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Monday, November 27, 2017

Markets Mixed in Lackluster Session

Charles Schwab: On the Market
Posted: 11/27/2017 4:15 PM EST

Markets Mixed in Lackluster Session
U.S. equities finished mixed with energy stocks finding pressure amid a drop in crude oil prices ahead of this week's OPEC production meeting. However, consumer discretionary stocks got a boost on upbeat holiday spending data, while an unexpected jump in new home sales to a decade high also added some optimism. Treasury yields were little changed and the U.S. dollar ticked higher, while gold gained modest ground. 

The Dow Jones Industrial Average (DJIA) rose 23 points (0.1%) to 23,581, the S&P 500 Index declined 1 point to 2,601, and the Nasdaq Composite fell 11 points (0.2%) to 6,879. In moderate volume, 766 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.84 to $58.11 per barrel and wholesale gasoline was $0.01 higher at $1.79 per gallon. Elsewhere, the Bloomberg gold spot price increased $6.05 to $1,294.42 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.2% higher to 92.92.

Meredith Corp. (MDP $67) announced an agreement to acquire Time Inc. (TIME $18) for $18.50 per share in cash, for a total transaction value of about $2.8 billion, including the assumption of debt. Shares of both companies rallied.

The retail sector was mostly higher with the markets paying attention to reports on how the holiday shopping season unofficially kicked off during the Black Friday weekend, and bolstered by today's online shopping deals known as Cyber Monday. According to Adobe Analytics, online sales on Thanksgiving Day and Black Friday rose 17.9% year-over-year (y/y) to about $7.9 billion and are estimated to be up 16.5% today to a record $6.6 billion.

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?, that we do think the picture entering the season is a positive one, with unemployment low, wages trending higher and consumer confidence the highest in almost 17 years. There are 32 days between Thanksgiving and Christmas this year, the second largest number of days possible between the two holidays. And Christmas falls on a Monday, giving shoppers one last weekend to ring the register. However, Brad cautions investors that at this point this rosy picture for consumers doesn't mean you should run out and buy retailers as discussed in his latest Schwab Sector Views: 'Tis the Season…Almost.

New home sales surprisingly jump to kick off busy week

New home sales (chart) unexpectedly jumped to the highest since October 2007, rising 6.2% month-over-month (m/m) in October to an annual rate of 685,000 units, versus the Bloomberg forecast calling for a drop to 625,000 units and the downwardly revised 645,000 unit pace in September. The median home price was up 3.3% y/y to $312,800. New home inventory fell to 4.9 months of supply at the current sales pace from 5.2 in September.

Sales surged m/m in the Northeast and jumped in the Midwest, while also rising solidly in the South and West. New home sales are based on contract signings instead of closings. Sales of properties in which construction has not yet started reached the highest in over a decade, suggesting housing starts could start to accelerate. The heightened confidence and status of the consumer appears to be translating into increased willingness to make major purchases, adding credence to Schwab's Brad Sorensen's, CFA, latest analysis of how important the consumer is not only to the holiday season but for the overall economy in his latest Schwab Sector Views.

The Dallas Fed Manufacturing Activity Index dropped more than expected but remained solidly in expansion territory (a reading above zero). The index fell to 19.4 in November from 27.6 in October—the highest since March 2006—and versus forecasts of a decline to 24.0.

Today's reports kick off the week that will return to normal operating hours and bring plenty of reports and events for the markets to contend with. OPEC will conduct a production meeting, the Senate could vote on its tax reform plan that differs significantly from the House's plan that passed two weeks ago, and Fed Chairwoman Janet Yellen is expected to address the Joint Economic Committee of Congress. Moreover, we will get a number of economic reports, continuing with tomorrow's releases of Consumer Confidence, forecasted to show sentiment remains elevated at a level of 124.0 for November, but slightly lower than the 125.9 posted in October, as well as the advance goods trade balance, wholesale inventories, the Richmond Fed Manufacturing Index and the S&P CoreLogic Case-Shiller Home Price Index. Late in the week, investors will be treated to the second look (of three) at Q3 GDP, the Fed's Beige Book, personal income and spending, Markit's Manufacturing PMI Index, the ISM Manufacturing Index, and November auto sales.

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, the bull market continues to be undisturbed by myriad actual or potential negative events and momentum favors the bulls for the foreseeable future. However, 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.

Treasuries were little changed, as the yield on the 2-year note and the 30-year bond were flat at 1.74% and 2.77%, respectively, while the yield on the 10-year note dipped by 1 bp to 2.34%. The yield curve has flattened and the U.S. dollar has found pressure as of late with the markets grappling with tax reform uncertainty, subdued inflation expectations, and broad-based global economic growth.

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 a number of tricky steps must still be overcome. Schwab's Chief Investment Strategist Liz Ann Sonders points out in her newest article, Green Grass and High Tides: Earnings Stellar But Not Without Risk, both earnings and revenues were strong; and importantly, the "beat rates" were well above average. The outlook for 2018 is bright, but we are on watch for an expectations bar that gets set too high.

Europe dips despite eased German political concerns, Asia mostly lower

European equity markets finished mostly lower, even as the euro dipped slightly after a recent run to a two-month high versus the U.S. dollar. Energy issues saw noticeable pressure as crude oil prices fell ahead of this week's OPEC production meeting, while the markets shrugged off cooling political concerns in Germany after reports suggested coalition talks could resume after collapsing last week. This joins deadlocked U.K. Brexit talks and festering U.S. tax reform uncertainty to keep the markets on edge. However, Spanish stocks rose slightly amid eased concerns as polls ahead of next month's vote in Catalonia are showing pro-Spain parties have as much support as pro-independence forces, per Bloomberg. Schwab's Chief Global Investment Strategist 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 British pound was little changed versus the greenback and bond yields in the region finished mostly lower.

Stocks in Asia finished mostly to the downside, with technology issues weighing heavily on South Korean equities, while the Bank of Korea is expected to raise rates after its monetary policy meeting later this week. Mainland Chinese stocks and those traded in Hong Kong declined, with sentiment being hampered by the recent rally in the nation's bond yields, which appears to be fostering some profit-taking after this year's strong gains, while a report showed growth in the country's industrial profits slowed in October. Schwab's Jeffrey Kleintop, CFA, offers a look at the global market rally seen this year that has been fostered by the broadest economic growth in a decade and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks. Japanese securities traded slightly to the downside, with the yen gaining ground late in the session amid the continued pressure on the U.S. dollar amid yield curve concerns and political uncertainty, but markets in Australia and India bucked the trend, finishing modestly higher.

The international economic calendar will be light tomorrow, with reports slated for release to include import prices and consumer confidence from Germany, and consumer confidence from France.

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