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Tuesday, October 31, 2017

Record High Rally Pauses

Charles Schwab: On the Market
Posted: 10/30/2017 4:15 PM EDT

Record High Rally Pauses
U.S. equities took a breather from their recent tech-fueled rally to fresh record highs ahead of a heavy slate of economic and earnings reports, with investors eyeing Dow member Apple's results and the Fed monetary policy decision later in the week. Caution also ensured amid uncertainty ahead of President Trump's pick for the next Fed Chief this week. Treasury yields and the U.S. dollar gave back some of their recent runs, despite an upbeat personal spending report and solid read on regional manufacturing activity. Crude oil and gold are moved higher.

The Dow Jones Industrial Average (DJIA) fell 85 points (0.4%) to 23,349, the S&P 500 Index decreased 8 points (0.3%) to 2,573, and the Nasdaq Composite ticked 2 points lower to 6,699. In moderate volume, 871 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.25 to $54.15 per barrel and wholesale gasoline lost $0.01 to $1.71 per gallon. Elsewhere, the Bloomberg gold spot price rose $2.87 to $1,276.22 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 94.50.

Lennar Corp. (LEN $56) announced an agreement to merge with CalAtlantic Group Inc. (CAA $49) in a transaction valued at $9.3 billion, including $3.6 billion of net debt. Under the terms of the deal, each share of CAA stock will be exchanged for 0.885 shares of LEN. Shares of CAA rallied over 20%, while LEN traded lower.

Vistra Energy Corp. (VST $19) and Dynegy Inc. (DYN $12) announced an agreement to combine, with the latter merging into the former, creating a company projected to have a market capitalization in excess of $10 billion. Under the terms of the deal, DYN shareholders will receive 0.652 shares of VST for each share owned. VST fell and DYN traded solidly higher.

Personal income and spending rise, with the latter topping forecasts

Personal income (chart) rose 0.4% month-over-month (m/m) in September, matching the Bloomberg forecast, and compared to August's unrevised 0.2% increase. Personal spending gained 1.0% last month, above expectations of a 0.9% increase, and versus August's unrevised 0.1% gain. The September savings rate as a percentage of disposable income was 3.1%. The PCE Deflator was 0.4% higher, in line with expectations and versus the prior month's unrevised 0.2% gain. Compared to last year, the deflator was 1.6% higher, matching estimates and compared to August's unrevised 1.4% rise. Excluding food and energy, the PCE Core Index was 0.1% higher m/m, matching expectations, and the index was 1.3% higher y/y, in line with estimates calling for it to match August's unrevised increase.

The Dallas Fed Manufacturing Activity Index unexpectedly jumped further into expansion territory (a reading above zero). The index rose to 27.6 in October—the highest since March 2006—from 21.3 in September, and versus forecasts of a dip to 21.0. Manufacturing activity has ramped up along with business capital spending (capex) and Schwab's Chief Investment Strategist Liz Ann Sonders points out that capex may be in for an even sharper recovery in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle.

Treasuries were higher, as the yield on the 2-year note decreased 2 basis points (bps) to 1.57%, while the yields on the 10-year note and the 30-year bond rate dropped 4 bps to 2.37% and 2.88%, respectively.

Treasury yields and the U.S. dollar have given back some gains seen as of late, that have come courtesy of Fed leadership speculation, an upbeat global economic outlook, and optimism regarding U.S. tax reform. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Vice President of Trading and Derivatives, Randy Frederick, discuss tax reform in the video, Where Does Tax Reform Stand?.

This week, earnings season will remain robust, but a fully-loaded economic calendar will likely go a long way in shaping market direction, continuing tomorrow with the S&P CoreLogic Case-Shiller Home Price Index, with economists anticipating that home prices in the 20-city composite increased 5.9% y/y during August and 0.40% m/m on a seasonally-adjusted basis, as well the Consumer Confidence Index, forecasted to have moved higher to a level 121.4 for October following the 119.8 posted in September. The Chicago Purchasing Managers Index will also be reported, expected to have moved lower for this month to a reading of 60.0 from the 65.2 registered in the month prior, while the Employment Cost Index will sum up the day's docket.

However, the headlining events for the week will likely be the midweek Federal Open Market Committee (FOMC) monetary policy decision, the ISM Manufacturing and non-Manufacturing 

Indexes, monthly auto sales, and the nonfarm payroll report.

A flood of upbeat earnings reports from some heavyweights in the tech sector bolstered the markets to end last week and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of our outperform rating we have held for some time on the group in his latest, Schwab Sector Views: Technology Trick or Treat?. As noted in the latest Schwab Market Perspective: Stocks Aren't so Spooky, we believe the bull market will continue, and suggest investors remain at their target allocations, but worry a bit about complacency. Third quarter earnings season has been solid so far and economic growth has picked up. But the pick of the next Fed chair—expected this week—could cause an uptick in volatility. Globally earnings have been strong as well and are helping to support stocks, but geopolitical and trade issues could cause some consternation.

Europe and mixed ahead of monetary policy decisions, data

European equity markets finished mixed, with Spanish stocks rallying amid apparent eased political concerns as the Spanish government called for elections in December after taking control of Catalonia last week in response to the region's parliament declaring independence. Economic data in the region was mostly positive, with German retail sales rising for September, while eurozone economic confidence improved more than expected for this month. Global monetary policy remained in focus as this week's decisions in the U.S. and Japan will be followed by Thursday's announcement from the Bank of England amid the backdrop of stalled Brexit talks and last week's dovish takeaway from the European Central Bank's decision to trim and extend its stimulus measures. 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, and talks with Randy Frederick in the video about Is An Optimistic Outlook for Global Equities Warranted?. The euro and British pound traded higher versus the U.S. dollar, while bond yields in the region were lower.
Stocks in Asia finished mixed, with the markets taking a breather that has been bolstered by late last week's host of favorable earnings reports out of the U.S. tech sector. Japanese stocks finished flat, pausing from a recent run that has taken the island nation's markets to highs not seen since 1996, with the yen choppy and a report showing the nation's retail sales rose in line with forecasts. Also, traders awaited the Bank of Japan monetary policy decision tomorrow, which will be followed by Wednesday's Fed decision. Mainland Chinese stocks and those traded in Hong Kong were bogged down by flared-up concerns as the bond markets came under pressure. The upbeat earnings sentiment also supported markets in India and South Korea, while strength in the energy sector helped lift Australian securities.

A slew of data from Japan in addition to the Bank of Japan's monetary policy meeting will highlight tomorrow's international economic calendar, including employment data, industrial production, construction orders, housing starts and trade figures, while a look at China's manufacturing activity is set for release, as well as GDP, CPI, PPI and consumer spending from France, PPI and CPI from Italy, and CPI and GDP from the Eurozone.

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