 4.7%, and average hourly earnings are projected to rise 0.2% month-over-month (m/m).

The March Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 55.2—the lowest since October 2016—from February's unrevised 57.6 level, which was the highest since October 2015, and compared to the Bloomberg forecast of a dip to 57.0. New orders and employment both decreased m/m but continued to show expansion, while prices also grew at a slower pace. The ISM said comments from respondents were mostly positive regarding the outlooks for business conditions and overall economy. However, ISM noted that there were several comments about the uncertainty of future government policies on health care, trade and immigration, and the potential impact on business.

The final Markit U.S. Services PMI Index was revised to 52.8 in March from the preliminary 52.9 level, versus estimates of a 53.1 reading, and compared to the 53.8 figure posted in February. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The services sector is the largest contributor to U.S. economic output and the reports may have disappointed somewhat, but both indexes remained above 50, a level depicting continued expansion. Also, the data is being countered by the much stronger-than-expected ADP employment report, which showed positive "hard data" and added credence to Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data, that after a "typical" weak first quarter, economic growth should accelerate. Based on history, soft data—generally survey-based readings, such as consumer and business measures of confidence, as well as purchasing managers' surveys (PMIs)—is likely to retreat, while hard data—quantitative data or actual measures of economic activity—is likely to gain steam but curb your enthusiasm for a more meaningful acceleration due to longer-term pressures. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The MBA Mortgage Application Index fell 1.6% last week, following the previous week's 0.8% decline. The decrease came as a 4.2% fall in the Refinance Index more than offset a 0.7% gain for the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.34%.

At 2:00 p.m. ET, the minutes from the Fed's March monetary policy meeting were released, noting that most officials supported policy to begin shrinking the Fed's $4.5 trillion balance sheet later this year, while also reiterating its outlook for gradual increases in interest rates. The minutes also showed that most members felt that the economy was at or near full employment, but continued to be divided over inflation, with some Fed officials indicating a "limited risk of a marked pickup in inflation," while others thought there were significant upside risks as a result of a strong jobs market. In addition, members felt that any fiscal stimulus may not come to fruition until 2018.

Treasuries finished higher, as the yields on the 2-year and the 10-year notes, as well as the 30-year bond were 2 bps lower at 1.23%, 2.32%, and 2.98%, respectively.

The markets have been choppy amid some upbeat economic data, exacerbated political uncertainty here and abroad, and the Fed's March rate hike and outlook for future increases. Amid this backdrop, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Financials—Opportunity or End of the Run?, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch. Also, check out our videos by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, titled, Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?, and Randy's and Schwab's Chief Fixed Income Strategist, Kathy Jones' discussion, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond, at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Tomorrow's economic calendar will be light, but offer more jobs data ahead of Friday's labor report, as weekly initial jobless claims will be released, forecasted to decline to a level of 250,000 from the 258,000 posted the week prior.

Europe mixed on data and a rebound in financials, Asia higher

European equities finished mixed, with financials rebounding from recent weakness as bond yields paused from a losing streak as of late and on the heels of yesterday's comments from U.S. President Donald Trump regarding changes to regulations in the banking sector. Oil & gas and basic materials also provided support as crude oil prices continued to recover and amid optimism of economic developments in China. However, conviction may have been stymied by tomorrow's beginning of a two-day meeting between the U.S. and China and Friday's U.S. nonfarm payroll report. Political uncertainty also lingered as Brexit negotiations continue and the markets digested last night's debate in France ahead of its key Presidential election later this month. For analysis of the European political front, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, check out our article, Brexit Begins: What's Next for the U.K., at www.schwab.com/insights, and Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. The euro dipped and the British pound was higher versus the U.S. dollar following reports showing eurozone services output missed forecasts but continued to show expansion, while U.K. activity in the sector easily beat expectations.

Stocks in Asia finished higher, aided by yesterday's modest gains in the U.S. that snapped a two-session losing streak, while gains may have been limited by the highly-anticipated two-day meeting between the U.S. and China beginning tomorrow and Friday's key U.S. labor report. The markets appeared to shrug off lingering political uncertainty in the U.S. and Europe, as well as reports that North Korea conducted another ballistic missile test. For commentary on global trade and China, check out Schwab's Jeffrey Kleintop's, CFA, articles, Top Five Trade Issues Investors Should Be Watching, and The Fed has China in a Tough Spot. Japanese equities rose modestly, with the yen paring a recent rally and reports showing the nation's manufacturing and services sector growth accelerated. Australian securities also advanced, with strength in basic materials and oil & gas issues leading the way amid the continued recovery in crude oil prices and news out of China.

Stocks in mainland China and Hong Kong gained ground in their return to action following a holiday break, as materials and industrial stocks led the way on optimism plans for a new economic zone near Beijing will bolster earnings, per Bloomberg. Meanwhile, South Korea's markets finished flat, while India's bourse rose slightly, hitting a record high in a return to action following yesterday's holiday. Emerging markets have enjoyed strong returns in 2017, led by Indian stocks, which have rebounded sharply after a brief post U.S. election slide. For more on emerging markets read Schwab's Michelle Gibley's, CFA, article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read all these commentaries at www.schwab.com/oninternational.

Markets Shrug Off Solid Jobs Report

Charles Schwab: On the Market

Posted: 3/8/2017 4:15 PM ET

Markets Shrug Off Solid Jobs Report

U.S. equities finished mixed, despite a much stronger-than-expected ADP employment report, as the data may have added to already-elevated Fed rate hike expectations. Meanwhile, political uncertainty here and abroad continued to be a drag on conviction. Treasury yields and the U.S. dollar moved higher and crude oil prices tumbled in the wake of a bearish government oil inventory report, while gold also finished lower.

The Dow Jones Industrial Average (DJIA) lost 69 points (0.3%) to 20,856, the S&P 500 Index declined 5 points (0.2%) to 2,363, while the Nasdaq Composite inched 4 points (0.3%) higher to 5,838. In moderate volume, 892 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.86 to $50.28 per barrel and wholesale gasoline was $0.03 lower at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price moved $7.64 lower to $1,208.22 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 102.09.

H&R Block Inc. (HRB $24) reported a fiscal 3Q loss of $0.50 per share, or $0.49 per share ex-items, compared to the $0.52 shortfall that was expected, as revenues declined 4.8% year-over-year (y/y) to $452 million, above the projected $428 million. The tax preparation company said it has seen market share gains in both assisted and do-it-yourself categories for the first half of tax season. Shares were sharply higher.

Shares of Dow member Caterpillar Inc. (CAT $93) saw pressure following a report from the New York Times (NYT) that said a report commissioned by the government accuses the company of tax and accounting fraud. The report follows last week's raid on the company's headquarters by Federal agents. No charges have been filed and the NYT said CAT told it that the company has not seen a copy of the report and declined further comment.

Urban Outfitters Inc. (URBN $25) reported 4Q earnings-per-share (EPS) of $0.55, below the estimated $0.56, as revenues rose 2.0% y/y to $1.0 billion, roughly in line with forecasts. 4Q same-store sales were flat y/y, versus the expected 0.1% increase. The retailer's gross margin was pressured, missing expectations, and the company said its 1Q gauge of profits is expected to see similar results as the quarter has started off weak. Shares dropped decisively.

Ciena Corp. (CIEN $24) posted fiscal 1Q EPS of $0.03, or $0.26 ex-items, compared to estimates of $0.29, with revenues rising 8.4% y/y to $622 million, below the forecasted $632 million. The network strategy and technology company reported gross margin that missed expectations. Shares were sharply lower.

ADP payroll report jumps, mortgage applications rise

The ADP Employment Change Report showed private sector payrolls jumped by 298,000 jobs in February, well above the Bloomberg forecast of a 187,000 gain, while January's increase of 246,000 jobs was revised to a 261,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader February nonfarm payroll report, expected to show an increase of 200,000 jobs, and private sector payrolls are estimated to rise by 195,000 jobs (economic calendar). The unemployment rate is forecasted to dip to 4.7% from 4.8%, and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

Final 4Q nonfarm productivity (chart) was unrevised at a 1.3% gain from the preliminary estimate on an annualized basis, below expectations of an adjustment to a 1.5% rise. 3Q productivity was revised lower to a 3.3% increase. Also, unit labor costs were unadjusted at a 1.7% increase, from the initial report, versus expectations of a 1.6% gain. Unit labor costs rose by a downwardly revised 1.6% in 3Q.

Wholesale inventories (chart) was adjusted to a 0.2% m/m decline for January, versus expectations of an unrevised 0.1% dip, and following December's 1.0% gain. Sales decreased 0.1% m/m, compared to forecasts of a 0.5% gain. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at December's 1.29 months level.

The MBA Mortgage Application Index rose 3.3% last week, following the previous week's 5.8% gain. The increase came as a 5.2% jump for the Refinance Index was met with a 1.7% rise for the Purchase Index. The average 30-year mortgage rate rose 6 basis points (bps) to 4.36%.

Treasuries finished lower, as the yield on the 2-year note rose 2 bps to 1.35%, the yield on the 10-year note gained 4 bps to 2.56%, and the 30-year bond rate increased 3 bps to 3.15%.

The markets continue to focus on the timing and details of President Donald Trump's policy plans, boosted expectations of a Fed rate hike next week in the wake of continued solid economic data, and the recent rally to all-time highs for the stock markets. As such, see our latest article, End of an Era: Why Volatility May Return to the Stock Market at www.schwab.com/insights.

As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations, higher inflation and stronger economic data—and perhaps the stock market's rip higher—have led to more "hawkish" commentary from the Fed recently. March Fed hike expectations have risen considerably, now well over 80. History compiled by Strategas Research Partners shows that the best stock market performance during a rate hiking cycle comes when the Fed moves slowly in the first year, but quicker in the second year. That pattern appears to be panning out in this cycle. Read more at www.schwab.com/marketinsight.

For analysis of the Fed and President Trump's highly-anticipated reflationary policies, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors? at www.schwab.com/onbonds, and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights. Follow Kathy on Twitter: @kathyjones.

Tomorrow's domestic docket will provide investors a look at weekly initial jobless claims, forecasted to rise to a level of 238,000 from the prior week's 223,000, as well as the Import Price Index, with economists anticipating a 0.1% m/m increase during February following the 0.4% rise registered in January.

Europe nudges higher on data, Asia mixed as conviction remains constrained

European equities ticked higher, with the markets digesting some relatively upbeat earnings and economic data, though a highly-anticipated U.S. rate hike loomed as a possibility and political uncertainty continued to linger. The upcoming key French Presidential election remained in focus as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Also, be sure to check out Jeff's articles, Five Reasons to Stay Invested Despite Heightened Uncertainty and The future of Europe: EU 2.0 and its impact on the markets at www.schwab.com/oninternational. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Shares of Adidas AG (ADDYY $92) rallied after the German athletic gear maker posted stronger-than-expected earnings results and offered a favorable outlook. In economic news, German and Spanish industrial production rebounded more than expected in January, ahead of tomorrow's monetary policy decision from the European Central Bank, with forecasts calling for the central bank to leave its stance unchanged. The U.K. raised its economic growth forecast for 2017, but lowered its outlook for the next three years as the nation delivered its spring budget. The euro and British pound were lower versus the U.S. dollar, while bond yields in the region gained ground.

Stocks in Asia finished mixed amid heightened expectations of a rate hike in the U.S. next week, mixed economic data, and festering U.S. and European political uncertainty. Also, recently resurfaced geopolitical concerns may have contributed to a lack of conviction in the markets. Japanese equities declined, as the yen strengthened intra-day, while a report showed the nation's 4Q GDP growth came in at a 1.2% annualized quarter-over-quarter pace, revised up from the preliminary estimate of 1.0% growth, but below the projected 1.5% expansion. Stocks in China dipped slightly, but those traded in Hong Kong advanced, following data that showed the nation's exports missed expectations for February, resulting in the first trade deficit in yuan terms for the country in three years. However, the Lunar New Year holiday may have impacted the data. Meanwhile, markets in Australia finished flat, India's market saw a modest decline, while South Korean securities ticked higher. For insight on global investing, see Schwab's Director of International Research, Michelle Gibley's, CFA, articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

In addition to the aforementioned European Central Bank meeting, tomorrow's international economic calendar will hold CPI and PPI from China, machine tool orders from Japan, and employment data from France.

Stocks Manage Mild Gains as Fed Holds Steady

Charles Schwab: On the Market

Posted: 2/1/2017 4:15 PM ET

Stocks Manage Mild Gains as Fed Holds Steady

U.S. stocks managed to finish with mild gains amid some favorable earnings results from Dow component Apple and a host of upbeat manufacturing reports out of China, Europe and the U.S. Investors seemed cautious ahead of today's Fed monetary policy decision, which showed the Central Bank will hold its current target rate range. Crude oil prices and the U.S. dollar were higher, while Treasuries and gold were lower.

The Dow Jones Industrial Average (DJIA) increased 27 points (0.1%) to 19,891, the S&P 500 Index was nearly unchanged at 2,279, and the Nasdaq Composite advanced 28 points (0.5%) to 5,643. In moderately heavy volume, 903 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil ticked $1.07 higher to $53.88 per barrel and wholesale gasoline added $0.03 to $1.58 per gallon. Elsewhere, the Bloomberg gold spot price declined $6.47 to $1,212.17 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.2% to 99.51.

Dow member Apple Inc. (AAPL $129) reported fiscal 1Q earnings-per-share (EPS) of $3.36, above the $3.22 FactSet estimate, as revenues rose 3.3% year-over-year (y/y) to $78.4 billion, topping the projected $77.3 billion. The company said its holiday quarter results generated all-time revenue records for its iPhone, Services, Mac and Apple Watch units, with services revenue growing "strongly" y/y, led by record customer activity on the App Store. AAPL's 2Q revenue guidance came in just shy of expectations. Shares finished nicely higher.

Advanced Micro Devices Inc. (AMD $12) posted a fiscal 4Q loss of $0.01 per share, matching forecasts, with revenues rising 15.9% y/y to $1.1 billion, roughly in line with estimates. The graphic chipmaker's 1Q revenue forecast topped expectations and shares rallied.

The big three U.S. automakers reported January sales today, with General Motors Co's (GM $36) sales declining 3.8% y/y, compared to the projected 1.0% decline. Fiat Chrysler Automobiles NV's (FCAU $11) sales fell 11.2%, compared to the expected 14.9% drop. Ford Motor Co (F $12) reported a 0.6% dip in sales, versus the expected 3.2% decline. GM, F and FCAU declined.

Manufacturing growth accelerates in January, Fed holds steady

The Institute for Supply Management (ISM) Manufacturing Index (chart) for January moved farther into expansion territory (above 50) than expected after rising to 56.0—the highest since November 2014—from December's 54.5 level, and compared to the Bloomberg forecast of a modest rise to 55.0. Production and new orders both improved to levels north of 60, and growth in employment accelerated. Prices rose to 69.0 from 65.5, and inventories increased but remained in contraction territory. Amid the backdrop of the strong U.S. dollar, new export orders decreased but remained above 50. The ISM said comments from the survey were generally positive regarding demand levels and business conditions.

The final Markit U.S. Manufacturing PMI Index was revised slightly lower to 55.0 for January from the 55.1 preliminary level, where it was expected to remain. However, the index is up from the 54.3 level posted in December. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

The ADP Employment Change Report showed private sector payrolls rose by 246,000 jobs in January, well above the Bloomberg forecast of a 168,000 gain, while December's increase of 153,000 jobs was revised slightly lower to a 151,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader January  nonfarm payroll report, expected to show an increase of 175,000 jobs, while private sector payrolls are projected to rise by 170,000 (economic calendar). The unemployment rate is forecasted to remain at 4.7%, and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

Today's manufacturing and employment data adds credence to our view in the latest Schwab Market Perspective: A New World, that we believe the market's post-election gains were not solely related to optimism about the pro-business leanings of the new administration, but also reflected improving economic data and better corporate earnings. Continued solid economic data and a decent earnings reporting season bolster our confidence in the continuation of the bull market in stocks. However, rising inflation, possibly forcing the Fed to be more aggressive, could lead to bouts of volatility and more pullbacks. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, opting to keep the target range for the Fed funds rate unchanged at 0.50%-0.75%, as many had expected, after agreeing unanimously to raise the target rate range at its December meeting. It was revealed in the Federal Reserve's FOMC statement that "in view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate." There was no press conference or updated economic projections following the decision. Be sure to check out analysis of the Fed's decision from Schwab's Chief Investment Strategist Liz Ann Sonders later today at www.schwab.com/marketinsight.

Construction spending (chart) declined 0.2% m/m in December, versus projections of a 0.2% advance, and following November's unrevised 0.9% gain. Residential spending was 0.4% higher, and non-residential spending declined 0.7%.

The MBA Mortgage Application Index declined 3.2% last week, following the previous week's 4.0% gain. The decrease came as the Refinance Index fell 1.4%, while the Purchase Index dropped 5.6%. The average 30-year mortgage rate rose 4 basis points (bps) to 4.39%.

Treasuries were lower, with the yield on the 2-year note gaining 1 basis point (bp) to 1.22%, the yield on the 10-year note rising 3 bps to 2.48% and the 30-year bond rate advancing 2 bps to 3.08%.Treasury yields and the U.S. dollar remain in focus with the global markets grappling with the latest policy moves from President Donald Trump, and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, 5 Themes to Watch as the Trump Era Begins, at www.schwab.com/insights.

On the heels of the pullback in stocks from record highs, Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Rise Up: Dow 20k Fails to Thrill Individual Investors, individual sentiment has become less bullish, while other measures show highly elevated optimism. She adds that extremely low volatility isn't likely to persist, but the bull market is. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Tomorrow's U.S. economic calendar will bring reports on weekly jobless claims, expected to have declined to 250,000 from the prior week's 259,000 level, and preliminary 4Q nonfarm productivity and unit labor costs, with productivity anticipated to have increased 1.0% on an annualized basis and costs forecasted to have risen 1.9%.

Europe snaps losing streak, Asia mostly higher following data

European equities gained ground, snapping a string of losses, with some upbeat Chinese business activity reports being met with some favorable eurozone and U.K. manufacturing data. The currency markets were in focus ahead of today's monetary policy decision in the U.S. and amid festering Brexit uncertainty, while U.S. President Donald Trump criticized currency valuations in Japan, China and Germany. The euro traded lower and the British pound moved higher versus the U.S. dollar, while bond yields in the region traded to the upside. Earnings results in the region were mostly upbeat to help sentiment, and the global tech sector got a boost from results from Dow member Apple.

For more on the global markets, see Schwab's Jeffrey Kleintop's, CFA, latest article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Also, Jeff delivers his articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read all these articles at www.schwab.com/oninternational.

Stocks in Asia finished mostly higher ahead of the U.S. monetary policy decision and some continued volatility in the currency markets following comments from U.S. President Donald Trump that criticized the low valuation of currencies in Japan, China and Germany. For more on Trump's policies, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? at www.schwab.com/oninternational, where you can also find Schwab's Director of International Research, Michelle Gibley's, CFA, latest article, Currency Hedging: 5 Things You Need to Know. Some upbeat economic data in the region lent some support, with manufacturing and services sector reports out of China both showing growth accelerated in January, with the former topping estimates, while South Korea posted a larger-than-expected jump in exports for last month.

Stocks trading in Hong Kong declined, returning to action after the long Lunar New Year holiday break, while mainland Chinese markets remained closed. South Korean and Australian equities advanced, while Indian securities rallied as traders digested the nation's annual budget. For more on international investing, see Schwab's Michelle Gibley's, CFA, article, Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

The international economic docket for tomorrow will include consumer confidence from Japan and PPI from the eurozone, while in central bank action, the Bank of England will announce its rate decision.

Markets Lose on Trifecta of Events

Charles Schwab: On the Market

Posted: 8/2/2016 4:15 PM ET

Markets Lose on Trifecta of Events

U.S. equities finished solidly lower amid a triple dose of negativity, with global sentiment dampened on festering European banking concerns, disappointment surrounding Japan's stimulus measures, as well as a drop into bear market territory for crude oil prices. Meanwhile, dismal July domestic auto sales figures didn't help matters. Treasuries were mixed on the heels of a divergent domestic personal income and spending report, the U.S. dollar was lower and gold moved higher.

The Dow Jones Industrial Average (DJIA) fell 91 points (0.5%) to 18,314, the S&P 500 Index declined 14 points (0.6%) to 2,157 and the Nasdaq Composite tumbled 46 points (0.9%) to 5,138. In moderately-heavy volume, 931 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.55 to $39.51 per barrel, wholesale gasoline inched $0.01 higher to $1.31 per gallon, while the Bloomberg gold spot price rose $12.30 to $1,365.45 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 95.09.

Dow member Procter & Gamble Co. (PG $87) reported fiscal 4Q earnings-per-share (EPS) ex-items of $0.79, above the $0.74 FactSet estimate, as revenues decreased 3.0% year-over-year (y/y) to $16.1 billion, versus the projected $15.8 billion. PG warned that core 1Q EPS will be disproportionately affected by foreign exchange headwinds and the impact of lost finished product sales to its Venezuelan subsidiaries. Shares finished higher.

Dow component Pfizer Inc. (PFE $36) posted 2Q EPS ex-items of $0.64, two cents above expectations, with revenues growing 11.0% y/y to $13.2 billion, versus the projected $13.0 billion. PFE reaffirmed its full-year guidance and shares were lower.

CVS Health Corp. (CVS $98) announced 2Q EPS ex-items of $1.32, above the expected $1.30, as revenues rose 17.6% y/y to $43.7 billion, below the forecast $44.3 billion. CVS issued 3Q earnings guidance that was mostly above expectations, and raised its full-year profit outlook. Shares were nicely higher. 

The major automakers reported U.S. July sales today, with Ford Motor Co's (F $12) sales falling 2.8%, below the FactSet estimate of a 0.3% decrease, while General Motors Co's (GM $30) sales dropped 1.9%, compared to the projected 0.1% dip. Fiat Chrysler Automobiles NV's (FCAU $6) Chrysler brand's sales ticked 0.3% higher y/y, compared to the expected 2.3% gain. Toyota Motor Corp. (TM $110) posted a 1,5% y/y decline in sales, besting the 3.8% shortfall expected, and Volkswagen AG (VLKAY $29) saw an 8.1% y/y decline in sales for the month, well above the 20% plunge forecast. Shares of all five of the automakers were lower.

Personal income and spending report mixed

Personal income (chart) was 0.2% higher month-over-month (m/m) in June, below the Bloomberg forecast of a 0.3% rise and matching May's unrevised increase. Personal spending came in 0.4% higher m/m last month, north of expectations of a 0.3% gain and matching May's unrevised rise. The June savings rate as a percentage of disposable income was 5.3%. The PCE Deflator rose 0.1% m/m, below forecasts of a 0.2% increase. Compared to last year, the deflator was 0.9% higher, matching estimates. Excluding food and energy, the PCE Core Index was 0.1% higher m/m, in line with expectations, and the index was up 1.6% y/y, in line with estimates.

Treasuries were mixed, as the yield on the 2-year note dipped 1 basis point (bp) to 0.68%, while the yield on the 10-year note ticked 1 bp higher to 1.54%, and the 30-year bond rate gained 3 bps to 2.30%. Bond yields have rebounded somewhat from last week's drop that came courtesy of the Fed leaving its monetary policy unchanged and 2Q GDP growth decisively missing expectations.  

Schwab's Chief Investment Strategist, Liz Ann Sonders provides analysis of last week's Fed's decision in her commentary, A Hopeful Transmission: Fed Holds Rates Steady, But… and Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Kathy on Twitter: @lizannsonders and @kathyjones.

Tomorrow the domestic economic calendar will bring some reads on the key services sector for July courtesy of the Institute for Supply Management's (ISM) non-Manufacturing Index and Markit's final Services PMI Index. ISM's index is projected to decline to 55.9 from 56.5 in June, and Markit's index is anticipated to be revised slightly higher to 51.0 from the preliminary level of 50.9, just shy of June's 51.4 figure. However, both reports are projecting continued expansion in the services sector as denoted by readings above 50.

Although last week's 2Q GDP report disappointed, the consumer spending component was a bright spot and today's personal spending data came in stronger than expected, suggesting the consumer may be poised to bolster the U.S. economy. As noted in the latest Schwab Market Perspective: New Records…Same Skepticism, the U.S. economy continues to show signs of improvement, with jobless claims reinforcing a healthier employment picture, wage growth starting to perk up, and housing continuing to be a bright spot and indicating better confidence among consumers. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

As well, the ADP Employment Change report is slated for release, forecast to show private sector payrolls added 170,000 jobs during July, as well as MBA Mortgage Applications.

Europe and Asia lower amid banking concerns and Japan stimulus details

European equities finished lower, with oil & gas issues remaining weak as the recent tumble in crude oil prices to bear market territory weighed on the energy sector. Financials led to the downside, amid festering uneasiness toward the Italian banking sector in the wake of late-Friday's European banking sector stress test results. Mixed earnings reports in the region, coupled with lackluster global economic data as of late and disappointment toward Japan's new stimulus measures weighed on the markets, overshadowing a rate cut in Australia today. Amid this backdrop, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read more at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro and the British pound were higher versus the U.S. dollar, while bond yields in the region gained ground. Switzerland's markets saw some pressure in a return to action following yesterday's holiday, on the heels of some disappointing retail sales and manufacturing data.

Stocks in Asia finished mostly lower with energy issues seeing pressure as crude oil prices continued to fall yesterday, entering bear market territory. Japanese equities dropped sharply, with the yen gaining ground late in the session, while the markets appeared to be disappointed by details of the government's fiscal stimulus package announced last week and approved after the markets closed. Markets in Australia declined, bogged down by oil & gas and basic materials issues, while failing to get a boost from the expected monetary policy decision from the Reserve Bank of Australia (RBA) to cut its benchmark interest rate by 25 bps to 1.50%. The RBA noted that the global economy is continuing to grow at a lower-than-average pace, with conditions becoming more difficult for a number of emerging markets, while inflation remains quite low. Jeffrey Kleintop, CFA, offers Five ways investors can make the most of slower growth, at www.schwab.com/oninternational. Meanwhile, Indian securities and those traded in South Korea's declined, but mainland Chinese listings bucked the trend to finish higher, rising for the first time in three sessions, led by property-related issues, and those traded in Hong Kong were closed due to the impact of tropical storm Nida on the region.

For tomorrow, the Markit Service PMI Indexes from around the globe will likely dominate the international economic calendar, with other reports scheduled for release to include wage data from Australia and retail sales from the Eurozone.

Stocks Disagree on Direction Ahead of Jobs Data

Charles Schwab: On the Market

Posted: 7/7/2016 4:15 PM ET

Stocks Disagree on Direction Ahead of Jobs Data

U.S. stocks closed the trading session mixed with some modest early gains fading as investors may have been exercising some caution ahead of tomorrow's June labor report release. Crude oil prices reversed solidly lower on the heels of a weekly report that showed stockpiles fell less than forecasted, while weekly jobless claims declined and ADP reported a better-than-expected increase for private sector jobs. Treasuries and gold were lower and the U.S. dollar was higher.

The Dow Jones Industrial Average (DJIA) declined 23 points (0.1%) to 17,896, the S&P 500 Index decreased 2 points (0.1%) to 2,098, and the Nasdaq Composite added 18 points (0.4%) to 4,877. In moderate volume, 864 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil was $2.29 lower at $45.14 per barrel, wholesale gasoline dropped $0.07 to $1.36 per gallon and the Bloomberg gold spot price decreased $3.76 to $1,360.02 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 96.27.

PepsiCo Inc. (PEP $107) reported core 2Q EPS of $1.35, above the $1.29 FactSet estimate, on revenues of $15.4 billion that matched expectations. The snack and soft drink maker credited strength in the U.S. market and its cost-cutting initiatives that were able to overcome weaker sales abroad. PEP also raised its full-year forecasts. Shares of PEP closed nicely higher.

Danone SA (DANOY $14) has agreed to buy WhiteWave Foods Co. (WWAV $56) for $10 billion, in a move to add the Denver-based company's popular Silk soy milk brand to its expanding organic food segment. WWAV shareholders will receive $56.25 per share in cash for each share owned, a 19% premium to Wednesday's closing price. Danone's Chief Executive Officer Faber said the acquisition will "allow us to double the size of our U.S. business and become the world leader in organic." DANOY finished slightly higher, while WWAV rallied.

Jobs data highlights economic calendar

Weekly initial jobless claims (chart) declined by 16,000 to 254,000 last week, versus the Bloomberg estimate of 270,000. The prior week's figure of 270,000 was downwardly revised to 268,000. The four-week moving average declined by 2,500 to 264,750, while continuing claims fell 44,000 to 2,124,000, north of the estimated level of 2,123,000.

The ADP Employment Change Report showed private sector payrolls rose by 172,000 jobs in June, above forecasts of 151,000, while May's gain of 173,000 jobs was revised lower to a 168,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of tomorrow's broader June nonfarm payroll report, expected to show an increase of 180,000 jobs, while private sector payrolls are expected to rise 170,000 (economic calendar). The unemployment rate is forecasted to tick higher to 4.8% from 4.7% and average hourly earnings are projected to rise 0.2% month-over-month (m/m).

In the final hour of trading tomorrow, we will also receive the latest consumer credit report, which is expected to show consumer borrowing for the month of May expanded by a level of $16.0 billion, after increasing by $13.4 billion in April.

Treasuries were mostly lower, with the yield on the 2-year note increasing 1 basis point (bp) to .059% and the yield on the 10-year note gaining 2 bps to 1.39%, while the yield on the 30-year bond was nearly unchanged at 2.14%. Bond yields have come under pressure as of late, falling to record lows as the global markets continue to grapple with the impact of the U.K. Brexit vote, and Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones. Also, for more on the Brexit fallout, see the latest Schwab Sector Views: Sector Impact of Brexitfrom Schwab Director of Market and Sector Analysis, Brad Sorensen, CFA, at www.schwab.com/marktetinsight, and follow Schwab on Twitter: @schwabresearch.

Europe rebounds from three-day fall, Asia mixed 

European equities finished higher, rebounding from a three-day drop, as optimism re-surfaced that central banks will be supportive in the wake of the U.K. Brexit vote, which has fueled risk aversion and global growth concerns, and after yesterday's minutes from the Fed's June meeting showed continued dovishness. Also, anxiety toward the Italian banking sector softened amid increased hopes that a resolution to aid the battered sector can be achieved. Moreover, the British pound recovered somewhat after falling to a 31-year low versus the U.S. dollar. For deeper analysis of the impact of the Brexit vote, see the Schwab Center for Financial Research's recent article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and be sure to check out the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Brexit Aftershock: When Will the Markets Calm Down?, at www.schwab.com/insights. Follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.

Economic news in the region was mixed, with a better-than-expected read on U.K. industrial production being somewhat overshadowed by a surprising decline in production out of Germany, while France's trade deficit narrowed and housing prices in the U.K. rose above forecasts. The euro was lower versus the U.S. dollar, while bond yields in the region were higher.

Stocks in Asia finished mixed, with the angst surrounding the U.K. Brexit vote fallout easing somewhat, but the global growth concerns remained. The flight-to-safety continued to boost the yen, which fostered a decline for Japanese equities. Elsewhere, Australian securities managed gains despite Standard & Poor's lowering the nation's AAA-credit rating outlook to negative from stable, saying "the government's fiscal stance may no longer be compatible with the country's high level of indebtedness." The move follows last weekend's general elections that rendered inconclusive results. Mainland Chinese stocks were mostly flat, but securities trading in Hong Kong gained ground for the sixth-straight day. Meanwhile, South Korean stocks rose and Indian equities inched higher following yesterday's holiday.

The international economic docket for tomorrow will yield trade data from Japan and Germany, industrial and manufacturing production from France and labor costs and the trade balance from the U.K.

FINANCIAL REVIEW

Milk and Cookies in the Land of No Satisfaction

Sinclair Noe — November 5, 2014

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Financial Review
DOW + 100 = 17,484
SPX + 11 = 2023
NAS – 2 = 4620
10 YR YLD un = 2.35%
OIL + 1.69 = 78.88
GOLD – 28.20 = 1141.00
SILV – .72 = 15.42

Record highs for the Dow Industrials and the S&P 500.

The midterm election is history, and it was a big night for the GOP. Republicans will have at least 52 Senate seats, a gain of 7. In the House, the GOP will now have at least 243 seats, a gain of 14. The GOP also gained 2 net governorships. So it was a big night. However, Obama was not on the ballot, even though some of the campaign ads made it sound that way; he’s got 2 more years and he still has veto power. It takes a two-thirds majority in both the House and Senate to override a veto. Republicans have nowhere near two-thirds of either chamber. So, get ready for 2 more years of gridlock.

One takeaway is that people are not satisfied with the economic progress of the past few years. While Wall Street is at record highs and the unemployment rate has dropped, that just isn’t enough. Fewer people participated in stock market gains and even though more people have jobs, the jobs aren’t paying what they used to. It doesn’t mean the numbers are wrong; the Dow closed at 17,484 and that is a real number, but the stocks in the Dow have used financial engineering to achieve price gains. The unemployment rate is 5.9%, not 32% (according to a survey released last week by Ipsos Mori, the average American guessed that the unemployment rate is 32%), but people have seen wages decline, they have seen their careers replaced by jobs. The top concerns of voters going into the midterms were economic growth and job creation.

According to national exit poll data, roughly half of the people interviewed as they left the polls said they expected life for the next generation of Americans to be “worse than life today.” Roughly four out of every five America voters were either “very worried” or “somewhat worried” about the direction of the economy in the next year, and just 22% said they were “not at all worried” or “not too worried”. Just 1% of voters felt the economy was “excellent.” Roughly 70% said the economy was “not so good” or “poor.” When asked whether the economy was getting better, getting worse, or roughly the same, voters were split evenly between the three choices. And when asked if a voter’s family financial situation had improved in the past two years, just 29% of respondents said it had. More than 60% of voters polled said they felt the US economic system “favors the wealthy.” On a side note, the new Credit Suisse 2014 Global Wealth Databook reports that each year since the recession, America’s richest 1% have made more than the cost of all US Social programs.

Since 1926, the S&P 500 has gained nearly 17% on average in Year 3 of presidential terms. The next-best years for stocks are presidential election years, when equities have gained 9.8% on average. The Stock Trader’s Almanac tells us that the Dow Jones industrial average has not suffered a third-year loss since 1939. Part of it has to do with the fact that the third year of an administration also tends to see the best growth in gross domestic product. Market strategists surmise that the party in power in the White House has a vested interest in stimulating the economy, and the markets as much as it can in the year before it faces re-election.

Researchers at Leuthold discovered that stocks have risen at an annualized rate of nearly 25% (including dividends) in the period that runs from the midterm elections in November to April of the following year. We are also moving into what is known as the best 6 months in the market; that November through April time is typically better than May through October. And then there is a tendency for an end of year, or Santa Claus rally. According to the Stock Traders’ Almanac, fourth quarters during years when midterm elections are held have produced an average gain of 8% over the past 65 years. They’ve been followed by rallies of almost that much in the next three months, making the average 16% two-quarter rally the best combination of the election cycles.

The S&P 500 has risen an average 15.1% in calendar years when a Democratic president has been opposed by a Republican-controlled Congress since 1945. These are tendencies and probabilities, not guarantees.

Let’s check the economic news. The Institute for Supply Management’s nonmanufacturing index dropped to 57.1% from 58.6% in September. New orders fell 1.9 points to 59.1% and production slipped 2.9 points to 60%. Yet the employment gauge, a sign of hiring intentions, rose 1.1 points to 59.6%, the highest level recorded since 2005.

ADP reports private employers added 230,000 jobs in October, the most since June. The monthly government jobs report is Friday, with most estimates around 225,000 net new jobs.

Productivity rose 1.5% in the third quarter, down from 2.3% in the spring. When workers and companies produce more and more goods and services with the same amount of labor and materials, firms make bigger profits and they can offer larger pay raises. The flip side of low productivity is that it’s often the result of companies that have too few workers to meet growing demand. So it’s usually a sign to hire more workers and rely less on overtime.

Bloomberg reports that of the S&P 500 members that have reported their latest quarterly results, 82% topped profit projections, while 61% exceeded sales estimates; that’s the fastest pace of earnings beats in 4 years.

Qualcomm reported a fiscal fourth-quarter profit of $1.89 billion, or $1.11 a share, on revenue of $6.69 billion. Both revenue and earnings missed estimates.

Chrysler reported a 32% increase in net income on stronger sales of SUV’s and pickup trucks.

Tesla reported third-quarter results that topped expectations after the close, but the electric car maker lowered its delivery forecast for 2014 to 33,000 cars (it had expected to deliver 35,000 cars).

SolarCity reported a 20% rise in quarterly revenue as it added more customers. SolarCity also reported a net loss of $70 million, wider than the $37 million loss it reported a year ago.

When Alibaba Group delivered its first quarterly report as a public company, they showed earnings of $1.1 billion, or 45 cents a share, up 15% from a year earlier; those numbers excluded some $490 million in expenses from Alibaba stock given to employees as part of their compensation. This stock-based compensation expense made up the vast bulk of items excluded from Alibaba’s preferred “adjusted” profit measure.
West Texas Intermediate crude rebounded from a three-year low, climbing to $78.88 a barrel after a government report showed that US oil supplies increased less than analysts expected last week, while refineries increased operating rates.

The recent plunge in oil (today’s move excluded) is propelling shares of airlines and truckers, and that has in turn pushed the transportation index to new highs. Dow theorists will tell you that the performance of the transports often indicates the market’s next move, as they are economically sensitive stocks. With the index at a record, though, some investors are asking a simple question: Is rally in the transports simply all about oil, or are they signaling a stronger economy ahead?

The Federal Reserve unveiled a final rule today designed to prevent large financial firms from becoming so big that their failure could shake the core of the financial markets. The final rule, required by the 2010 Dodd-Frank Wall Street reform law, prohibits banks and certain large financial firms from acquiring another company if that merger would cause their liabilities to exceed 10% of the total consolidated liabilities for all financial firms. The “too big to fail” rule applies to banks and to large financial firms who are designated as “systemic” by the Financial Stability Oversight Council. Richmond President Jeffrey Lacker delivered a speech today, saying that the Bankruptcy Code must be a viable option for large complex financial institutions to end the perception that some firms are too big to fail.