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Wednesday, October 18, 2017

Stocks Gain Ground, Dow Rallies

On the Market
Posted: 10/18/2017 4:15 PM EDT

Stocks Gain Ground, Dow Rallies
U.S. stocks finished higher with Dow member IBM's quarterly results aiding the blue chip index to close well above the 23,000 mark for the first time. Treasury yields rose despite continued uncertainty in regard to the future leadership of the Federal Reserve. Housing construction activity disappointed and the Fed's Beige Book noted a modest and moderate increase in domestic economic activity. The U.S. dollar and crude oil prices were little changed, while gold was lower. 

The Dow Jones Industrial Average (DJIA) rallied 160 points (0.7%) to 23,158, the S&P 500 Index added 2 points (0.1%) to 2,561, and the Nasdaq Composite was nearly 1 point higher at 6,624. In moderate volume, 677 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.15 higher to $52.26 per barrel and wholesale gasoline increased $0.01 to $1.64 per gallon. Elsewhere, the Bloomberg gold spot price lost $4.04 to $1,281.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.41.

Dow member International Business Machines Corp. (IBM $160) reported Q3 earnings-per-share (EPS) of $2.92, or $3.30 ex-items, versus the $3.28 FactSet estimate, as revenues dipped 0.4% year-over-year (y/y) to $19.2 billion, topping the expected $18.6 billion. The company's cloud revenue rose 20% y/y, helping it achieve double-digit growth in its strategic imperatives. IBM reaffirmed its full-year earnings outlook and projected Q4 revenues that topped forecasts and would end a 22-quarter streak of declines. Shares rallied.

Abbott Laboratories(ABT $56) reported Q3 EPS of $0.32, or $0.66 ex-items, versus the projected $0.65, with revenues rising 5.6% y/y to $6.8 billion, compared to the expected $6.7 billion. ABT issued Q4 profit guidance that matched forecasts, while it narrowed its full-year earnings outlook. Shares traded higher.

Housing construction activity misses, ahead of Fed's business activity report

Housing starts (chart) for September dropped 4.7% month-over-month (m/m) to an annual pace of 1,127,000 units, below the Bloomberg forecast of a 1,175,000 unit rate. August starts were upwardly revised to an annual pace of 1,183,000. Starts on both single and multi-unit structures were down m/m but are higher compared to the last year. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, fell 4.5% m/m in September to an annual rate of 1,215,000, after August's downwardly revised 1,272,000 rate, and south of the expected annual pace of 1,245,000 units. Permits for single unit structures were up m/m and y/y, while multi-family units were down sharply m/m and y/y.

The MBA Mortgage Application Index rose 3.6% last week, following the prior week's 2.1% decline. The increase came as a 3.0% gain in the Refinance Index was met with a 4.2% rise in the Purchase Index. The average 30-year mortgage rate decreased 2 basis points (bps) to 4.14%.
Mortgage demand appears healthy and home-buying incentives may be bolstered by continued relatively low interest rates and high rental rates in some areas of the country, as discussed as one of the reasons we have an outperform rating on the financial sector in Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest, Schwab Sector Views: Sustainable Energy?.

In afternoon action, the Federal Reserve released its Beige Book, a summary of business activity across the nation used as a tool to prepare for its next two-day monetary policy meeting ending on November 1st. The report indicated that domestic economic activity increased at a pace split between modest and moderate in September through early October. Major disruptions from hurricanes Harvey and Irma were reported in some areas and sectors in the Richmond, Atlanta and Dallas Districts. Meanwhile, job growth was modest on balance, and labor markets continued to be characterized as "tight."

The report also noted that price pressures remained modest and several Districts noted increased manufacturing input costs that in most cases weren't passed through to selling prices, while retail prices increased slightly. For our analysis of inflation, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, The Waiting: Wage Growth and Inflation Finally Getting in Gear?, 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. Also, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes 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.

Global monetary policy remains in focus as many central banks appear to be shifting onto the path to normalization, while the upcoming end of Fed Chief Janet Yellen's term is fostering some uncertainty. Schwab's Jeffrey Kleintop discusses, How the Shift by Central Banks May Affect the Stock Market, and Schwab's Chief Fixed Income Strategist, Kathy Jones talks in the video with Vice President of Trading and Derivatives, Randy Frederick, Should a Change in Fed Leadership Matter to Investors?. Tax reform continues to garner attention, with the Senate expected to vote this week on its budget resolution that could help nudge it further down the long road to fruition, as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend in the article, Tax Reform Framework Released, But The Road Ahead Is Long.

Check out these articles and video on the Market Commentary page at Follow our Schwab experts on Twitter: @lizannsonders, @jeffreykleintop, @kathyjones and @randyafrederick.
Treasuries finished lower, with the yield on the 2-year note ticking 2 bps higher to 1.56%, while the yields on the 10-year note and 30-year bond rose 4 bps to 2.34% and 2.85%, respectively. The U.S. dollar was little changed as global economic optimism was countered by the aforementioned uncertainties.

Tomorrow, the U.S. economic calendar will begin with weekly initial jobless claims, forecasted to have ticked lower to a level of 240,000 from the prior week's 243,000, as well as the Philly Fed Manufacturing Index, anticipated to have ticked lower to a reading of 22.0 in October from 23.8 in September. Rounding out the day, we'll receive the Leading Index for September, expected to increase 0.1% m/m after rising 0.4% in August.

Europe higher despite lingering political uneasiness, Asia mixed as Japan continues streak

European equity markets finished higher, despite festering political uncertainty as the independence standoff between Spain and Catalonia continues, with that latter given a deadline of Thursday morning to renounce independence claims. Also, Brexit talks remain in a deadlock ahead of this week's summit of European Union leaders. For analysis, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Market Commentary page at IBM's earnings results across the pond appeared to foster some optimism regarding global earnings as the season kicks into gear. The euro ticked higher and British pound dipped versus the U.S. dollar, while bond yields in the region gained solid ground to boost financials. In economic news, U.K. employment change came in below forecasts, while eurozone construction output declined in August.

Stocks in Asia finished mixed as the markets await a flood of Chinese economic data tonight, headlined by the nation's Q3 GDP report, which is expected to show growth slowed slightly to a 6.8% y/y pace from 6.9% in Q2. Also, the commencement of China's Communist Party National Congress was in focus but comments from President Xi offered no huge changes to the country's outlook. Shares trading in Hong Kong and mainland China gained ground. Japanese equities nudged higher to continue a winning streak to 12 sessions, which has led the Nikkei 225 Index to its highest level since 1996. Japan's stock market has contributed to the global rally and Schwab's Jeffrey Kleintop, CFA, and Randy Frederick discuss in the video, Are Investors Underestimating the Stock Market Rally?, on the Market Commentary page at Stocks trading in South Korea and India dipped, while Australian securities finished mostly flat.

The international economic docket for tomorrow will include trade data, the All Industry Activity Index and machine tool orders from Japan, employment data and business confidence from Australia and retail sales from the U.K., while China will release retail sales in addition to its aforementioned GDP report.

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