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Tuesday, October 10, 2017

Markets Back to Winning Ways

Charles Schwab: On the Market
Posted: 10/10/2017 4:15 PM EDT

Markets Back to Winning Ways
The U.S. equity markets finished higher, despite continued domestic and global political uncertainties, and a slight cooling in small business sentiment. Dow member Wal-Mart's $20 billion share buyback plan and upbeat sales outlook gave the consumer staples sector a boost, and the hotly-contested proxy fight surrounding Dow component Procter & Gamble was also in focus. Treasury yields and the U.S. dollar were lower after recent rallies, while gold and crude oil prices were higher. 

The Dow Jones Industrial Average (DJIA) increased 70 points (0.3%) to 22,831, the S&P 500 Index gained 6 points (0.2%) to 2,551, and the Nasdaq Composite added 7 points (0.1%) to 6,587. In moderate volume, 709 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $1.34 to $50.92 per barrel and wholesale gasoline was $0.03 higher at $1.59 per gallon. Elsewhere, the Bloomberg gold spot price was up $4.42 to $1,288.47 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 93.24.

Dow member Wal-Mart Stores Inc. (WMT $84) announced at its analyst day a new $20.0 billion share repurchase program and reiterated its earnings guidance for the current year. The company issued a profit outlook for the following year that had a midpoint that was below forecasts, but said it expects sales growth at or above 3.0%, driven by same-store sales and eCommerce growth. Shares rallied.

Dow component Pfizer Inc. (PFE $36) reported that it is reviewing strategic alternatives for its consumer healthcare business, with options ranging from a full or partial separation through a spin-off, as well as a sale or other transaction, but it may ultimately determine to retain the business. Shares were little changed.

Honeywell International Inc. (HON $143) announced that it plans to separately spin off its homes product portfolio and ADI global distribution business, as well as its transportation systems business, into two stand-alone, publicly-traded companies. Shares were slightly lower.

Dow member Procter & Gamble Co. (PG $92) was in focus today as the company held a highly-anticipated and hotly-contested shareholder vote. PG said after the vote that activist investor Nelson Peltz, who runs Trian Fund Management, was not elected to the company's Board. Peltz told CNBC that the vote was too close to call and Trian is awaiting certification by an independent inspector, adding that no matter how the vote goes, PG should add him to the Board. PG said it is encouraged that shareholders recognize it is a profoundly different, much stronger, more profitable company than just a few years ago. Shares finished lower.

Small business optimism declines

The National Federation of Independent Business (NFIB) Small Business Optimism Index for September fell to 103.0, from August's unrevised 105.3 level, versus the Bloomberg expectation of a dip to 105.0.

Treasuries were slightly higher, as the yield on the 2-year note was flat at 1.50%, while the yields on the 10-year note and the 30-year bond declined 1 basis point to 2.35% and 2.88%, respectively.
Bond yields and the U.S. dollar have given back some of recent rallies to multi-month highs. Uncertainty appears to be ramping up regarding if the tax-reform framework can avoid being derailed as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend, in his article, Tax Reform Framework Released, But The Road Ahead Is Long.

Interest rates and the greenback have received a boost from elevated December Fed rate hike expectations and the Central Bank's plan to begin to shrink its massive balance sheet this month, as well as an upbeat global economic backdrop, which has also seen signs that inflation may be nudging higher. Global market attention on inflation is ramping up and Schwab's Chief Investment Strategist Liz Ann Sonders notes that with wage growth picking up and the labor market even tighter, it’s time to put even traditional measures of inflation back on the radar screen in her article, The Waiting: Wage Growth and Inflation Finally Getting in Gear?.

Also, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, points out in his commentary, Inflation May Be The Biggest Question For Investors In 2018, that central banks are behaving as if wages and inflation will revive in the year ahead. If they don’t, and central banks don’t alter their policy path, the global stock markets could be in for a rough 2018. Read these articles and other timely commentary from our Schwab experts on the Market Commentary page at Follow Liz Ann, Jeff and Schwab on Twitter: @lizannsonders, @jeffreykleintop, and @schwabresearch.

Tomorrow's economic calendar will provide investors a look at the job market via the Job Openings and Labor Turnover Survey (JOLTS), with the measure of unmet demand for labor forecasted to show 6.1 million jobs were available to be filled in August, a slight downtick from the 6.2 million posted in July, as well as MBA Mortgage Applications. In afternoon action, the Fed will release the minutes from its September monetary policy meeting.

Europe mostly lower despite data, Asia mostly higher as markets return to action
European equity markets finished mostly lower, despite stronger-than-expected manufacturing and industrial production reports out of the U.K. and a larger-than-projected rise in German exports, which likely preserved the positive global economic sentiment. However, political uncertainty continued to hamper the Spanish markets, with a speech by the Catalan leader later today being highly anticipated to see if he declares independence following last week's referendum that was deemed illegal by national authorities. After the close of the markets, the Catalan President treaded cautiously in his remarks, looking to initiate talks with the government in Madrid as opposed to an outright declaration of independence. Also, Brexit and political uncertainty in the U.K. festered as Prime Minister Theresa May's speech yesterday afternoon detailing a two-year transition period after exiting the European Union as digested as the fifth round of negotiations continue.

For analysis, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at Follow Randy on Twitter: @randyafrederick. The British pound and the euro traded higher versus the U.S. dollar and bond yields in the region finished mixed. Fed leadership uncertainty remains, along with hawkish sentiment toward the European Central Bank and the Bank of England. As such, Schwab's Jeffrey Kleintop, CFA, offers analysis in his article, How the Shift by Central Banks May Affect the Stock Market, on the Market Commentary page at

Stocks in Asia finished mostly higher despite the slip in the U.S. yesterday, with global economic optimism continuing to buoy sentiment, while Japanese markets returned to action following yesterday's holiday and South Korean markets coming back after more than a week-long break. Japanese equities advanced, and South Korean securities rallied sharply to catch up to the global markets' run over the past week. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick discussion in the video, Are Investors Underestimating the Stock Market Rally?, on the Insights & Ideas page at Meanwhile, mainland Chinese stocks and those traded in Hong Kong and India all traded higher, though markets in Australia finished flat.

The international economic calendar for tomorrow will hold consumer sentiment from Australia, core machinery orders from Japan, and CPI from Spain.

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