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Friday, September 22, 2017

Stocks Little Changed Amid Data and Geopolitical Developments

Charles Schwab: On the Market
Posted: 9/22/2017 4:15 PM EDT

Stocks Little Changed Amid Data and Geopolitical Developments
U.S. stocks finished nearly unchanged to round up the trading week as the markets grappled with flared up tensions in regard to North Korea and as international and domestic business activity reports painted a positive global growth picture. Treasury yields and the U.S. dollar pared a weekly advance, while gold was higher and crude oil prices were mixed. In equity news, Texas Instruments raised its dividend and CarMax rallied after topping quarterly expectations.

The Dow Jones Industrial Average (DJIA) decreased 10 points (0.1%) to 22,350, the S&P 500 Index added 2 points (0.1%) to 2,502, and the Nasdaq Composite ticked 4 points higher (0.1%) to 6,427. In light to moderate volume, 719 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil added $0.11 to $50.66 per barrel and wholesale gasoline was $0.02 higher at $1.63 per gallon. Elsewhere, the Bloomberg gold spot price increased $5.80 to $1,297.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 92.18. Markets were mixed for the week, as the DJIA gained 0.4%, the S&P 500 Index ticked 0.1% higher and the Nasdaq Composite declined 0.3%.

Dow member McDonald's Corp. (MCD $159) announced a 7.0% increase to its quarterly dividend to $1.01 per share, while Texas Instruments Inc. ( TXN $88) reported that it will boost its quarterly dividend by 24.0% to $0.62 per share and a $6.0 billion addition to its share repurchase program. MCD dipped, while TXN gained solid ground.

CarMax Inc. (KMX $73) reported fiscal Q2 earnings-per-share (EPS) of $0.98, versus the $0.95 FactSet estimate, as revenues rose 9.7% year-over-year (y/y) to $4.4 billion, above the expected $4.3 billion. Q2 same-store sales of used autos grew 5.3% y/y, compared to the 5.0% increase that was expected. Shares are rallied.

Preliminary September business activity reports mixed but continue to signal growth

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output accelerated after rising to 53.0 in September, from August's 52.8 level, matching the Bloomberg expectation. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector this month slowed more than expected, declining to 55.1 from August's 56.0 level, versus forecasts calling for a dip to 55.7.

Readings above 50 for both reports denote expansion in activity and the data followed Markit's eurozone manufacturing and services growth that topped forecasts. All of the world's top 20 economies are growing this year, a rare occurrence over the last decade and a key component to our positive global outlook for earnings right now as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick in the video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page at Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Treasuries were mostly higher, with the yield on the 2-year note flat at 1.44%, while the yield on the 10-year note declined 2 basis points (bps) to 2.26% and the 30-year bond rate dipped 1 bp to 2.80%.
Bond yields and the U.S. dollar experienced volatility following Wednesday's decision by the Fed to hold interest rates steady, discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her latest commentary, The Fed's on the QT, on the Market Commentary page at Liz Ann notes that the Fed, as expected, left rates unchanged but announced it would start to shrink its balance sheet in October. On balance, the statement was seen as more hawkish than expected, with the majority of FOMC participants expecting at least one more rate hike this year. We continue to believe a December rate hike remains firmly on the table given continued strength in the labor market and some signs that inflation is getting a lift. In addition, since the Fed began raising interest rates in late-2015, financial conditions have actually loosened—giving the Fed the runway to continue tightening policy. Follow Liz Ann on Twitter: @lizannsonders.

North Korean concerns flared-up after the country issued a threat that it could test another hydrogen bomb over the Pacific. The threat comes as U.S. President Donald Trump offered some tough commentary toward the nation in his speech at this week's United Nations gathering. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks, investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. Read more on the International page at, and follow Jeff on Twitter: @jeffreykleintop.

Europe mostly higher and Asia mostly lower amid geopolitical uneasiness
Most European equity markets finished higher, with some upbeat economic data in the region helping overshadow flared up risk aversion on new threats by North Korea. Markit's preliminary Eurozone Composite PMI Index—a gauge of activity in both the manufacturing and services sectors—improved to 56.7 in September from 55.7 in August, and versus the projected dip to 55.6. A reading above 50 denotes expansion and German manufacturing activity was a standout in the report as its index unexpectedly rose to a level above 60. The euro ticked higher versus the U.S. dollar following the data and as the greenback was hampered by the geopolitical uneasiness. The markets mostly shrugged off some political uncertainty ahead of this weekend's national election in Germany and as today's highly anticipated Brexit speech from U.K. Prime Minister Theresa May appeared to disappoint as it lacked details on the path to leave the European Union. The British pound saw pressure following May's speech. For analysis of the political front see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond?, on the Insights & Ideas page at, where you can also find our article, Brexit Begins: What's Next for the U.K.?.

Global monetary policy remained in focus as the Fed this week signaled a December rate hike remains in play, while the European Central Bank and Bank of England have offered hawkish signals as of late. Schwab's Jeffrey Kleintop, CFA, notes in his latest article, How the Shift by Central Banks May Affect the Stock Market, despite the coming shift by central banks towards trimming/tapering their balance sheets, we don't believe the bull market is at risk. Read more on the Market Commentary page at, including Jeff's point that earnings, not easing, remain the key support for stock markets around the world. Bond yields in the region were relatively flat.

Stocks in Asia finished mostly to the downside amid a reversal as new bomb testing threats by North Korea caused geopolitical tensions to flare up and bolster risk aversion. Schwab's Liz Ann Sonders offers analysis of the tensions toward North Korea in her article, Twist and Shout: United States Takes on North Korea … Implications for Stocks, on the Market Commentary page at The yen rallied in the final hours of trading and Japanese equities declined. Shares trading in mainland China and Hong Kong fell, with the geopolitical uneasiness being met with a downgrade of China's credit rating by Standard & Poor's. South Korean stocks decreased and Indian equities dropped. However, strength in financials helped lift Australian securities higher.

Stocks mixed as a plethora issues persist

Stocks finished the week mixed but still remained near record high territory as the markets took a plethora of traditional market-moving events relatively in stride. The U.S. dollar spiked briefly and Treasury yields continued a recent rally on the heels of the Fed's perceived hawkish monetary policy statement. However, both pared gains in the second-half of the week as geopolitical concerns were revived after President Trump's stern warning at this week's UN gathering appeared to prompt a threat of another hydrogen bomb test by North Korea. Natural disasters remained in focus as U.S. homebuilder sentiment, housing construction activity, and existing home sales were impacted by Hurricanes Harvey and Irma, Maria hit the already ravaged Caribbean, and Mexico was rocked by a deadly earthquake.

Telecommunications stocks led to the upside, bolstered by merger chatter regarding T-Mobile US Inc. (TMUS $64) and Sprint Corp. (S $9), which appeared to ease heated up price competition concerns. Financials posted a solid gain on the rise in bond yields, and energy issues gained ground as crude oil prices posted a third-straight weekly gain. However, the rise in interest rates weighed on real estate and utilities issues, while technology issues declined on the choppiness in the U.S. dollar and pressure on Dow member Apple Inc. (AAPL $152) amid concerns following last week's new iPhone launch. Best Buy Co. Inc's (BBY $54) disappointing long-term outlook and Bed Bath & Beyond Inc's (BBBY $23) decisive earnings miss and lowered guidance hamstrung the consumer discretionary sector. General Mills Inc's (GIS $51) results preserved concerns toward the packaged foods market to hamper the consumer staples sector. Healthcare issues moved lower amid the volatile biotech sector as discussed by Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, in his latest, Schwab Sector Views: Biotech Bonanza or Bust?, on the Insights & Ideas page at

Next week, the U.S. economic calendar will bring some key data points for the markets to digest, courtesy of Consumer Confidence, preliminary durable goods orders, personal income and spending, as well as the final look at Q2 GDP. A host of Fedspeak is poised to garner attention, headlined by Fed Chairwoman Janet Yellen's speech on inflation, uncertainty and monetary policy, which will include a Q&A segment. As noted in the latest Schwab Market Perspective: A Cat and Mouse Fall, volatility has ramped up a bit in the traditionally-slow final weeks of summer, which could be a preview of a bumpy fall for investors. Solid economic data and strong corporate earnings should allow the bull market to continue, but fiscal and monetary uncertainties present risks. Read more on the Market Commentary page at, and follow us on Twitter: @schwabresearch.

International reports due out next week that deserve a mention include: China—Caixin China PMI Manufacturing Index and industrial profits. Japan—PMI Manufacturing Index, household spending, retail sales, industrial production and consumer price inflation. Eurozone—consumer price inflation estimate, along with German business confidence and retail sales. U.K.—Q2 GDP.

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