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Wednesday, November 15, 2017

Equities take a Ride on the Global Stock Slide

Charles Schwab: On the Market
Posted: 11/15/2017 4:15 PM EST

Equities take a Ride on the Global Stock Slide
Domestic stocks traded lower, joining a global equity slump as global market participants remain uncertain about the prospect of a successful overhaul of U.S. tax policy. Treasury yields were lower and the U.S. dollar was mostly flat after recovering from some early pressure. In equity news, tech stocks led the decline and a cautious outlook from Target weighed on consumer discretionary listings. Crude oil prices added to a recent selloff and gold reversed to the downside. 

The Dow Jones Industrial Average (DJIA) fell 138 points (0.6%) to 23,271, the S&P 500 Index lost 14 points (0.6%) at 2,565, and the Nasdaq Composite declined 32 points (0.5%) to 6,706. In moderate volume, 844 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.37 to $55.33 per barrel and wholesale gasoline was $0.02 lower at $1.74 per gallon. Elsewhere, the Bloomberg gold spot price ticked $1.79 lower to $1,278.46 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.79.

Target Corp. (TGT $54) reported Q3 earnings-per-share (EPS) of $0.87, or $0.91 ex-items, versus the $0.86 FactSet estimate, as revenues increased 1.4% year-over-year (y/y) to $16.7 billion, above the projected $16.6 billion. Q3 same-store sales rose 0.9% y/y, topping the expected 0.4% gain. TGT said it was pleased with its Q3 performance, including traffic and sales growth that demonstrate it is building on the progress it saw in the first half of the year. The retailer issued Q4 EPS guidance with a midpoint below estimates, while its same-store sales outlook had a midpoint above expectations, as it added that it expects the Q4 environment to be highly competitive but it is confident in its holiday season plans. TGT raised its full-year guidance. Shares traded sharply lower.

Shares of Acorda Therapeutics Inc. (ACOR $17) tumbled after the company announced that some patients had developed a severe blood infection called sepsis and some died during a late-stage trial of its treatment for Parkinson's disease.

Retail sales and consumer price inflation roughly match expectations

Advance retail sales (chart) for October rose 0.2% month-over-month (m/m), compared to the Bloomberg forecast of a flat reading and compared to September's upwardly revised 1.9% increase. Last month's sales ex-autos were up by 0.1% m/m, versus expectations of a 0.2% gain, and following the favorably revised 1.2% increase seen in the previous month. Sales ex-autos and gas gained 0.3% m/m, in line with estimates, and versus September's upwardly revised 0.6% gain. The retail sales control group, a figure used to help calculate GDP, increased 0.3%, matching projections, and versus the prior month's favorably revised 0.5% gain.

Sales gains were widespread, led by activity at sporting goods, hobby, book and music stores, food services and drinking places, clothing stores, and auto dealers. However, sales declined at gasoline stations, building material and garden equipment stores, and at nonstore retailers, which includes on line shopping.

Today's report, highlighted by the positive upward revisions to September's figures, suggests the consumer remains relatively healthy heading into the key holiday shopping season. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest, Schwab Sector Views: 'Tis the Season…Almost, much of the U.S. economy arguably comes down to how the consumer is faring. Brad adds that it would be difficult to view the status of the consumer as anything less than mostly positive with unemployment historically low, wages trending higher and still low interest rates conspiring to boost consumer confidence. He concludes that this holiday season could shape up to be a solid one but offers some headwinds facing retailers that lead us to maintain our marketperform rating for the consumer discretionary sector.

The Consumer Price Index (CPI) (chart) ticked 0.1% higher m/m in October, matching estimates, while September's 0.5% rise was unrevised. The core rate, which strips out food and energy, was up 0.2% m/m, in line with expectations and compared to September's unrevised 0.1% rise. Y/Y, prices were 2.0% higher for the headline rate, matching forecasts, while the core rate was up 1.8%, above of projections of a 1.7% increase. September's y/y figures showed unrevised 2.2% and 1.7% rises for the headline and core rates, respectively.

The Empire Manufacturing Index showed output from the New York region slowed but remained solidly at a level depicting expansion (a reading above zero) for November. The index decreased to 19.4 from October's unrevised 30.2 level—which was the highest since 2014—with forecasts calling for a decline to 25.1.

The MBA Mortgage Application Index rose 3.1% last week, following the prior week's flat reading. The increase came as a 6.3% jump in the Refinance Index was accompanied by a 0.4% gain in the Purchase Index. The average 30-year mortgage rate remained at 4.18%.

Business inventories (chart) were flat m/m in September, matching forecasts, and versus August's downwardly revised 0.8% increase.

Treasuries finished mostly higher, with the yield on the 2-year note little changed at 1.68%, while the yield on the 10-year note declined 5 basis points (bps) to 2.32% and the 30-year bond rate decreased 6 bps to 2.77%.

Treasury yields and the U.S. dollar remain under pressure as risk aversion appears to be continuing, with the global stock markets pulling back from the recent rally. Fiscal and monetary policy uncertainties are countering a relatively positive economic landscape, though caution has ramped up following soft Chinese economic data as of late. As such, check out our article, Does Low Market Volatility Portend a Market Tumble?, as well as Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest commentary, Tax Reform: Key Differences Between the Senate and House Plans.

Tomorrow, the U.S. economic calendar will offer the Import Price Index for October, expected to have increased 0.4% m/m, after rising 0.7% in September and weekly initial jobless claims, forecasted to have dipped to 235,000 from the previous week's level of 239,000. Additionally, we'll receive the Fed's October industrial production and capacity utilization report, forecasted to show production advanced 0.5% m/m and utilization ticked higher to 76.3%. The housing market will also garner attention with tomorrow's release of the NAHB Housing Market Index, with economists anticipating November's reading to inch lower to 67 from the 68 posted in October, where the 50 mark represents the point of separation for good versus poor conditions.

Europe sees pressure and Asia falls as global markets turn cautious

Most European equity markets traded to the downside, with energy and commodity-related issues seeing pressure amid the continued risk aversion in the markets, exacerbated by festering U.S. tax reform skepticism, recent disappointing Chinese economic data and the pullback in crude oil prices. However, Spanish stocks bucked the trend, bolstered by solid gains in the country's banking sector, which helped the European financial sector overcome early losses. The euro and the British pound were little changed versus the U.S. dollar, while bond yields in the region finished mixed. In economic news, the September eurozone trade surplus widened more than expected, while U.K. employment unexpectedly declined. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, momentum favors the bulls for the foreseeable future, but elevated valuations and growing investor complacency pose risks that could lead to a long-awaited pullback and/or a pickup in volatility from today’s extremely low base.

Stocks in Asia finished broadly lower as the global markets appear to be skittish following the recent rally as U.S. tax reform uncertainty lingers and Chinese economic data has been softer than expected as of late. Japanese equities fell, with the yen gaining ground, while the nation reported Q3 GDP growth of 1.4% on a quarter-over-quarter annualized basis, missing the 1.5% projection and compared to the upwardly revised 2.6% expansion posted in Q2. Shares trading in mainland China and Hong Kong dropped, while stocks in Australia and South Korea also traded lower. Indian securities moved to the downside, on the heels of late-yesterday's disappointing October trade report.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, 5 Reasons Investors Should Give Thanks, the record breaking streak of gains in the global stock market this year has been supported by the broadest global economic growth in a decade. Stocks appear to closely track earnings growth, even where risks are most intense. Broad economic and earnings growth is expected to continue in 2018.

The international economic docket for tomorrow will include housing loans and machine tool orders from Japan, inflation expectations and employment data from Australia, the unemployment rate from France and retail sales from the U.K.

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