Stocks Overcome Early Pressure, Manage Mild Gains

Charles Schwab: On the Market

Posted: 9/28/2017 4:15 PM EDT

Stocks Overcome Early Pressure, Manage Mild Gains

 

U.S. stocks overcame some early weakness to finish the regular trading session slightly higher as market participants welcomed a surprising upward revision to Q2 GDP, while Fed rate hike expectations remained elevated and yesterday's GOP tax reform proposal found focus. The U.S. dollar pared its recent run and Treasury yields finished mixed. Crude oil registered lower after a midday reversal and gold was higher. In equity news, BlackBerry and Rite Aid announced quarterly results and Abbot Labs received a boost after the FDA approved its diabetes device.

The Dow Jones Industrial Average (DJIA) increased 40 points (0.2%) to 22,381, the S&P 500 Index was 3 points (0.1%) higher at 2,510, and the Nasdaq Composite was nearly unchanged at 6,453. In moderate volume, 766 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.58 to $51.56 per barrel and wholesale gasoline was $0.01 lower at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price added $4.18 to $1,286.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 93.17.

BlackBerry Ltd. (BBRY $10) reported a Q2 loss of $0.07 per share, or earnings-per-share (EPS) ex-items of $0.05 per share, versus the breakeven FactSet estimate, as revenues decreased 28.7% year-over-year (y/y) to $238 million, above the projected $222 million. The company said it achieved historical highs in total software and services revenue and gross margin, reflecting its complete transformation to a software company. BBRY reaffirmed its full-year guidance. Shares rallied.

Abbott Laboratories (ABT $54) gained solid ground after the U.S. Food and Drug Administration (FDA) approved the company's continuous glucose monitor for people with diabetes that does not require routine finger pricking. The treatment is already sold in other countries and will be the first in the U.S. DexCom Inc. (DXCM $45), a competitor that got FDA approval for its device late last year but it does require finger pricking, fell sharply on the news.

Conagra Brands Inc. (CAG $34) posted fiscal Q1 EPS of $0.36, or $0.46 ex-items, versus the expected $0.40, with revenues decreasing 4.8% y/y to $1.8 billion, roughly in line with expectations. The company said it continued to see gross margin expansion, despite higher-than-expected inflation and its planned increase in investments. CAG reaffirmed its full-year guidance and shares traded higher.

Rite Aid Corp. (RAD $2) reported Q2 EPS of $0.16, or a $0.01 per share loss ex-items, compared to the $0.01 shortfall that was expected, as revenues declined 4.4% y/y to $7.7 billion, below the projected $7.8 billion. Same-store sales dropped 3.4% y/y, versus the estimated 2.2% decrease. The company said its performance reflects a challenging reimbursement rate environment and the effects of an extended merger and asset sale process. Additionally, RAD announced that Kermit Crawford will join the company as president and chief operating officer. Shares finished sharply lower.

Final read on Q2 GDP revised higher, jobless claims increase

The final look (of three) at Q2 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 3.1%, adjusted up from the 3.0% expansion posted in the first revision, where it was expected to remain. Q1 GDP expanded by an unrevised 1.2% rate. Personal consumption was unrevised at a 3.3% gain for Q2, matching estimates. Personal consumption grew by an unrevised 1.9% in Q1.

On inflation, the GDP Price Index was unadjusted at a 1.0% gain, in line with forecasts, while the core PCE Index, which excludes food and energy, was unadjusted at a 0.9% rise, matching expectations.

Weekly initial jobless claims (chart) rose by 12,000 to 272,000 last week, above forecasts of 270,000, with the prior week’s figure being revised higher by 1,000 to 260,000. The four-week moving average gained by 9,000 to 277,750, while continuing claims fell 45,000 to 1,934,000, south of estimates of 1,993,000.

The advance goods trade deficit narrowed unexpectedly to $62.9 billion in August, from the downwardly revised $63.9 billion in July, and compared to expectations of $65.1 billion.

Preliminary wholesale inventories rose 1.0% month-over-month (m/m) in August, versus forecasts for a 0.4% increase, and following July's unrevised 0.6% rise.

The Kansas City Fed Manufacturing Activity Index for September unexpectedly showed growth (a reading above zero) accelerated, rising to 17 from August's 16 reading, versus forecasts of a dip to 15.

Treasuries were mixed, with the yield on the 2-year note dipping 2 basis points (bps) to 1.46%,the yield on the 10-year note nearly unchanged at 2.31% and the 30-year bond rate adding 1 bp to 2.87%.
Treasury yields eased off a recent rally that took the rate on the 10-year note to multi-month highs, while the U.S. Dollar Index pared a jump as of late to levels not seen in over a month. These moves were bolstered by heightened December Fed rate hike expectations and apparent optimism regarding fiscal policy as some details regarding tax reform were released.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the global monetary policy front in his article, How the Shift by Central Banks May Affect the Stock Market, on the Market Commentary page at www.schwab.com. Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses the tax reform details his latest article, Tax Reform Framework Released, But The Road Ahead Is Long, on the Insights & Ideas page. Follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch.

The stock markets remain near record highs despite a plethora of things for the market to worry about and Schwab's Chief Investment Strategist Liz Ann Sonders provides analysis of this resiliency in her article, Comfortably Numb? An Update on Investor Sentiment, on the Market Commentary page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Tomorrow, the U.S. economic calendar will include personal income and spending for August, with economists expecting increases of 0.2% and 0.1%, respectively, and the Chicago Purchasing Managers Index, anticipated to show a slight downtick to a level of 58.7 in September from the 58.9 registered in August. Rounding out the day's releases will be the final University of Michigan Consumer Sentiment Index for September, forecasted to remain at the preliminary level of 95.3, but down from August's final read of 96.8.

Europe mostly higher on data, Asia mixed following advance in U.S. yesterday

European equity markets finished mostly higher, with an upbeat read on eurozone sentiment supporting the advance and helping the euro rebound. The British pound also recovered from recent weakness, as the two currencies have come under pressure amid a rally in the U.S. dollar on heightened Fed rate hike expectations and on the heels of yesterday's details of the tax reform framework. Bond yields in the region finished mixed. German consumer confidence unexpectedly dipped in October, while the nation's consumer price inflation came in slightly below expectations for September. However, September eurozone economic confidence improved more than expected. For a look at the global markets, see Schwab's Jeffrey Kleintop's, CFA, article, U.S. vs International: What Do Earnings Tell Us About What May Be Ahead?, on the Market Commentary page at www.schwab.com.

Stocks in Asia finished mixed on the heels of yesterday's gains in the U.S., which were bolstered by an upbeat durable goods orders report and the release of details of tax reform framework for the world's largest economy. The U.S. dollar has rallied to apply pressure on the yen, which helped Japanese equities move higher. However, lingering regulatory concerns and dampened conviction ahead of next week's holiday break weighed on Chinese stocks. Australian securities ticked higher and South Korean shares finished flat. Indian equities snapped a seven session losing streak that developed amid recent economic data that fostered concerns and led to the markets retreat from record highs. For analysis of global investing, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page at www.schwab.com.

The international economic docket for tomorrow will be dominated with reports from Japan as it releases its jobless rate, CPI, retail sales, industrial production, vehicle production, housing starts and construction orders. Additional releases include private sector credit from Australia, industrial production from South Korea, retail sales and unemployment claims from Germany and 2Q GDP, consumer credit and business investment from the U.K.