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Tuesday, November 28, 2017

Markets Break Out of Midday Anxiety

Charles Schwab: On the Market
Posted: 11/28/2017 4:15 PM EST

Markets Break Out of Midday Anxiety
U.S. equities were solidly in the green, with the major indexes notching fresh highs, shrugging continued tax reform uncertainty and anxiety over North Korea's latest missile test. The gains came courtesy of a 17-year high in Consumer Confidence, reports of record-breaking Cyber Monday figures, and a more than two-decade high in regional manufacturing activity. Treasury yields were slightly lower and the U.S. dollar gained ground, while crude oil prices fell ahead of Thursday's OPEC meeting, and gold reversed to the downside.

The Dow Jones Industrial Average (DJIA) jumped 256 points (1.1%) to 23,837, the S&P 500 Index rose 26 points (1.0%) to 2,627, and the Nasdaq Composite gained 34 points (0.5%) to 6,912. In moderate-to-heavy volume, 834 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.12 lower to $57.99 per barrel and wholesale gasoline lost $0.02 to $1.77 per gallon. Elsewhere, the Bloomberg gold spot price decreased $1.28 to $1,293.24 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.4% higher to 93.25.

Arby's Restaurant Group Inc., owned by Roark Capital Group, announced an agreement to acquire Buffalo Wild Wings Inc. (BWLD $156) for $157 per share in cash, for a total transaction value of about $2.9 billion, including the assumption of debt. BWLD traded solidly higher.

Dow memberUnitedHealth Group Inc. (UNH $216) issued mixed 2018 guidance with its earnings-per-share outlook having a midpoint below the Street's expectations, while its revenue forecast was above estimates. UNH reaffirmed its 2017 guidance. Shares were higher.

Thor Industries Inc. (THO $154) rallied nearly 20% after posting fiscal Q1 earnings-per-share (EPS) of $2.43, well above the $1.84 FactSet estimate, as revenues grew 30.6% year-over-year (y/y) to $2.2 billion, north of the forecasted $2.0 billion. The Recreational Vehicle (RV) maker said industry demand remains exceedingly high and it believes the industry will continue to grow for the foreseeable future.

Consumer Confidence hits fresh 17-year high, home prices rise more than expected

The Consumer Confidence Index (chart) unexpectedly rose to a fresh 17-year high of 129.5 in November from the upwardly revised 126.2 in October, and compared to the Bloomberg estimate of a 124.0 reading. Both the Present Situation Index and the Expectations Index of business conditions for the next six months increased. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 20.2 from the 19.6 level posted in October.

Consumer sentiment is running high and has shown up in record high Cyber Monday sales that came on the heels of robust year-over-year (y/y) Black Friday weekend sales to bolster the outlook for the holiday season. Also, as Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in our article, Holiday Shopping Season: Are Consumers Set to Stuff Some Stockings?, a strong consumer bodes well for the overall U.S. economy as consumer spending makes up nearly 70% of economic output.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 6.2% year-over-year (y/y) gain in home prices in September, versus the Bloomberg expectation of a 6.0% gain. Month-over-month (m/m), home prices were up 0.5% on a seasonally adjusted basis for September, above forecasts calling for a 0.3% rise.

The advance goods trade deficit widened much more than expected to $68.3 billion in October, from the unrevised $64.1 billion in September, and compared to expectations of $64.9 billion.
Preliminary wholesale inventories unexpectedly declined, dropping 0.4% m/m in October, versus forecasts for a 0.4% increase, and following September's downwardly revised 0.1% rise.

The Richmond Fed Manufacturing Activity Index jumped to 30 in November, the highest since 1993, from 12 in October, and versus estimates of a rise to 14, with a reading above zero denoting expansion.

Treasuries were mostly higher, with the yield on the 2-year note flat at 1.74%, while the yields on the 10-year note and the 30-year bond dipped 1 basis point to 2.32% and 2.76%, respectively.
The broadest global economic growth in a decade and solid earnings performance have conspired to keep stocks near record highs and be up every month this year. However, the U.S. dollar has pulled back and the markets appear to be getting a bit concerned with what the recent flattening of the yield may be signaling.

In his latest article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, addresses the question Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years.

The markets are also grappling with OPEC's looming production meeting this week, as well as flared-up European political uncertainty, which has joined scrutiny of U.S. tax reform. The Senate could vote on its tax reform plan this week after the House passed its bill two weeks ago, with several key differences setting the stage for a complicated reconciliation process.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Reform Bills Progress, but Many Hurdles Remain, we believe the prospects for a tax reform bill being signed into law before the end of the year are improving, but we still think it is too early for investors to take any drastic action. The bill is virtually certain to be changed many times in the weeks ahead. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly.

Tomorrow, investors will get the second look (of three) at Q3 Gross Domestic Product, the broadest measure of economic output, with economists expecting a revised 3.2% quarter-over-quarter (q/q) rate of expansion from the 3.0% in the first report, personal consumption to be adjusted slightly higher to 2.5% from the previously-reported 2.4%, and the GDP Price Index and core PCE to remain at their initial increases of 2.2% and 1.3%, respectively. Later in the morning pending home sales will be reported, with the conduit of existing home sales expected to have increased 1.2% m/m during October, while in afternoon action the Fed will release its Beige Book. MBA Mortgage Applications will also be reported (economic calendar).

Europe higher as U.K. bank stress test results were positive, Asia mixed

European equity markets traded higher, with energy stocks rebounding from a recent pullback that has come amid the weakness in crude oil prices leading up to this week's OPEC meeting. Financials were modestly higher as the markets digest the Bank of England's (BoE) banking sector stress test results that showed all banks passed with no need to strengthen their capital positions for the first time, per Bloomberg. However, U.K. banks were mixed as BoE Governor Carney continued to warn about the risk of a bumpy Brexit process for the sector. Brexit talks remain deadlocked but developments in Ireland, which averted an election, appeared to help ease some of the concerns. Moreover, reports suggesting German coalition talks could resume helped cool political uneasiness, along with polls in Spain ahead of next month's vote in Catalonia. However, uncertainty regarding U.S. tax reform continued to fester.

Schwab's Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans. The euro and the British pound were lower versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed on the heels of the lackluster session in the U.S. yesterday. The markets remained relatively skittish amid lingering U.S. tax reform and European political uncertainties, the looming OPEC meeting that has weighed on crude oil prices, exacerbated by flared-up geopolitical concerns after reports suggested Japan had noticed radio signals that North Korea could be making preparations for another missile launch. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. However, despite some resurfacing uneasiness, Asian markets remain near record levels and Jeffrey Kleintop, CFA, notes that the global market rally seen this year has been fostered by broad economic growth and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks.
Stocks in Japan and Hong Kong finished flat, with the yen paring gains seen on the North Korean reports, while headlines regarding the possibility that China could limit investor flows into Hong Kong-listed shares stymied conviction. Meanwhile, mainland Chinese equities rose, rebounding from a recent fall, while those listed in South Korea also moved to the upside, but markets in Australia and India declined.

Items on tomorrow's international economic calendar include retail sales and the trade balance from Japan, consumer spending and GDP from France, CPI from Spain and Germany, and confidence data from the Eurozone.

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