Tax Reform Again Provides Fuel for Stock Rally

Charles Schwab; On the Market

Posted: 12/18/2017 4:15 PM EST

Tax Reform Again Provides Fuel for Stock Rally

 

U.S. stocks joined their foreign counterparts in a global rally, courtesy of optimism regarding tax reform which is expected to make its way through Congress this week. An unexpected jump in homebuilder sentiment to a more than 18-year high and a host of global M&A deals also aided in providing support. Treasury yields were mostly higher and the U.S. dollar lost ground, while gold was higher and crude oil prices were mixed.

The Dow Jones Industrial Average (DJIA) increased 140 points (0.6%) to 24,792, the S&P 500 Index was 15 points (0.6%) higher at 2,691, and the Nasdaq Composite jumped 58 points (0.8%) to 6,995. In heavy volume, 921 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.11 to $57.22 per barrel and wholesale gasoline added $0.02 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price moved $4.99 higher to $1,261.43 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 93.70.

Hershey Co. (HSY $114) announced an agreement to acquire Amplify Snack Brands Inc. (BETR $12), for $12.00 per share in cash, or about $1.6 billion including debt. HSY was higher, while BETR surged over 70%.

Campbell Soup Co. (CPB $50) announced an agreement to acquire Snyder's-Lance Inc. (LNCE $50) for $50.00 per share in cash, or about $4.9 billion. Shares of both companies were higher.

Penn National Gaming Inc. (PENN $29) announced an agreement to acquire Pinnacle Entertainment Inc. (PNK $31) for $32.47 per share in cash and stock, valued at about $2.8 billion. Under the terms of the deal, PNK stockholders will receive $20.00 in cash and 0.42 shares of PENN for each share owned. In connection with the deal, Boyd Gaming Corp. (BYD $35) agreed to acquire four assets of PNK for $575 million in cash. Shares of PENN were lower, while PNK and BYD were higher.

CSX Corp. (CSX $54) announced that Chief Executive Officer (CEO) Hunter Harrison passed away over the weekend after taking a medical leave due to unexpected severe complications from a recent illness. The board has named Chief Operating Officer James Foote as acting CEO. Shares were higher.

Homebuilder sentiment unexpectedly jumps to 18-year high, kicking off busy week

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month unexpectedly jumped to over an 18-year high of 74, versus the Bloomberg forecast calling for a 70 reading and November's downwardly revised 69 level. The index sits decisively above the 50 mark, the point of separation for good versus poor conditions. The NAHB said housing market conditions are improving partially because of new policies aimed at providing regulatory relief to the business community.

The NAHB added that with low unemployment rates, favorable demographics and a tight supply of existing home inventory, we can expect continued upward movement of the single-family construction sector next year. Tomorrow, we will get a look at November housing construction activity in the form of housing starts and building permits (economic calendar). Starts are projected to decline 3.2% month-over-month (m/m) to an annual rate of 1,249,000 units and permits are forecasted to decrease 3.1% to an annual rate of 1,275,000 units.

New home construction rebounded in October to the fastest pace in a year, suggesting a potential boost for Q4 GDP growth as construction spending subtracted from GDP in the second and third quarters, per Bloomberg. Schwab's Chief Investment Strategist Liz Ann Sonders notes in our 2018 Market Outlook: U.S. Stocks and Economy, animal spirits are keeping business optimism alive and broad U.S. growth should remain healthy in 2018, however late cycle tendencies should be on investors’ radar screen.

Treasuries were mostly lower, with the yield on the 2-year note flat at 1.84%, while the yield on the 10-year note rose 3 bps to 2.39% and the 30-year bond rate gained 4 bps to 2.75%. Schwab's Chief Fixed Income Strategist Kathy Jones provides a look at the bond markets heading into the New Year, in her video, What Could Fixed Income Investors Expect in 2018?.

Treasury yields have diverged and the U.S. dollar has fallen, though the stock markets continue their ascent, as the House and Senate are expected to vote on a final tax bill this week. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers a look at the tax bill and the votes in his latest commentary, Sweeping Tax Bill Poised to Become Law. Also, Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, delivers his article, Tax Reform: Frequently Asked Questions and as you conduct your year-end tax planning, check out our, Tax Reform: 11 Questions to Ask Your Advisor.

Europe and Asia higher, bolstered by U.S. tax reform optimism

European equity markets finished broadly higher, with the global markets rallying on hopes that U.S. tax reform will face final votes this week, while a flood of M&A deals buoyed global sentiment. Stocks gained ground despite gains in the euro and British pound versus the U.S. dollar, while bond yields in the region traded mixed. In economic news, eurozone consumer price inflation rose in line with expectations for November. 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 2018 global stock market gains could potentially be in the double-digits and international stocks may outperform U.S. stocks. Jeff urges investors to rebalance 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 higher with growing optimism of U.S. tax reform, as lawmakers are set to vote on the final bill this week, lifting global economic sentiment. The global markets have rallied this year, bolstered by the broadest economic growth in a decade and is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks. Japanese equities rallied, with the yen holding onto Friday's losses, while a report showed the nation's exports grew more than expected. Mainland Chinese stocks and those traded on Hong Kong were higher, with the People's Bank of China continuing to raise short-term interest rates and home price data came in mostly positive. Meanwhile, markets in Australia and India rose, and shares listed in South Korea finished flat.

From tomorrow's international economic calendar, investors will get the minutes from the Reserve Bank of Australia's last monetary policy meeting, PPI from South Korea, and the Ifo Business Climate Survey from Germany.

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.

Tech Assistance Boosts Gains

Charles Schwab: On the Market

Posted: 12/11/2017 4:15 PM EST

Tech Assistance Boosts Gains

 

U.S. stocks began the week modestly higher with gains led by the technology sector, while healthcare shares advanced amid a flood of reports from the annual Meeting of the American Society of Hematology. Market participants appeared to exercise a cautious approach as legislators continue to grapple with reconciling the Senate and House tax reform bills. Treasury yields ticked higher ahead of this week's Fed monetary policy decision. Crude oil prices gained ground, gold ticked lower and the U.S. dollar was nearly unchanged. 

The Dow Jones Industrial Average (DJIA) increased 57 points (0.2%) to 24,386, the S&P 500 Index was 8 points (0.3%) higher at 2,660, and the Nasdaq Composite advanced 35 points (0.5%) to 6,875. In moderate volume, 782 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.63 to $57.99 per barrel and wholesale gasoline gained $0.01 to $1.73 per gallon. Elsewhere, the Bloomberg gold spot price moved $5.80 lower to $1,242.69 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.94.

Mattel Inc. (MAT $15) announced bond offerings totaling $1 billion, and it intends to use the proceeds to refinance debt coming due next year and repay all outstanding borrowings related to its commercial paper program. The toy company also warned that it anticipates Q4 sales to continue to be negatively impacted by key retail partners moving toward tighter inventory management and certain underperforming brands. Shares traded higher.

At the annual Meeting of the American Society of Hematology (ASH), Juno Therapeutics Inc. (JUNO $50) and Celgene Corp. (CELG $108) announced mixed results from a trial of their treatment for a type of non-Hodgkin lymphoma. However, Celgene also announced upbeat results of a study of its myeloma treatment with partner Bluebird Bio Inc. (BLUE $202). JUNO fell, while CELG traded higher and BLUE rallied. Dow member Merck & Co. Inc. (MRK $56) gained ground after it announced at the ASH meeting that the FDA assigned priority review for its treatment for large B-cell lymphoma known as Keytruda.

Job openings dip to kick off busy week

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, came in at a level of 6.0 million jobs available to be filled in October, down from the upwardly revised 6.2 million level in September. This compared to the Bloomberg forecast calling for a 6.1 million level. The hiring rate rose to 3.8% from September's 3.6% pace, and the separation rate dipped to 3.5% from the prior month's 3.6% rate.

Treasuries finished lower, with the yield on the 2-year note rising 2 basis points (bps) to 1.82%, while the yields on the 10-year note and the 30-year bond gained 1 bp to 2.39% and 2.77%, respectively.
Treasury yields ticked higher and the U.S. dollar gave back some of last week's gain, with U.S. tax reform remaining a key focus for the markets, as the House and Senate try to reconcile their bills with a goal of trying to get one bill on President Donald Trump's desk for a signature by the end of the year.

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.

However, this week fiscal policy focus will share the spotlight with monetary policy as the Federal Open Market Committee (FOMC) is highly expected to conclude its Wednesday meeting with a 25 bps increase to its target fed funds rate to 1.50%. The accompanying updated FOMC projections and Chairwoman Janet Yellen's final press conference shortly after the decision will likely garner the most attention as the markets try to gauge the pace of rate hikes in 2018. The Fed's meeting will be followed by monetary policy decisions from the European Central Bank (ECB) and Bank of England (BoE) on Thursday. Other economic releases this week include: the Consumer Price Index (CPI), retail sales, Markit's business activity reports, and industrial production and capacity utilization.

As noted in the latest Schwab Market Perspective: The Big Picture Heading into 2018, a better-than-expected 2017 appears to be morphing into a solid start to 2018, but it is unlikely to be as smooth a ride. We believe the bull market still has room to run but it could shape up to be a bumpier ride as expectations and sentiment are elevated. For detailed market analysis heading into the New Year, check out our 2018 Schwab Market Outlook: Executive Summary.

Tomorrow, the U.S. economic calendar will include the National Federation of Independent Business (NFIB) Small Business Optimism Index, forecasted to move higher to a level of 104.0 during November from the 103.8 posted the month prior, followed by the first look at inflation readings in the form of the Producer Price Index (PPI), with economists anticipating a 0.3% month-over-month (m/m) increase for November, while the core rate, which excludes food and energy, expected to have gained 0.2%.

Europe mixed amid political focus, Asia mostly higher

European equities finished mixed, with the euro higher versus the U.S. dollar and technology issues remaining under pressure, while the markets likely treaded cautiously ahead of monetary policy decisions this week from the Fed, ECB and BoE. Politics also garnered attention as the U.S. tax reform reconciliation process continues and traders look to see if U.K. Brexit talks will move to the next stage after late last week's agreement that appeared to break the negotiation impasse between the U.K. and European Union. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, European equities finished mixed, with the euro higher versus the U.S. dollar and technology issues remaining under pressure, while the markets likely treaded cautiously ahead of monetary policy decisions this week from the Fed, ECB and BoE. Politics also garnered attention as the U.S. tax reform reconciliation process continues and traders look to see if U.K. Brexit talks will move to the next stage after late last week's agreement that appeared to break the negotiation impasse between the U.K. and European Union. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans. The British pound was lower versus the U.S. dollar and bond yields in the region moved mostly to the downside.

Stocks in Asia finished higher on the heels of the gains in the U.S. on Friday, with a relatively favorable labor report bolstering global economic optimism, while the markets kept an eye on the U.S. tax reform reconciliation process. Also, looming monetary policy decisions this week out of the U.S., eurozone and U.K. are in focus, along with a host of economic data in the region, commencing with inflation figures out of China that showed wholesale inflation rose in line with forecasts, but consumer inflation came in slightly cooler than expected. After the closing bell, China reported lending statistics for November that came in above forecasts. The global stock markets remain nicely higher for the year, bolstered by the broadest economic growth in a decade, which is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, discusses in his article, 5 Reasons Investors Should Give Thanks. Japanese equities advanced with the yen's recent weakness aiding the markets, while stocks trading in mainland China and Hong Kong gained solid ground. Australian and South Korean securities ticked higher, while Indian shares also advanced.

The international economic docket for tomorrow will yield PPI and the Tertiary Industry Index from Japan, export and import prices from South Korea, house prices from Australia and CPI and industrial production from India. Reports from across the pond will include CPI and PPI from the U.K., total payrolls from France and the Zew Economic Sentiment Survey from Germany.

Stocks Extend Recent Gains

Charles Schwab: On the Market

Posted: 12/8/2017 4:15 PM EST

Stocks Extend Recent Gains

 

U.S. stocks advanced during the regular trading session to extend recent gains and finish the week mostly higher. The advance for equities was aided by a relatively upbeat read on the domestic labor market which followed favorable economic reports out of China and Japan. Treasury yields were mixed and the U.S. dollar was higher, while gold was little changed and crude oil prices rallied. 

The Dow Jones Industrial Average (DJIA) increased 119 points (0.5%) to 24,329, the S&P 500 Index was 15 points (0.6%) higher at 2,651, and the Nasdaq Composite advanced 27 points (0.4%) to 6,840. In moderate volume, 740 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.67 to $57.36 per barrel and wholesale gasoline gained $0.02 to $1.72 per gallon. Elsewhere, the Bloomberg gold spot price moved $0.71 higher to $1,247.93 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 93.90. Markets were mixed for the week, as the DJIA and the S&P 500 Index increased 0.4% and the Nasdaq Composite declined 0.1%.

United Continental Holdings Inc. (UAL $64) increased its Q4 passenger revenue outlook after reporting a 5.1% increase in November traffic, and it announced a new $3 billion share repurchase program. Shares traded higher.

Western Digital Corp. (WDC $81) is gained solid ground amid media reports that the company and Toshiba Corp. (TOSYY $16) have reached a deal in principle to settle their chip dispute and could announce a formal agreement next week. Neither company commented on the report.

Cooper Companies Inc. (COO $227) reported fiscal Q4 earnings-per-share (EPS) of $1.78, or $2.65 ex-items, versus the $2.64 FactSet estimate, with revenues rising 8.0% year-over-year (y/y) to $562 million, above the projected $559 million. The medical device company issued 2018 EPS guidance that had a midpoint below expectations. Shares finished solidly lower.

November labor report shows job growth tops forecasts, consumer sentiment slips

Nonfarm payrolls (chart) rose by 228,000 jobs month-over-month (m/m) in November, compared to the Bloomberg forecast of a 195,000 increase. The rise of 261,000 seen in October was revised to a gain of 244,000 jobs. The total upward revision to the job gains in October and September was 3,000.

Excluding government hiring and firing, private sector payrolls increased by 221,000, versus the forecasted gain of 195,000, after rising by 247,000 in October, revised from the 252,000 increase that was initially reported. The Department of Labor said employment continued to trend up in professional and business services, manufacturing and healthcare.

The unemployment rate remained at 4.1%, matching estimates, while average hourly earnings were up 0.2% m/m, below projections of a 0.3% increase and versus October's downwardly revised 0.1% decrease. Y/Y, wage gains were 2.5% higher, versus estimates of a 2.7% increase and October's downwardly revised 2.3% rise. Finally, average weekly hours ticked higher to 34.5 from October's unrevised 34.4 rate, where it was forecasted to remain.

Rate hike expectations for when the Fed concludes its meeting next week remained elevated following the relatively favorable employment report but the softer-than-expected wage growth and downward revision to the prior month may have caused some uncertainty regarding the pace of rate hikes in 2018. As we head toward the New Year, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at the key issues to watch in his latest, Schwab Sector Views: 18 Thoughts Heading into '18, pointing out that business optimism is elevated, which could bolster already rising capital investments. This could help support a continuation of the strong labor market.
Schwab's Chief Investment Strategist Liz Ann Sonders points out that capital spending (capex) is likely to be an economic highlight in 2018 and coupled with the continued rebound in productivity is good news for wages in her articles, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle and One Thing Leads to Another: Productivity's Rebound.

The preliminary University of Michigan Consumer Sentiment Index (chart) declined to 96.8 in December, from 98.5 in November, and compared to expectations of an improvement to 99.0. The current economic conditions component of the survey improved but was more than offset by a decline in the expectations part of the report. The 1-year inflation forecast rose to 2.8% from November's 2.5% rate, while the 5-10 year inflation outlook ticked higher to 2.5% from the prior month's level of 2.4%.

Wholesale inventories (chart) were revised lower to a 0.5% m/m decline for October from the preliminary estimate of a 0.4% decrease, where it was forecasted to remain and compared to September's 0.1% gain. Sales grew 0.7% m/m, compared to forecasts of a 0.3% increase and September's upwardly revised 1.4% rise. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dipped to a 1.25 months pace from September's 1.26 rate.

Treasuries finished mixed, with the yield on the 2-year note dipping 1 basis point (bp) to 1.79%, the yield on the 10-year note remaining at 2.37%, and the 30-year bond rate increasing 1 bp to 2.76%.

The U.S. dollar is extended its weekly gain and Treasury yields are diverged on the heels of the employment data, which followed favorable Chinese trade and Japanese GDP figures. Moreover, the markets cheered a breakthrough in the U.K. Brexit impasse, and a short-term government funding bill late yesterday that should help avoid a U.S. government shutdown this weekend. However, tax reform continues to be a main focus for the markets as the House and Senate grapple with reconciling key differences in their bills.

Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of the reconciliation process and what investors should be paying attention to, in his article, Tax Reform: What Investors Should Know.

If you have questions regarding how the potential tax overhaul may affect you as an investor, see Hayden's Tax Reform: Frequently Asked Questions.

Europe and Asia higher

European equity markets moved higher, with the markets cheering upbeat economic reports out of the U.S., China and Japan, which overshadowed an unexpected drop in German exports and mixed industrial and manufacturing production figures in the region. Financials led the way, bolstered by a long-awaited deal by regulators to complete the final batch of post-crisis capital rules, which offered clarity for the industry. The U.K. and European Union (EU) reached a deal on three key issues, including the Irish border, that paves the way to break the Brexit negotiation deadlock and likely leads to talks moving to the next phase ahead of next week's EU summit. However, the next stage would revolve around trade and headlines suggested this could be a lengthy process in getting an agreement, which appeared to weigh on the British pound versus the U.S. dollar. The Brexit breakthrough joined the agreement in the U.S. on a short-term government spending bill that likely avoids a near-term shutdown, though the markets continued to eye the U.S. tax reform reconciliation process.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans. The euro dipped versus the greenback and bond yields in the region finished mixed.

Stocks in Asia finished higher as the U.S. markets rose to break a string of sluggishness, while economic reports in the region fostered some optimism. Japan's Q3 GDP was revised to a 2.5% quarter-over-quarter annualized pace of growth, from the preliminary estimate of a 1.4% rise, and versus expectations of an adjustment to a 1.5% rate of expansion. China's November exports and imports rose much more than expected resulting in an unexpected widening of the nation's trade surplus. The yen lost ground for a second day amid some rejuvenated global economic optimism, helping lift Japanese share prices. Stocks trading in mainland China and Hong Kong advanced, while securities trading in Australia and India also gained ground and South Korean equities ticked to the upside. The markets rebounded after a recent stumble and Schwab's Jeffrey Kleintop, CFA, and Randy Frederick, discuss in the video, It's All Relative: Why Stocks May Not Be Overvalued.

Stocks nudge higher on week as tech rebounds and tax reform moves closer

U.S. stocks finished the week modestly higher with economic data continuing to paint a positive global backdrop, while the weekend passage of the Senate's tax reform bill fostered optimism that the most sweeping overhaul effort in decades was moving closer to President Donald Trump's desk. Moreover, the tech sector rollover that had pressured the markets as of late, reversed to the upside as the week matured to help nudge the markets into positive territory and the Nasdaq mostly recover early losses. Energy stocks lagged behind as crude oil prices moved to the downside. The U.S. dollar moved noticeably higher and Treasury yields ticked to the upside in choppy trading with political uncertainty in Europe also garnering attention.

Next week, fiscal policy focus will share the spotlight with monetary policy as the Federal Open Market Committee (FOMC) is highly expected to conclude its Wednesday meeting with a 25 bps increase to its target fed funds rate to 1.50% (economic calendar). However, the accompanying updated FOMC projections and Chairwoman Janet Yellen's final press conference shortly after the decision will likely garner the most attention as the markets try to gauge the pace of rate hikes in 2018. The decision will also be joined by releases next week including: JOLTS Job Openings report, the NFIB Small Business Optimism Index, the Consumer Price Index (CPI), the Producer Price Index (PPI), retail sales, Markit's business activity reports, and industrial production and capacity utilization.

As noted in the latest Schwab Market Perspective: The Big Picture Heading into 2018, a better-than-expected 2017 appears to be morphing into a solid start to 2018, but it is unlikely to be as smooth a ride. We believe the bull market still has room to run but it could shape up to be a bumpier ride as expectations and sentiment are elevated. U.S. economic growth appears to be picking up, but with the Federal Reserve tightening policy and inflation likely to heat up, we appear to be in the latter stages of the cycle. Global markets are also poised to have an unprecedented year of performance; which is unlikely to be repeated, but conditions around the world still look largely supportive of further gains.

International reports due out next week to look out for include: Australia—employment change. China—CPI and PPI, lending statistics, retail sales, and industrial production. India—CPI, industrial production, and trade balance. Japan—machine orders, industrial production and capacity utilization, and the Q4 Tankan Large Manufacturing Index. Eurozone—European Central Bank monetary policy decision, industrial production, Markit's business activity reports, and the trade balance, along with German investor sentiment and CPI. U.K.—the Bank of England monetary policy decision, CPI, employment change, and retail sales.

Stocks Advance Ahead of Jobs Report

Charles Schwab: On the Market

Posted: 12/7/2017 4:15 PM EST

Stocks Advance Ahead of Jobs Report

 

U.S. stocks traded higher with technology shares leading the advance on the heels of some upbeat results and guidance from Broadcom. Crude oil prices rose solidly and Treasury yields were mostly higher, while gold was lower and the U.S. dollar ticked to the upside to add to its recent gains. Market participants continued to assess the tax reform landscape amid the reconciliation process. Tomorrow, the morning release of the November labor report will likely garner much attention.

The Dow Jones Industrial Average (DJIA) increased 71 points (0.3%) to 24,211, the S&P 500 Index was 8 points (0.3%) higher at 2,637, and the Nasdaq Composite advanced 36 points (0.5%) to 6,813. In moderate volume, 824 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.73 to $56.69 per barrel and wholesale gasoline gained $0.04 to $1.70 per gallon. Elsewhere, the Bloomberg gold spot price moved $15.54 lower to $1,247.83 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% higher at 93.74.

Broadcom Limited (AVGO $264) reported fiscal Q4 earnings-per-share (EPS) of $1.50, or $4.59 ex-items, versus the $4.52 FactSet estimate, as revenues rose 17.0% year-over-year (y/y) to $4.9 billion, above the projected $4.8 billion. The chipmaker issued Q1 revenue guidance that had a midpoint above expectations. The company also announced a 72% increase to its quarterly dividend to $1.75 per share. Shares finished flat after initially trading higher.

Dollar General Corp. (DG $93) posted Q3 EPS of $0.93, versus the estimated $0.94, as revenues increased 11.0% y/y to $5.9 billion, topping the projected $5.8 billion. Q3 same-store sales grew 4.3% y/y, exceeding the forecasted 2.7% gain. DG narrowed its full-year earnings outlook, while increasing its sales guidance. Shares gained ground.

Dow member General Electric Co. (GE $18) announced that its GE Power group plans to reduce its global headcount by about 12,000 positions as part of its effort to reduce overall structural costs. GE traded to the upside.

Lululemon Athletica Inc. (LULU $72) announced Q3 EPS of $0.43, or $0.56 ex-items, versus the projected $0.52, with revenues rising 14.0% y/y to $619 million, north of the expected $610 million. Q3 same-store sales grew 8.0% y/y, above the estimated 5.3% gain. The company's gross and operating margins topped forecasts. LULU issued Q4 guidance that topped forecasts, while it raised its full-year outlook. Separately, the company authorized the repurchase of up to $200 million in its common shares. Shares gained solid ground.

Shares of SAGE Therapeutics Inc. (SAGE $156) rallied 70% after the company announced positive results regarding a trial of its treatment for major depressive disorder.

Consumer credit tops expectations, jobless claims surprisingly decline

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $20.5 billion during October, well above the $17.0 billion forecast of economists polled by Bloomberg, while September's figure was adjusted lower to $19.2 billion from $20.8 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $12.2 billion, a 5.3% increase y/y, while revolving debt, which includes credit cards, rose by $8.3 billion, a 9.9% y/y rise.

Weekly initial jobless claims (chart) decreased by 2,000 to 236,000 last week, versus the Bloomberg forecast of 240,000, as the prior week was unrevised at 238,000. The four-week moving average dipped by 750 to 241,500, while continuing claims dropped by 52,000 to 1,908,000, south of estimates of 1,919,000.

The upbeat report comes ahead of tomorrow's November nonfarm payroll report, with jobs projected to rise by 195,000, following October's 261,000 jump (economic calendar). Private sector employment is expected to grow 198,000 on the heels of the prior month's 252,000 gain. The unemployment rate is forecasted to remain at 4.1%. However, given the importance of the consumer on U.S. economic output and the subdued inflation outlook, tomorrow's wage component of the report is likely to garner the most attention as the markets try to project the pace of Fed rate hikes in 2018 after December's highly-expected increase. Average hourly earnings are anticipated to rise 0.3% month-over-month (m/m) after being disappointingly flat in October and the y/y pace of earnings is projected to accelerate to 2.7% from 2.4%.

As we head into 2018, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers his latest, Schwab Sector Views: 18 Thoughts Heading into '18. In our view, a repeat of 2017 is unlikely, and we’re expecting more sector changes in 2018 than there were in 2017. Brad adds that the Fed will be under new management and have several new members throughout the year, and we don’t currently expect major changes in the normalization process but the new makeup could change things.

Treasuries were mostly lower, with the yield on the 2-year note dipping 1 basis point (bp) to 1.80%, while the yield on the 10-year note increased 2 bps to 2.36%, and the 30-year bond rate advanced 3 bps to 2.76%.

The U.S. dollar slightly extended its weekly gain and Treasury yields dipped. Tax reform continues to be a main focus for the markets as the House and Senate grapple with key differences in their bills with the reconciliation process expected to be highly competitive.

Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of some likely changes, based on what we know about the current bills, in his article, Tax Reform: What Investors Should Know, though he cautions that it's hard to be certain what might be in the final bill.
We believe it would be premature for individual investors to make changes now, given the high degree of uncertainty over any eventual new tax law, but Hayden offers his Tax Reform: Frequently Asked Questions for investors wondering how the most sweeping tax overhaul effort in decades will affect them.

Additional economic reports expected tomorrow include wholesale inventories, forecasted to have declined 0.4% m/m in October, and the preliminary University of Michigan Consumer Sentiment Index, expected to have ticked higher for December's initial result to 99.0 from November's final read of 98.5.

Europe and Asia finish mixed

European equity markets finished mixed, following some divergent economic data in the region, while conviction remained stymied by policy uncertainty as the U.S. tax reform reconciliation process looms and U.K. Brexit concerns festered. The British pound turned slightly higher versus the U.S. dollar as U.K. Prime Minister May scrambles amid heightened political pressures to try to make progress on Brexit negotiations. The U.K. and EU have reportedly agreed on the future role of the European Court of Justice in British legal cases but the Irish border issues still remains a substantial sticking point as a deadline nears for the EU to deem if negotiations have progressed enough to move on to the next stage. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans. In economic news, German industrial production unexpectedly fell in October and the Q3 eurozone GDP growth rate was revised higher to a 2.6% y/y pace, from a previous estimate of a 2.5% gain, where it was expected to remain. The euro was little changed versus the U.S. dollar and bond yields in the region traded mixed.

Stocks in Asia finished mixed, with technology issues rebounding after a recent bout of pressure, while the focus on U.S. tax reform remained and the markets appear to be continuing to assess the year's strong advance. The global rally is discussed by Schwab's Jeffrey Kleintop, CFA, and Randy Frederick, in the video, It's All Relative: Why Stocks May Not Be Overvalued. Japanese equities almost overcame yesterday's entire drop, with the yen giving back yesterday's rise. Stocks trading in Hong Kong rebounded slightly from yesterday's slide, though mainland Chinese shares declined with banks seeing some pressure after a the IMF said lenders need more capital and the government proposed liquidity-management regulations. Australian securities traded higher, led by strength in banking stocks and Indian equities gained ground on the heels of yesterday's unchanged monetary policy decision by the Reserve Bank of India. South Korean stocks declined with the tech rebound being countered by weakness in manufacturing and energy issues.

The international economic docket for tomorrow will yield reports on Q3 GDP and bank lending from Japan, home loans from Australia, the trade balance and labor costs from Germany, and construction output, industrial and manufacturing production, and the trade balance from the U.K.

Stocks Little Changed Following Two-Day WobbleStocks Mostly Flat After Overcoming Morning Lows

Charles Schwab: On the Market

Posted: 12/6/2017 4:15 PM EST

Stocks Little Changed Following Two-Day WobbleStocks Mostly Flat After Overcoming Morning Lows

 

U.S. stocks overcame some early weakness to finish the regular trading session fairly flat. U.S. tax reform continued to garner attention as the reconciliation process has begun. Treasury yields were lower and crude oil prices fell, while the U.S. dollar extended recent gains and gold was higher. Dow member Home Depot traded to the downside after announcing an accelerated business investment plan and the kidney dialysis services company DaVita agreed to sell its medical group to a unit of Dow component UnitedHealth for approximately $4.9 billion. 

The Dow Jones Industrial Average (DJIA) declined 40 points (0.2%) to 24,141, the S&P 500 Index was nearly unchanged at 2,629, and the Nasdaq Composite traded 14 points (0.2%) higher to 6,776. In moderate volume, 801 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.66 to $55.96 per barrel and wholesale gasoline fell $0.06 to $1.66 per gallon. Elsewhere, the Bloomberg gold spot price ticked $1.39 higher to $1,267.79 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.2% higher at 93.55.

DaVita Inc (DVA $69) announced an agreement to sell its DaVita Medical Group to Optum, a unit of Dow member UnitedHealth Corp. (UNH $220), for about $4.9 billion in cash. DVA rallied and UNH dipped.

Dow member Home Depot Inc. (HD $181) reaffirmed its full-year guidance and announced a new $15 billion share repurchase program, along with providing an update on its strategic priorities including its intent to accelerate business investment over the next three years. The boosted investment plans pressured shares of HD due to concerns about margin expansion as it issued its long-term goal for operating margins that missed expectations.

Dave & Buster's Entertainment Inc. (PLAY $53) reported Q3 earnings-per-share (EPS) of $0.29, or $0.27 ex-items, versus the $0.24 FactSet estimate, as revenues rose 9.3% year-over-year (y/y) to $250 million, compared to the forecasted $256 million. Q3 same-store sales declined 1.3% y/y, versus the expected 1.0% decrease. PLAY raised its full-year earnings guidance, but lowered its sales outlook, while its longer-term guidance appeared to please the Street. Shares traded solidly higher.

ADP private sector payroll report matches forecasts

The ADP Employment Change Report showed private sector payrolls rose by 190,000 jobs in November, matching the Bloomberg forecast, while October's increase of 235,000 jobs was unrevised. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader November nonfarm payroll report, expected to show jobs grew by 195,000 and private sector payrolls rose by 200,000 (economic calendar). The unemployment rate is forecasted to remain at 4.1% and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

Final Q3 nonfarm productivity (chart) was unrevised at the preliminary estimate of a 3.0% rate of growth on an annualized basis, versus expectations of a revised 3.3% rise. Q2 productivity was unrevised at a 1.5% gain. Unit labor costs were adjusted to 0.2% decrease, from the initial report of a 0.5% increase, and versus the forecast calling for an adjustment to a 0.2% rise. Q2 labor costs were revised lower to a 1.2% drop.

The MBA Mortgage Application Index rose 4.7% last week, following the prior week's 3.1% decline. The increase came as a 9.0% jump in the Refinance Index was met with a 2.4% increase in the Purchase Index. The average 30-year mortgage rate dipped 1 basis point (bp) to 4.19%.
Treasuries traded higher, with the yields on the 2-year and 10-year notes dipping 2 bps to 1.80% and 2.33%, respectively while the 30-year bond rate decreased 1 bp to 2.72%.

The U.S. dollar added to its recent gains with European currencies seeing pressure, while Treasury yields dipped from levels near the top end of the year's trading range. The markets continue to await the expected competitive tax reform reconciliation process between the House and Senate as they try to find compromises on some key differences of their bills.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Bill Passes Senate, Clearing Key Hurdle, reaching consensus between the two chambers won’t be easy; there are significant differences between the two bills that will need to be resolved. The conference process will begin this week and Republican leaders are optimistic that a deal can be struck within a matter of days. Complicating matters, the two chambers also must find time this week to avert a government shutdown and approve legislation that extends funding to keep the government open and operating.

The tech sector has seen some volatility as of late with the prospects of tax reform improving and fostering some noticeable sector rotation, which Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, I Melt with You: Anatomy of a Market Melt Up, is a healthy occurrence, for now.

The U.S. economic calendar for tomorrow will be light, starting with weekly initial jobless claims, forecasted to have ticked higher to a level of 240,000 from 238,000. Consumer Credit will be released in the final hour of trading to round out the day, expected to have increased by $17.0 billion in October, after expanding $20.8 billion in September.

Europe mixed on data, Asia falls amid global retreat

European equity markets finished mixed in the wake of the recent global market pullback recently after a strong year, while the euro lost some ground on the U.S. dollar and technology issues remained under pressure. Financials were also lower along with bond yields in the region. The economic calendar delivered a surprising rise in German factory orders. The British pound lost ground versus the greenback, amid ramped up uncertainty as Brexit negotiations remain deadlocked and British Prime Minister May faces political pressures regarding her stance during the talks on how to resolve the Irish border issue. May has only a few days left to reach a deal on the Irish border issue as the European Union is due to decide on whether Brexit talks can move to the next stage. The markets also grappled with the looming highly expected contested U.S. tax reform reconciliation process. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans.

Stocks in Asia finished decisively lower amid a global market retreat as of late, with technology issues leading the slide, while traders assess the strong global rally this year and U.S. tax reform heads for a likely contested reconciliation process. The global rally and recent volatility is discussed by Schwab's Jeffrey Kleintop, CFA, and Randy Frederick, in the video, It's All Relative: Why Stocks May Not Be Overvalued. The yen showed some strength as risk aversion nudged higher, weighing on Japanese equities. Stocks trading in mainland China and Hong Kong declined, with the markets giving back some of the year's strong gains and concerns about government regulations lingered. South Korean shares traded lower. Australian securities slipped after the nation reported softer-than-expected Q3 GDP growth. Indian stocks finished lower ahead of today's monetary policy decision by the Reserve Bank of India (RBI). After the closing bell, the RBI left its monetary policy and benchmark interest rates unchanged as expected.

The international economic docket for tomorrow will include the trade balance from Australia, the Leading Index from Japan, industrial production from Germany, and house prices from the U.K.

Stocks Decline as Political Uncertainty Fuels Volatility

Charles Schwab: On the Market

Posted: 12/1/2017 4:15 PM EST

Stocks Decline as Political Uncertainty Fuels Volatility

 

U.S. stocks finished the trading session lower, but well off the day's the worst levels as volatility ramped up on heightened uncertainty inside the beltway. Afternoon reports suggesting that the Senate has enough votes to pass its tax bill were overshadowed by some uncertainty regarding the possible ramifications that the developing situation surrounding former NSA advisor Mike Flynn may have for the Trump administration. Treasury yields and the U.S. dollar traded lower as some upbeat reads on the manufacturing sector were seemingly brushed aside. Energy shares outperformed amid a rise in crude oil prices and gold gained ground.

The Dow Jones Industrial Average (DJIA) declined 41 points (0.2%) to 24,232, the S&P 500 Index decreased 5 points (0.2%) to 2,642, and the Nasdaq Composite lost 26 points (0.4%) to 6,848. In heavy volume, 972 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.96 to $58.36 per barrel and wholesale gasoline ticked $0.01 higher to $1.74 per gallon. Elsewhere, the Bloomberg gold spot price increased $5.61 to $1,280.61 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.2% lower at 92.88. Markets were mixed for the week, as the DJIA rallied 2.9% and the S&P 500 Index advanced 1.5%, while the Nasdaq Composite declined 0.6%.

Ulta Beauty Inc. (ULTA $213) reported Q3 earnings-per-share (EPS) of $1.70, or $1.71 ex-items, versus the $1.66 FactSet estimate, as revenues rose 18.6% year-over-year (y/y) to $1.3 billion, roughly in line with forecasts. Q3 same-store sales rose 10.3% y/y, matching expectations. UTLA's gross margin came in south of expectations. The company issued Q4 EPS guidance that was below estimates, while its same-store sales outlook for the period had a midpoint that was just shy of forecasts. Shares closed solidly lower.

VMware Inc. (VMW $124) posted Q3 earnings of $1.07 per share, or $1.34 ex-items, compared to the projected $1.28, with revenues growing 11.0% y/y to $2.0 billion, roughly in line with forecasts. The cloud infrastructure and business mobility company issued Q4 guidance that exceeded expectations. Shares were nicely higher.

The major automakers reported November sales today, with General Motors Co's (GM $43) sales declining 2.9% y/y, compared to FactSet's projected 1.5% decrease. Ford Motor Co (F $13) reported a 6.7% rise in sales, versus the expected gain of 3.3%. Fiat Chrysler Automobiles NV's (FCAU $17) Chrysler sales fell 3.7%, compared to the expected 5.6% drop. GM and FCAU traded lower, while F finished higher.

Manufacturing activity continues to show solid expansion, tax reform uncertainty flares up

The Institute for Supply Management (ISM) Manufacturing Index (chart) for November declined to 58.2 from 58.7 in October, compared to the Bloomberg forecast calling for a dip to 58.3. New orders rose 0.6 points to 64.0 and production gained 2.9 points to 63.9, while employment dipped 0.1 points to 59.7 and prices declined 3.0 points to 65.5. Order backlog remained at 55.0 and new export orders decreased 0.5 points to 56.0. ISM said comments from respondents reflect expanding business conditions.

The final Markit U.S. Manufacturing PMI Index was revised to 53.9 for November from the preliminary reading of 53.8, versus expectations of 54.0, and below the 54.6 level posted in October. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Although manufacturing slowed, these reports continue to suggest solid growth with readings above 50 denoting expansion for both indexes. Moreover, Schwab's Chief Investment Strategist Liz Ann Sonders notes that it’s time for optimism about a significant capex cycle unfolding as we look ahead to 2018, in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle, adding that tax reform—if we get it—would be an additional kicker.

Construction spending (chart) rose 1.4% month-over-month (m/m) in October, well above projections of a 0.5% increase, and following September's unrevised 0.3% increase. Residential spending was up 0.4% m/m, while non-residential spending jumped 2.1%.

Treasuries finished higher, with the yield on the 2-year note dipping 1 basis points (bp) to 1.77%, the yield on the 10-year note falling 5 bps to 2.36% and the 30-year bond rate dropping 7 bps to 2.76%.

The U.S. dollar reversed to the downside, along with Treasury yields following a two-day rally, after former National Security Advisor Flynn pleaded guilty for lying to the FBI and agreed to cooperate with the Special Counsel's Office. This caused a spike in volatility and fostered uncertainty about what this could mean for the Trump Presidency, with the Senate scrambling to find enough support to bring its tax bill to a final vote. The Senate delayed yesterday's final vote as a key area of compromise regarding deficit concerns hit a snag. The Senate spent much of the day in preliminary procedures to try to mend disagreements. Afternoon reports have suggested that the legislative body now has enough votes to pass its bill with a vote expected later in the day.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Reform Bills Progress, but Many Hurdles Remain, if the bill passes the Senate, the House and Senate would need to convene a conference to negotiate and reconcile differences between the two bills to produce a single consensus bill. That bill would then need to be approved by both chambers before it could be sent to President Donald Trump for his signature.

Negotiations between the two chambers will likely be extremely challenging, given the differences between the two approaches. For investors, we still think it is too early to take any drastic action. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly. Regardless of the outcome of the tax bill, it’s always a good idea to meet with your tax and financial advisors before the end of the year to review your current financial situation and discuss your plans for the coming year.

Europe falls late in the day, Asia mixed

The European equity markets fell late in the session, with yesterday's delayed vote on tax reform in the U.S. stymieing recent optimism regarding progress being made to pass a bill and causing uncertainty to flare up. This was exacerbated former U.S. National Security Advisor Flynn pleading guilty for lying to the FBI and agreeing to cooperate with the Special Counsel's Office. Technology issues in the region extended the week's selloff, while auto-related issues saw some pressure. However, the energy sector was the lone group in positive territory amid a rally in crude oil prices on the heels of yesterday's OPEC agreement to extend its production cuts to the end of next year. An upbeat read on November eurozone manufacturing growth by Markit, which showed growth was revised to a higher acceleration from October's than initially estimated, was overshadowed.

The euro overcame early pressure as the U.S. dollar fell noticeably on the exacerbated U.S. political uncertainty, and the British pound came off the worst levels of the day but still modestly pared a recent rally. The pound found some strength this week amid signs that the deadlocked Brexit negotiations may be heading to the next stage. Bond yields in the region mostly saw solid pressure. Amid the flare-up in volatility, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Are Stocks too Expensive?, that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years.

Stocks in Asia finished mixed with the markets choppy following yesterday's delayed tax reform vote in the U.S. that appeared to cool some of the optimism that has led a sharp rally in the U.S. equity markets this week. Shares of Japanese companies advanced with the yen reversing a brief spike yesterday, while reports showed the nation's Q3 capital spending accelerated more than expected and household spending for October came in stronger than anticipated, while national October consumer price inflation rose in line with expectations. Mainland Chinese stocks finished flat and equities trading in Hong Kong declined on the heels of the flared-up U.S. tax reform uncertainty and a report from Caixin showing growth in the country's manufacturing output unexpectedly slowed, diverging from yesterday's government report that suggesting expansion surprisingly accelerated.

Australian securities gained ground with financials modestly paring yesterday's drop on the government's announcement that it will launch an inquiry into the sector, while energy issues rose following yesterday's OPEC production extension. Indian stocks fell on the heels of late-yesterday's report that showed Q3 GDP accelerated to a 6.3% y/y pace of growth, but slightly below the projected 6.4% expansion. South Korean equities finished flat in the wake of the recent selloff in the tech sector, yesterday's Bank of Korea rate hike, and today's stronger-than-expected Q3 GDP report. Even after this week's choppiness for the markets, they hold onto strong gains for the year fostered by the broadest economic growth in a decade, which is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, discusses in his article, 5 Reasons Investors Should Give Thanks.

Stocks higher on week as damage already done by the bulls

Despite the spike in volatility on Friday, most U.S. equity markets posted solid gains for the week, bolstered by signs the Senate's tax reform bill was finding enough support to gain momentum toward a final vote. Telecom and financial stocks led the way on the tax reform optimism, though a noticeable sector rotation came to the detriment of technology issues and the Nasdaq, which have led the markets' yearly rally and string of record highs. Economic optimism also helped boost the markets, with Consumer Confidence hitting a 17-year high, new home sales unexpectedly jumping to a decade high, Q3 GDP being revised higher to 3.3%, and culminating with the Fed's Beige Book showing business activity remained steady and noting a slight improvement in the outlook. Energy issues finished higher, while the highly-anticipated OPEC meeting delivered a production cut extension. Following Friday's volatility surge, the U.S. dollar finished little changed after showing mid-week signs of life and the Treasury yield curve gave back a brief bout of steepening.

This sets the stage for next week, in which the economic calendar will likely contend with continued scrutiny of tax reform, while delivering factory orders, the trade balance, the ISM non-Manufacturing Index, Q3 nonfarm productivity and unit labor costs, as well as the preliminary December University of Michigan Consumer Sentiment Index. However, the headlining report will likely be Friday's November nonfarm payroll report, with the Fed's December monetary policy meeting looming the following week and highly-expected to deliver a third rate hike of the year.

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, the bull market continues to be undisturbed by a myriad of actual or potential negative events and momentum favors the bulls for the foreseeable future. However, elevated valuations and growing investor complacency pose risks that could lead to a long-awaited pullback and/or a pickup in volatility from today’s extremely low base.

International reports due out next week that deserve a mention include: Australia—Q3 GDP and the Reserve Bank of Australia's monetary policy decision. China—trade balance, Caixin's PMI Services Index and inflation statistics. India—the Reserve Bank of India's monetary policy decision. Japan—Q3 GDP. Eurozone—Markit's business activity reports, retail sales and Q3 GDP, along with German factory orders and trade balance. U.K.—industrial and manufacturing production, trade balance and the Bank of England's inflation target.

Stocks Rally Ahead of Senate Tax Vote

Charles Schwab: On the Market

Posted: 11/30/2017 4:15 PM EST

Stocks Rally Ahead of Senate Tax Vote

 

U.S. stocks traded nicely higher as market participants weighed the likelihood of the Senate passing its tax reform bill, with a vote expected to be held soon. Energy stocks rose as crude oil prices ticked higher and Treasury yields extended recent gains, while gold and the U.S. dollar traded lower. Domestic economic reports showed that personal income and spending in October rose and weekly jobless claims dipped. Kroger announced upbeat quarterly profits and Costco reported better-than-expected same-store sales growth. 

The Dow Jones Industrial Average (DJIA) rallied 332 points (1.4%) to 24,272, the S&P 500 Index advanced 22 points (0.8%) to 2,648, and the Nasdaq Composite gained 50 points (0.7%) to 6,874. In heavy volume, 1.5 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.10 higher to $57.40 per barrel and wholesale gasoline was unchanged at $1.73 per gallon. Elsewhere, the Bloomberg gold spot price decreased $8.30 to $1,275.34 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 93.07.

PVH Corp. (PVH $135) reported Q3 earnings-per-share (EPS) of $3.05, or $3.02 ex-items, versus the $2.91 FactSet estimate, as revenues increased 5.0% year-over-year (y/y) to $2.4 billion, above the projected $2.3 billion. PVH issued Q4 EPS guidance that was below expectations, though it raised its full-year profit outlook. The parent of Calvin Klein and Tommy Hilfiger projected Q4 and full-year revenues to be slightly above estimates. Shares declined.

Kroger Co. (KR $26) posted Q3 profits of $0.44 per share, compared to the forecasted $0.40, with revenues rising 4.5% y/y to $27.7 billion, above the expected $27.5 billion. The grocer's Q3 same-store sales grew 1.1% y/y, versus the estimated 0.9% gain. KR reaffirmed its full-year EPS outlook. Shares rallied.

Costco Wholesale Corp. (COST $184) moved nicely higher after the company said its November same-store sales grew 10.8% y/y, above the projected 7.9% increase. L Brands Inc. (LB $56) said its November same-store sales declined 1.0% y/y, versus the forecasted 0.2% gain, but noted that it sees December sales being flat to up low-single digits. LB rallied.

Personal income and spending rise, jobless claims dip

Personal income (chart) rose 0.4% month-over-month (m/m) in October, above the Bloomberg forecast of a 0.3% gain, and compared to September's unrevised 0.4% increase. Personal spending increased 0.3% last month, matching expectations, and versus September's downwardly revised 0.9% gain. The October savings rate as a percentage of disposable income was 3.2%. The PCE Deflator was 0.1% higher, in line with expectations and versus the prior month's unrevised 0.4% gain.

Compared to last year, the deflator was 1.6% higher, north of estimates of a 1.5% rise and compared to September's upwardly revised 1.7% gain. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, matching expectations, and versus the prior month's upwardly revised 0.2% gain. The index was 1.4% higher y/y, in line with estimates, and compared to September's upwardly revised 1.4% increase.

Weekly initial jobless claims (chart) declined by 2,000 to 238,000 last week, versus forecasts calling for it to match the prior week’s upwardly revised 240,000 figure. The four-week moving average rose by 2,250 to 242,250, while continuing claims grew by 42,000 to 1,957,000, north of estimates of 1,890,000.

The Chicago Purchasing Managers Index (chart) declined in November to 63.9 from October's unrevised 66.2 level, and better than expectations calling for a decline to 63.0. The index remained solidly in expansion territory (above 50) and pulled back from the highest level since March 2011, adding to a long list of signs that the manufacturing sector remains solid.

Schwab's Chief Investment Strategist Liz Ann Sonders notes that U.S. business capital spending has already picked up but an even sharper recovery could be in the cards for 2018, while tax reform—if we get it—would be an additional kicker in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle. Tomorrow, November manufacturing activity will be on display with the releases of the ISM Manufacturing Index and the final Markit Manufacturing PMI Index. The ISM index is projected to dip to 58.3 from 58.7 in October, while Markit's index is expected to be revised higher to 54.0 from the preliminary 53.8 reading, but slightly below October's 54.6 level. Readings above 50 for both reports denote expansion.

Treasuries traded lower, with the yield on the 2-year note rising 2 basis points (bps) to 1.78%, the yield on the 10-year note gaining 3 bps to 2.42%, and the 30-year bond rate ticking 1 bp higher to 2.83%.

Treasury yields added to yesterday's noticeable curve steepening after a recent bout of flattening that fostered some market weariness, while the U.S. dollar pared its modest weekly rebound.
The markets continued to grapple with the continued signs of broad-based global economic growth and mostly favorable earnings results, along with tax reform uncertainty. The Senate appears headed to vote later today or tomorrow on its bill with signs emerging the past couple days that it has been tweaked enough to find enough support to pass. This has fostered some optimism regarding tax reform becoming a reality this year, but has also resulted in some rotation in the stock market sectors, which helped lead yesterday's selloff in the tech sector.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Reform Bills Progress, but Many Hurdles Remain, if the bill passes the Senate, the House and Senate would need to convene a conference to negotiate and reconcile differences between the two bills to produce a single consensus bill. That bill would then need to be approved by both chambers before it could be sent to President Donald Trump for his signature.

Negotiations between the two chambers will likely be extremely challenging, given the differences between the two approaches. For investors, we still think it is too early to take any drastic action. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly. Regardless of the outcome of the tax bill, it’s always a good idea to meet with your tax and financial advisors before the end of the year to review your current financial situation and discuss your plans for the coming year.

Tomorrow, the U.S. economic calendar will give us a look at national manufacturing activity in November with the releases of the ISM Manufacturing Index, projected to dip to 58.3 from 58.7 in October, and the final Markit Manufacturing PMI Index, expected to be revised higher to 54.0, but down from October's 55.3 level. Readings above 50 for both depict expansion. Construction spending for October will also be reported, forecasted to have increased 0.5% after rising 0.3% in September.

Europe gives up gains as euro and pound rally, Asia mostly lower

European equity markets relinquished early gains and finished mostly lower, with the euro extending a rise amid a downside reversal for the U.S. dollar late in the session and the British pound jumping on signs of progress in deadlocked Brexit negotiations. Energy issues gave up an advance as crude oil prices were choppy ahead of today's OPEC production decision. OPEC is expected to deliver an extension of cuts to the end of 2018 but there were some uncertainties that lingered ahead of the decision. U.S. tax reform optimism continued but this fostered yesterday's noticeable rotation out of the technology sector, and the group remained under pressure on this side of the pond. In economic news, eurozone consumer price inflation estimates came in a bit cooler than expected for November, while the region's October unemployment rate dipped unexpectedly. German retail sales surprisingly fell last month. In his latest article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, addresses the question Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years. Bond yields finished mostly lower to exacerbate pressure on financials.

Stocks in Asia finished mostly lower, with the global selloff in the tech sector weighing on markets, while optimism of U.S. tax reform lingered and a flood of data in the region was digested. Shares trading in mainland China and Hong Kong fell, with the weakness in tech more than offsetting the government's reports on manufacturing and the key services sectors showing growth accelerated for both, with the former surprisingly increasing. South Korean equities dropped as the tech pullback was met with an expected increase in the Bank of Korea's benchmark interest rate and an unexpected drop in the nation's industrial production. Australian securities moved lower with financials seeing some pressure after the government announced that it will launch an inquiry into the sector. Indian stocks also traded to the downside on the tech volatility and ahead of the nation's Q3 GDP report. After the closing bell, India's Q3 GDP accelerated to a 6.3% y/y pace of growth, but slightly below the projected 6.4% expansion.

However, Japanese equities rose with the yen extending yesterday's weakness and strength in financials helping counter the slide in the tech sector. Japan reported that industrial production rose at a smaller rate than expected but growth in vehicle production accelerated solidly in October. Despite the downside pressure on most markets, they remain nicely higher on the year, fostered by the broadest economic growth in a decade and is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks.

The international economic docket for tomorrow will yield a host of reports from Japan as the island nation reports its jobless rate, CPI, capital spending, company sales and vehicle sales. China, India and South Korea will deliver manufacturing PMI reads and the latter will also announce final Q3 GDP. Reports from across the pond will include Markit Manufacturing PMI reads from the U.K., Germany, France, Italy and the eurozone.