Stocks Mostly Advance Amid Fed Hike and Tentative Tax Deal

Charles Schwab: On the Market

Posted: 12/13/2017 4:15 PM EST

Stocks Mostly Advance Amid Fed Hike and Tentative Tax Deal

 

U.S. stocks traded mostly higher mid-week as the Federal Reserve expectedly increased its federal funds rate target range and recent headlines suggest that legislators have reached a tentative agreement on a final tax bill with full House and Senate votes expected to be held next week. Treasury yields declined despite the Fed decision and the U.S. dollar lost ground on the heels of a cooler-than-forecasted core consumer price inflation reading. Crude oil prices were lower and gold ticked higher. Shares of Finisar surged after receiving an investment from Dow member Apple. 

The Dow Jones Industrial Average (DJIA) increased 81 points (0.3%) to 24,585, the S&P 500 Index ticked 1 point lower to 2,663, and the Nasdaq Composite advanced 13 points (0.2%) to 6,876. In moderate volume, 874 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.54 to $56.60 per barrel and wholesale gasoline lost $0.05 to $1.65 per gallon. Elsewhere, the Bloomberg gold spot price moved $10.93 higher to $1,255.43 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 93.46.

VeriFone Systems Inc. (PAY $18) reported Q4 earnings-per-share (EPS) of $0.03, or $0.44 ex-items, versus the $0.43 FactSet estimate, as revenues rose 2.6% year-over-year (y/y) to $477 million, compared to the projected $472 million. The payment transaction device company issued Q1 and 2018 EPS guidance that missed expectations. PAY also announced the sales of its Taxi business and a new $100 million share repurchase program. Shares were solidly lower.

Finisar Corp. (FNSR $24) jumped after Dow member Apple Inc. (AAPL $173) announced it will invest $390 million into the manufacturer of optical communications components. AAPL said the investment is part of its Advanced Manufacturing Fund and will enable Finisar to increase its production of vertical-cavity surface-emitting lasers (VCSELs) that power some of Apple's new features, including Face ID, Animoji, and Portrait mode selfies. AAPL traded higher.

Honeywell International Inc. (HON $156) reported that it expects Q4 EPS to be at the high end of its previous guidance, while issuing a 2018 profit outlook that had a midpoint below expectations as it executes its previously-announced restructuring plans that include spinning off a couple business units. HON gained ground.

Eli Lilly and Company (
LLY $88) issued 2018 EPS guidance with a midpoint slightly above the Street's expectations, while noting that in 2018 it expects continued product pipeline progress, including U.S. regulatory action for some of its experimental treatments. Shares traded higher.

Fed raises target range as expected, consumer price inflation report mixed

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, voting seven to two to increase the target range for the federal funds rate by 25 basis points (bps) to 1.25-1.50%, a move that was widely expected. The Committee noted that it expects "with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong." The Fed also updated its economic projections, increasing its GDP annual growth estimate to 2.5% from September's forecast of 2.1% and Janet Yellen held her final press conference as the Fed Chair. For in depth analysis of the Fed’s decision look for commentary later today from Schwab's Senior Fixed Income Research Analyst, Collin Martin, CFA, on the Market Commentary page and see Schwab's article, Fed Rate Hike: What Does It Mean for Your Portfolio.

As noted in the latest Schwab Market Perspective: The Big Picture Heading into 2018, uncertainty is elevated as the Fed faces several changes in 2018 but recent comments from incoming Fed Chief Jerome Powell suggest continuity and transparency are priorities. However, if inflation should flare up, or growth start to lag, the Fed may be challenged early in the new regime.

The Fed's decision will be followed by tomorrow's fully-loaded economic calendar, expected to show jobless claims remain at low levels, import prices nudged higher, business activity continued to grow solidly per Markit, business inventories dipped, and retail sales accelerated as the holiday season rolls on. The retail sales data will likely carry the most weight, given heavy impact of the U.S. consumer on economic output as we head into 2018.

The Consumer Price Index (CPI) (chart) rose 0.4% month-over-month (m/m) in November, matching the Bloomberg estimate, while October's 0.1% rise was unrevised. The core rate, which strips out food and energy, was 0.1% higher m/m, compared to expectations to match October's unrevised 0.2% increase. Y/Y, prices were 2.2% higher for the headline rate, in line with forecasts and following October's unrevised 2.0% rise. The core rate was up 1.7% y/y, versus projections to match October's unadjusted 1.8% increase.

The MBA Mortgage Application Index decreased 2.3% last week, following the prior week's 4.7% gain. The decline came as a 2.5% drop in the Refinance Index accompanied a 1.1% decrease in the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.20%.

Treasuries finished higher, with the yields on the 2-year note and the 30-year bond dipping 5 bps to 1.77% and 2.73%, respectively, and the yield on the 10-year note decreasing 6 bps to 2.35%. The yield on the 10-year note retreated after reaching the high end of its recent range and the U.S. dollar dipped after a run as of late following the inflation report, while the stock markets continue to notch record highs.

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. As noted in our 2018 Schwab Market Outlook: Executive Summary, we anticipate solid growth and don't see a recession on the horizon. However, with markets priced for ongoing moderate growth and low volatility, the risks we’re monitoring include the potential for higher inflation and more central bank tightening than expected.

As the tax reform reconciliation process continues, recent headlines suggest that the House and Senate negotiators have reached a tentative deal on a final tax bill. Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of this process and 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 declines and Asia mixed ahead of Fed decision

European equity markets finished mostly lower, with the markets treading cautiously ahead of today's Fed monetary policy decision, which will be followed by tomorrow's decisions from the European Central Bank and Bank of England. Also, some key Chinese economic data loomed on the horizon, while tax reform and the Alabama Senate election results in the U.S. garnered attention. The euro and British pound traded higher versus the U.S. dollar and bond yields in the region were mixed. In economic news, German consumer price inflation rose in line with expectations, eurozone industrial production unexpectedly increased, and U.K. employment change declined more than expected.

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, with tax reform reconciliation and the Alabama Senate election results in the U.S. garnering attention, while the markets awaited today's Fed monetary policy decision. Japanese equities declined, with the yen gaining solid ground and despite a stronger-than-expected rebound in machine orders—a gauge of capital investment—for October. Stocks trading in mainland China and Hong Kong advanced, led by strength in the banking sector and ahead of some key economic data due out tonight. Australian securities ticked higher and South Korean shares increased, while Indian equities declined amid some weakness in the financial sector. Schwab's Jeffrey Kleintop, CFA, offers a look at the global markets, which have rallied this year due to the broadest economic growth in a decade, in his article, 5 Reasons Investors Should Give Thanks.

In addition to the aforementioned central bank decisions, tomorrow's stacked international economic docket will yield industrial production and capacity utilization from Japan, retail sales and industrial production from China, consumer inflation expectations and employment data from Australia and wholesale prices from India. Releases from across the pond will include Markit Manufacturing and Services PMIs from the U.K., Germany, France and the eurozone, while the U.K. will also report retail sales.

Stocks Settle Down Ahead of Yellen's Speech

Charles Schwab: On the Market

Posted: 8/25/2016 4:15 PM ET

Stocks Settle Down Ahead of Yellen's Speech

U.S. stocks closed mildly lower and European equities snapped a winning streak as caution prevailed ahead of tomorrow's speech from Federal Reserve Chairwoman Janet Yellen. Some upbeat domestic data included better-than-expected reads on weekly jobless claims and durable goods orders, while a preliminary report on services sector activity unexpectedly declined but remained in expansion territory. Treasuries and gold were lower, the U.S. dollar was little changed and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) declined 33 points (0.2%) to 18,448, the S&P 500 Index lost 3 points (0.1%) to 2,173, and the Nasdaq Composite decreased 5 points (0.1%) to 5,212. In moderately light volume, 705 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.56 to $47.33 per barrel, wholesale gasoline added $0.01 to $1.42 per gallon and the Bloomberg gold spot price declined $1.64 to $1,322.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.76.

HP Inc. (HPQ $14) reported fiscal 3Q earnings-per-share (EPS) ex-items of $0.48, above the $0.44 FactSet estimate, as revenues declined 4.0% year-over-year (y/y) to $11.9 billion, versus the projected $11.5 billion. HPQ issued softer-than-expected 4Q EPS guidance, while lowering the high end of its full-year profit outlook. Shares pared sharp early losses.

Tiffany & Co. (TIF $73) posted 2Q profits of $0.84 per share, north of the forecasted $0.72, with revenues declining 6.0% y/y to $932 million, compared to the expected $933 million. 2Q same-store sales decreased 8.0% y/y, compared to the expected 7.8% drop. TIF maintained its full-year EPS outlook and shares rallied.

PVH Corp. (PVH $107) announced 2Q EPS ex-items of $1.47, well above the projected $1.28, as revenues increased 4.0% y/y to $1.9 billion, roughly in line with forecasts. The parent of Calvin Klein and Tommy Hilfiger issued mixed 3Q guidance, while raising its full-year profit forecast and reaffirming its revenue outlook. Shares gave up early gains and finished lower.

Dollar General Corp. (DG $76) reported 2Q earnings of $1.08, one penny below forecasts, with revenues growing 5.8% y/y to $5.4 billion, just shy of the expected $5.5 billion. 2Q same-store sales increased 0.7% y/y, versus the estimated 2.7% gain. DG confirmed its full-year EPS outlook, while announcing an additional $1.0 billion in share repurchases. DG closed sharply lower.

Dollar Tree Inc. (DLTR $86) posted 2Q EPS of $0.72, one cent south of expectations, as revenues rose 66% y/y to $5.0 billion—reflecting results from its acquisition of Family Dollar—compared to the projected $5.1 billion. 2Q same-store sales rose 1.2% y/y, compared to the 2.4% gain that was anticipated. DLTR issued stronger-than-expected 3Q earnings guidance, though it raised and lowered its full-year EPS and revenue forecasts, respectively. Shares were decisively lower.

Durable goods orders easily top forecasts, jobless claims unexpectedly dip

July preliminary durable goods orders (chart) jumped 4.4% month-over-month (m/m), compared to Bloomberg's estimate of a 3.4% gain and June's downwardly revised 4.2% drop. Ex-transportation, orders gained 1.5% m/m, easily topping the 0.4% forecasted increase, and June's favorably revised 0.3% decline. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, increased 1.6%, well above projections of a 0.2% increase, and following the upwardly revised 0.5% rise in the month prior. Gains were widespread, notably surges in the volatile aircraft and parts and a sharp jump in computers and related products, though motor vehicles were flat and communications declined.

The business spending component of the report has posted back-to-back monthly gains, and a continuation of this trend could give the U.S. economy a needed boost to escape this prolonged period of stagnant growth. As noted in the Schwab Market Perspective: The Calm Before the…., consumer confidence has firmed, with the labor market continuing to improve, housing is looking good, and wages are finally starting to rise. Additionally, we've seen signs that consumers may be more comfortable taking on debt. However, it will be difficult to get the U.S. economy rolling without an improvement in productivity, which is undoubtedly being constrained by ongoing tepid capital spending. Read the whole perspective at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Weekly initial jobless claims (chart) dipped 1,000 to 261,000 last week, versus estimates of a rise to 265,000, with the prior week's figure unrevised at 262,000. The four-week moving average declined 1,250 to 264,000, while continuing claims fell 30,000 to 2,145,000, south of the estimated level of 2,155,000.

The preliminary Markit U.S. Services PMI Index for August unexpectedly declined to 50.9 from July's final reading of 51.4, compared to forecasts of a modest rise to 51.8, though a reading above 50 indicates expansion. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and its index components are weighted differently.

Treasuries were lower, with the yields on the 2-year note and the 30-year bond ticking 2 basis points (bps) higher to 0.79% and 2.27%, respectively, while the yield on the 10-year note increased 1 bp to 1.58%. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds? Also, Schwab's Chief Fixed Income Strategist, Kathy Jones addresses in her article, What Does Strong Job Growth Mean for Bond Investors?, at www.schwab.com/marketinsight. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Tomorrow, the U.S. economic calendar will close out the week with the first revision (of two) of 2Q GDP, projected to be adjusted slightly lower to a 1.1% quarter-over-quarter annualized rate of growth, after 1Q's 0.8% expansion. The University of Michigan Consumer Sentiment Index will follow, expected to be revised modestly higher to 90.8 from 90.4, and an improvement from July's 90.0 figure, while wholesale inventories will close out the day, projected to tick 0.1% higher m/m in July following June's 0.3% gain. However, the highlight of the morning will be the 10:00 a.m. ET speech from Federal Reserve Chairwoman Janet Yellen at the Central Bank's annual policy symposium in Jackson Hole, Wyoming.

Schwab's Chief Investment Strategist, Liz Ann Sonders discusses in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings, we continue to believe a rate hike is on the table for this year. The combination of Fed policy uncertainty and the contentious election season could mean the recent lull in volatility will not persist into the fall. Read more at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Europe and Asia lower as global markets eye Yellen's speech

European equities finished lower, declining for the first time in four days, with basic materials stocks lower on the continued pressure on the mining sector and as the markets digested some mixed economic data in the region, headlined by a disappointing read on August German business sentiment. Global caution persisted ahead of tomorrow's key speech from U.S. Federal Reserve Chairwoman Yellen at the Central Bank's annual policy symposium in Jackson Hole, Wyoming. Healthcare issues came under pressure amid concerns about a potential pricing crackdown following comments from U.S. Democratic nominee Hillary Clinton. In other economic news, Spain's 2Q GDP growth was unexpectedly revised higher and U.K. August retail sales figures rebounded. The U.K. report added to recent data to suggest the U.K. economy is seeing a limited impact from the late-June vote to leave the European Union, known as Brexit. For commentary on the Brexit vote fallout, see Schwab's Director of International Research, Michelle Gibley, CFA, discusses Keep Calm and Carry On: The Brexit Shock That Wasn't at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. The euro was higher and the British pound lost ground on the U.S. dollar, while bond yields in the region finished mostly higher.

Stocks in Asia finished lower in subdued volume as the global markets remained cautious ahead of tomorrow's key speech from U.S. Fed Chair Janet Yellen, while the recent drop in crude oil prices and dampened sentiment in the mining sector weighed on commodity-related issues. Japanese equities declined despite some weakness in the yen, while basic materials led Australian securities lower. Stocks in India fell amid some choppy trading on the expiration of monthly derivatives contracts and South Korean listings finished flat. Equities trading in mainland China fell and those in Hong Kong were little changed as liquidity concerns resurfaced and reports that the government may act to cool speculation in the financial and real estate markets fostered some uneasiness. Amid the uncertain global backdrop, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and Your portfolio may be less diversified than you think. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Tomorrow, the international economic docket will deliver consumer price inflation for Japan, consumer confidence from Germany, preliminary 2Q GDP from France and business investment, the Index of Services and preliminary 2Q GDP from the U.K.

Financial Review

Milk and Cookies. Enjoy While You Can.

Sinclair Noe — February 25, 2015       

 

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

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DOW + 15 = 18,224
SPX – 1 = 2113
NAS – 0.98 = 4967
10 YR YLD – .02 = 1.97%
OIL + 1.75 = 51.03
GOLD + 2.90 = 1205.20
SILV + .22 = 16.64

Another record high for the Dow Industrial Average. These are the days of milk and cookies.

Federal Reserve Chairwoman Janet Yellen continued her semi-annual Humphrey-Hawkins testimony today in front of the House Financial Services Committee. The prepared opening remarks were identical to the testimony yesterday in the Senate. The Q&A session became a bit testy today as Yellen was accused of political bias. Republicans questioned Yellen about an October speech on inequality, just before the midterm elections, as evidence she was leaning toward the Obama administration and Democrats. Methinks they doth protest too much. There were also calls for an audit of the Fed, historically a nonstarter with Federal Reserve Chairs. It made for generally poor political theater.

The important part of the testimony was fairly easy to find. Keep in mind the Fed has a dual mandate of maximum employment and price stability. So the key statement from Yellen was when she said: “Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2% objective.”

So, higher rates will come with higher inflation, indicating that disinflation and deflation are still a concern for now. The Fed believes that inflation is going to move lower before it moves higher because of oil prices and import prices. As for the timing of when we will see inflation and possible interest rate hikes, Yellen said: “We expect inflation over the medium term — the next two or three years — to move up to our 2% target.”

Greek stocks and bonds surged yesterday, with Athens’ main stock exchange closing almost 10% higher on the day after Eurozone financial ministers approved a four-month extension to the country’s bailout program. Although the list of proposals were accepted, the ministers warned that the reforms must be expanded in detail before new bailout funding would be released.

The German government is now selling five-year bonds with a negative yield. That means investors will pay to lend money to the country for five years. Germany auctioned 3.28 billion euros ($3.72 billion) of bonds due in April 2020 at an average yield of negative 0.08%.

Today the Senate moved to avert a shutdown of the Department of Homeland Security. The upper chamber voted 98-2 on a procedural hurdle that would pave the way for a “clean” funding bill to be brought to the floor. It remains unclear when the Senate will vote on final passage on the funding bill. If the Senate passes a clean bill, it would then move over to the House, and it is uncertain if House Speaker John Boehner would allow a vote on such a bill. DHS funding runs out in 2 days.

The White House says President Obama would veto a House Republican effort to rewrite the federal “No Child Left Behind” law. The House bill is expected to pass the chamber later this week. Senate Republicans are working on their own version of No Child Left Behind, which expired in 2007.

New homes sold at annual rate of 481,000 last month, essentially unchanged from December. The Commerce Department reports sales were 5.3% higher in January compared to a year earlier; this despite a drop of 51% in the Northeast, where bad weather kept buyers away. The median price for a new home was up 9% from a year ago.

For all the talk about how lower oil prices would reduce supplies, it hasn’t happened yet. Just the opposite. According to EIA weekly data released today, crude oil in storage in the US jumped 2%, or 8.4 million barrels, to 434 million barrels. Oil storage is bursting at the seams and inventories remain at their highest levels in at least 80 years. The rate of growth of production is slowing slightly but production continues at the highest rate since 1972, for now.

Southwest Airlines took 128 of its jets out of service late Tuesday, or roughly one-fifth of its fleet, after informing federal regulators that it “inadvertently omitted” required maintenance checks on the planes’ backup hydraulic systems. Dozens of flights were immediately canceled as a result, while officials from Southwest and the FAA discussed plans to complete the maintenance checks and return the planes to service.

American Express will raise interest rates on about one million customers. Annual rates will climb by an average of 2.5 percentage points to at least 12.99%. The firm sent letters saying it’s making adjustments after finding their rates were below those for rival cards held by borrowers “with similar credit profiles.” Typically banks make large scale changes in response to broader shifts in interest rates or risk.

Anthem, which earlier this month reported that it was hit by a massive cyberbreach, has concluded that the personal information of 78.8M customers was exposed in the attack, including 8.8M-18.8M people who were members of independently run Blue Cross Blue Shield plans. Anthem still believes the hacked data was restricted to birthdays and Social Security numbers, among other data, but doesn’t appear to have involved medical information or financial details.

Another company that had problems with cybersecurity is Target, but it doesn’t seem to have hurt their most recent results.  Target saw a higher-than-expected jump in its fourth-quarter earnings and is forecasting modest growth for the first quarter of 2015. Exiting Canada, as the company recently announced it will do, will cost it $5.1 billion.

Earlier this month Wal-mart announced they would be paying workers at least $9 an hour, increasing to $10 an hour next year. Wal-Mart is of course the largest retailer, and we thought this might ripple out through other retailers. Sure enough. T.J. Maxx, Marshalls and other chains owned by TJX Cos. will be increasing the pay of US workers to at least $9 an hour beginning in June, increasing to $10 an hour next year.

Now for today’s edition of “Banks Behaving Badly”; yet another foreign currency scandal, Reuters reports that BNY Mellon is in settlement talks with the DOJ and New York AG over claims that it defrauded clients in foreign exchange transactions. The bank faces several lawsuits, including class actions, stemming from allegations that it misled clients about how it determined currency exchange rates for certain transactions.

HSBC has a “terrible list of problems,” so says the chairman of HSBC, Douglas Flint. And he admits that he couldn’t rule out further scandals emerging at the bank along the same lines as the tax evasion schemes at HSBC’s Swiss private bank, but he said: “I sincerely hope there are no more skeletons.”

A British parliamentary committee questioned Flint and CEO Stuart Gulliver after the tax evasion schemes were revealed by several news organizations. The news story only came to light 4 years after a former HSBC employee turned over bank files. Some of the clients whose details HSBC’s Swiss operations were sheltering included arms dealers and politicians who were part of discredited regimes, like that of Bashir-al-Assad in Syria. Earlier, when asked why some HSBC clients reportedly came to Switzerland with wads of cash, Flint was lost for words. Still to be determined is why the bank should not be broken up.

Move over Alibaba, you could have company next year. Postal Savings Bank of China, the country’s sixth largest lender by assets, is seeking an initial public offering in 2016 that could make history by bringing in some $25 billion .

In a new S-1, GoDaddy declared plans to list on the NYSE under the symbol “GDDY” and announced IPO underwriters including Morgan Stanley, JPMorgan, Citi and others. GoDaddy is a fast-growing company which posted revenue of $1.4 billion in 2014, up 23% from 2013 levels, according to the filing. But it’s also a big money loser. The company posted a loss of $143.3 million in 2014, which is the fourth annual loss in a row.