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Thursday, October 19, 2017

Stocks off Lows, but Mostly Flat on Close

Charles Schwab: On the Market
Posted: 10/19/2017 4:15 PM EDT

Stocks off Lows, but Mostly Flat on Close
U.S. stocks finished the regular trading session mostly unchanged, but well off the lows of the day as separate reports on Dow member Apple weighed on the tech sector. Risk aversion flared amid a host of mixed global earnings and economic data, along with political and monetary policy uncertainties. Treasuries and gold advanced, while the U.S. dollar and crude oil prices moved lower. In economic news, weekly jobless claims declined and regional manufacturing activity rose, but the Leading Index unexpectedly dipped.

The Dow Jones Industrial Average (DJIA) ticked 5 points higher to 23,163, the S&P 500 Index inched nearly 1 point higher to 2,562, and the Nasdaq Composite declined 19 points (0.3%) to 6,605. In moderate volume, 706 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil traded $0.75 lower to $51.51 per barrel and wholesale gasoline was unchanged at $1.64 per gallon. Elsewhere, the Bloomberg gold spot price added $7.08 to $1,288.15 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 93.27.

Dow member Verizon Communications Inc. (VZ $49) reported Q3 earnings-per-share (EPS) of $0.89, or $0.98 ex-items, versus the FactSet estimate of $0.97, with revenues rising 2.5% year-over-year (y/y) to $31.7 billion, above the projected $31.4 billion. The highly-coveted postpaid retail net subscriber additions easily topped forecasts, more than offsetting a decline in FiOS TV subscribers. VZ reaffirmed its full-year guidance. Shares traded nicely higher.

Dow component Apple Inc. (AAPL $156) saw solid pressure to weigh on the tech sector, amid a report by the Economic Daily News that the company is cutting supplier orders for its iPhone8 and a separate report by the Wall Street Journal that its watch is no longer able to make cell service connection in China. AAPL did not comment on the reports.

Dow component Travelers Companies Inc. (TRV $133) posted Q3 earnings of $1.05 per share, or $0.91 ex-items, versus expectations of $0.42, as net written premiums grew 4.0% y/y to $6.7 billion, compared to the forecasted $6.6 billion. The company said in a quarter of unprecedented hurricane activity, its disciplined coastal underwriting stood up to the storms. Shares were higher in choppy trading.

Dow member American Express Co. (AXP $92) achieved Q3 EPS of $1.50, compared to the projected $1.48, with revenues increasing 9.0% y/y to $8.4 billion, above the expected $8.3 billion. The company said loan growth continued to be strong and credit metrics were again in line with its expectations. AXP raised its full-year EPS outlook. Separately, the company announced that Chief Executive Officer (CEO) and Chairman Kenneth Chenault will retire after 37 years with the company and be replaced by Stephen Squeri, effective February 1, 2018. Shares declined.

eBay Inc. (EBAY $37) reported Q3 profits of $0.48 per share, matching estimates, with revenues rising 9.0% y/y to $2.4 billion, roughly in line with forecasts. The company said its saw the fastest volume growth in over three years. EBAY issued Q4 guidance that missed expectations and shares finished down.

United Continental Holdings Inc. (UAL $60) posted Q3 EPS of $2.12, or $2.22 ex-items, compared to the projected $2.16, as revenues were roughly flat y/y at $9.9 billion, matching forecasts. Shares fell following the company's Q4 guidance, which seemed to foster analyst concerns about the airline's pricing power in a firming fare industry environment.

Jobless claims fall, regional manufacturing activity rises, and Leading Index declines

Weekly initial jobless claims (chart) fell by 22,000 to 222,000 last week, below forecasts of a decline to 240,000, with the prior week’s figure being revised higher by 1,000 to 244,000. The four-week moving average dropped by 9,500 to 248,250, while continuing claims declined 16,000 to 1,888,000, south of estimates of 1,890,000.

The Philly Fed Manufacturing Index (chart) in October unexpectedly rose to 27.9 from 23.8 in September, with a reading above zero indicating expansionary activity, and compared to estimates of a decline to 22.0.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for September declined 0.2% month-over-month (m/m), missing projections of a 0.1% gain, and versus August's unrevised 0.4% rise. This snapped a 12-straight month winning streak for the index, as jobless claims, average workweek, and building permits weighed, more than offsetting positive contributions from ISM new orders, the yield curve, and stock prices.

The impacts of the hurricanes continue to skew economic data, and tomorrow we will get a look at another report that likely will be noisy due the storms, in the form of September existing home sales, projected to decline 0.9% m/m to an annual rate of 5.3 million units. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, Fires, Hurricanes, and Earthquakes: What Disasters Mean For Markets, 2017 is likely to rank as the most costly year ever for natural disasters. From a purely economic perspective—where analysis replaces emotion—disasters tend to spur economic growth over the short and long-term despite the widespread destruction they leave behind. Stock market losses associated with past major disasters were typically short-lived.

Treasuries traded higher, with the yields on the 2-year note and the 30-year bond declining 2 basis points (bps) to 1.54% and 2.83%, respectively, and the yield on the 10-year note dropping 3 bps to 2.32%. The U.S. dollar saw some pressure as the markets grapple with continued global economic optimism, Fed leadership uncertainty, and world political uncertainty, including whether U.S. tax reform can successfully navigate the long road.

Schwab's Chief Fixed Income Strategist, Kathy Jones offers a look at the Fed's path to normalization, notably the start of shrinking its balance sheet, as well as the potential leadership changes at the Central Bank in her article, Understanding the Federal Reserve's Shrinking Balance Sheet, and 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, 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 and follow Kathy, Randy and Schwab on Twitter: @kathyjones, @randyafrederick and @schwabresearch.

Europe lower on data and politics, Asia mixed on China data

European equity markets traded lower, with some mixed global earnings and economic data appearing to stymie conviction, joining festering political concerns in the region. U.K. retail sales fell more than expected and U.S. leading indicators snapped a string of gains, while China's industrial production missed, retail sales beat and Q3 GDP growth slowed. Spain's government announced that it plans to suspend Catalonia's autonomy after it failed to renounce its independence push. Deadlocked Brexit negotiations remained in focus as the European Union's summit in Brussels began today. 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 The euro gained ground and the British pound was little changed versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed following the record highs in the U.S. and amid a host of Chinese economic data, while Japanese markets extended a winning streak that has taken its markets to highs not seen since 1996. China's Q3 GDP growth came in at 6.8% y/y, matching estimates and down from the 6.9% expansion seen in Q2. Also, China's retail sales rose slightly more than expected in September, while the nation's industrial production and fixed asset investment modestly missed expectations. Stocks trading in mainland China and in Hong Kong declined. Japanese equities advanced with yesterday's weakness in the yen helping shares post 13-straight session of gains. South Korean stocks declined and Australian securities ticked higher, while Indian markets were closed for a holiday. Amid the global market rally, Schwab's Chief Investment Strategist Liz Ann Sonders talks with Schwab's Randy Frederick in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?, on the Market Commentary page at Follow Liz Ann on Twitter: @lizannsonders.

The international economic docket for tomorrow will be light, offering PPI from Germany, the Current Account for the Eurozone and public sector borrowing from the U.K.

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