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Wednesday, October 18, 2017

Stocks Hold All-Time Highs

Charles Schwab: On the Market
Posted: 10/17/2017 4:15 PM EDT

Stocks Hold All-Time Highs
U.S. stocks finished the regular trading session fairly flat, though the Dow broke through the 23,000 mark intraday as market participants waded through a flood of corporate earnings and economic reports. Treasury yields were little changed and the U.S. dollar rose as uncertainty and speculation in regard to who will soon lead the Federal Reserve remains. In economic news, homebuilder sentiment and industrial production rebounded, while import prices rose. Gold was lower and crude oil prices inched higher.

The Dow Jones Industrial Average (DJIA) increased 40 points (0.2%) to 22,997, the S&P 500 Index added 2 points (0.1%) to 2,559, and the Nasdaq Composite was nearly unchanged at 6,624. In moderate-to-light volume, 692 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.01 higher to $51.88 per barrel and wholesale gasoline also increased $0.01 to $1.63 per gallon. Elsewhere, the Bloomberg gold spot price lost $9.69 to $1,286.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 93.51.

Morgan Stanley(MS $49) reported Q3 earnings-per-share (EPS) of $0.93, compared to the $0.81 FactSet estimate, as revenues rose 3.4% year-over-year (y/y) to $9.2 billion, above the projected $9.0 billion. The company said its results reflected the stability its wealth management, investment banking and investment management businesses bring when its sales and trading business faces a subdued environment. Shares traded higher.

Netflix Inc. (NFLX $199) posted Q3 EPS of $0.29, versus the expected $0.32, as revenues grew 30.3% y/y to $3.0 billion, roughly in line with forecasts. The company reported net subscriber additions for its domestic and international streaming units that both topped estimates, with the latter easily besting forecasts. NFLX issued Q4 guidance that exceeded expectations and said it will spend $7-8 billion on content for 2018. Shares lost ground.

Dow member Goldman Sachs Group Inc. (GS $236) announced Q3 profits of $5.02 per share, above the estimated $4.17, as revenues increased 1.9% y/y to $8.3 billion, topping the $7.5 billion expectation. The company's trading revenues fell, while its investment banking and investing and lending revenues rose solidly. Shares traded lower.

Dow component UnitedHealth Group Inc. (UNH $204) achieved Q3 EPS of $2.51, or $2.66 ex-items, versus the projected $2.56, with revenues rising 9.0% y/y to $50.3 billion, compared to the estimated $50.4 billion. UNH raised its full-year earnings outlook and shares finished nicely higher.

Dow member Johnson & Johnson(JNJ $141) reported Q3 earnings of $1.37 per share, or $1.90 ex-items, versus the expected $1.80, as revenues rose 10.3% y/y to $19.7 billion, above the forecasted $19.3 billion. The company noted the strong performance of its pharmaceutical business. JNJ raised its full-year guidance and shares traded solidly to the upside.

Homebuilder sentiment rebounds, industrial production rises

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month rose to a five-month high of 68, versus the Bloomberg forecast calling for it to match September's unrevised 64 level. The index sits well above the 50 mark, the point of separation for good versus poor conditions. The NAHB said the report showed homebuilders are rebounding from the initial shock of the hurricanes, but need to be mindful of long-term repercussions from the storms, such as intensified material price increases and labor shortages.

Housing construction will come into focus tomorrow, with the economic calendar delivering the September housing starts and building permits report. Starts are projected to dip 0.4% month-over-month (m/m) to an annual rate of 1,175,000 units and permits are forecasted to decline 2.1% to a rate of 1,245,000 units. MBA's mortgage applications report tomorrow will also give us a look at home lending activity. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest, Schwab Sector Views: Sustainable Energy?, mortgage demand appears to be healthy, while interest rates continue to be relatively low and the high rental rates in some areas of the country provide incentive for home buying.

Industrial production (chart) rose 0.3% month-over-month (m/m) in September, matching estimates, after August's upwardly revised 0.7% decrease, which snapped a six-month string of gains. Manufacturing and mining production both ticked higher, while utilities output rose solidly. Capacity utilization rose to 76.0% from the prior month's downwardly revised 75.8% rate, and compared to forecasts of 76.2%. Capacity utilization is 3.9 percentage points below its long-run average. The Federal Reserve noted the continued effects of the hurricanes held down growth in total production. Tomorrow, the Fed will give us a look at national business activity in the form of its Beige Book, a tool it will use to prepare for its next two-day monetary policy meeting scheduled to end November 1st.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the global impact of the natural disasters in his latest article, Fires, Hurricanes, and Earthquakes: What Disasters Mean For Markets, noting that stock market losses associated with past major disasters were typically short-lived.

The Import Price Index (chart) gained 0.7% m/m for September, above projections to match August's unrevised 0.6% gain. Compared to last year, prices were up 2.7%, topping forecasts of a 2.6% gain and compared to August's unrevised 2.1% increase.

Treasuries finished mixed but little changed, with the yield on the 2-year note increasing 1 basis point (bp) to 1.55%, the yield on the 10-year note flat at 2.30% and the 30-year bond rate dipping 1 bp to 2.81%. The U.S. dollar gained ground on uncertainty regarding who will be the next Fed Chief amid the backdrop of signs that inflation may be nudging higher and global economic growth remains steady. Also, the markets continued to grapple with global political uncertainty and the potential for U.S. tax reform.

As such, Schwab's Chief Investment Strategist Liz Ann Sonders offers her article, The Waiting: Wage Growth and Inflation Finally Getting in Gear?, and Schwab's Jeffrey Kleintop, CFA, delivers his commentary, Inflation May Be The Biggest Question For Investors In 2018.
Moreover, Jeff 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?. For analysis of the journey to tax reform, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's 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.

Europe slips as political uncertainties linger

European equity markets gave up early gains and finished modestly lower even as the euro and British pound lost ground as the U.S. dollar showed some strength on speculation regarding who will be the leader of the Central Bank. Materials issues led to the downside and political concerns continued to stymie conviction. Financials pared gains after rising in the wake of key results from the sector in the U.S. The pound shrugged off signs that U.K. inflation continues to rise, with Brexit negotiations remaining in a deadlock even after Prime Minister Theresa May's meeting in Brussels yesterday with European Union officials. However, Spanish stocks rebounded from recent weakness that has come as Spain continues to push Catalonia for clarification on whether it declared independence or not, showing some resiliency in the face of the nation lowering its GDP growth outlook. For analysis of the uncertain political front in the region, 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 In other economic news, German investor confidence for October came in below forecasts. Bond yields in the region were mostly lower.

Stocks in Asia finished mixed with continued global economic optimism helping support sentiment, while caution appeared elevated ahead of a flood of Chinese economic data, headlined by its Q3 GDP report, as well as the highly anticipated Communist Party gathering in China later this week. Japanese equities rose as the yen weakened to help it extend its string of gains to eleven sessions that has taken it to levels not seen in over two decades. Mainland Chinese stocks declined and shares trading in Hong Kong finished flat. Australian securities advanced with basic materials gaining ground and the minutes from the Reserve Bank of Australia's policy meeting earlier this month suggested that there was no sense of urgency to raise rates. South Korean equities advanced and Indian shares dipped. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick offer a look at global investing in the video, Is An Optimistic Outlook for Global Equities Warranted?, on the Market Commentary page at

Tomorrow, the international economic docket will be limited to leading indicators from Australia, jobless claims from the U.K. and construction output from the Eurozone.

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