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Tuesday, November 21, 2017

Stocks Add to Yesterday’s Bounce

Charles Schwab: On the Market
Posted: 11/21/2017 4:15 PM EST

Stocks Add to Yesterday’s Bounce
The U.S. equity markets added to yesterday's gains, despite a slew of mixed earnings reports, and continued global political uncertainty. Upbeat existing home sales gave the bulls some sustenance on the heels of yesterday's jump in Leading Indicators. However, volume was again somewhat restrained ahead of this week's Thanksgiving holiday break for the markets. Treasury yields were mixed and the U.S. dollar dipped, while crude oil and gold were higher.

The Dow Jones Industrial Average (DJIA) rose 161 points (0.7%) to 23,591, the S&P 500 Index gained 17 points (0.7%) at 2,599, and the Nasdaq Composite jumped 72 points (1.1%) to 6,862. In moderate volume, 828 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.41 to $56.83 per barrel and wholesale gasoline was $0.03 higher at $1.77 per gallon. Elsewhere, the Bloomberg gold spot price gained $2.96 to $1,279.88 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—decreased 0.1% to 94.00.

The U.S. Department of Justice (DOJ) announced that it is suing to block AT&T Inc's (T $34) proposed $85 billion takeover of Time Warner Inc. (TWX $90), noting that the merger would greatly harm American consumers. T responded by saying the DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent and it is confident the U.S. District Court will reject the Government's claims and permit this merger under longstanding legal precedent. T was lower and TWX was higher.

Lowe's Companies Inc. (LOW $81) reported Q3 earnings-per-share (EPS) of $1.05, above the $1.02 FactSet estimate, as revenues increased 6.5% year-over-year (y/y) to $16.8 billion, exceeding the projected $16.6 billion. Q3 same-store sales grew 5.7% y/y, north of the expected 4.5% gain. LOW reaffirmed its full-year guidance. Shares dipped.

Dollar Tree Inc. (DLTR $99) posted Q3 profits of $1.01 per share, well above the estimated $0.90, with revenues rising 6.3% y/y to $5.3 billion, roughly in line with forecasts. Q3 same-store sales grew 3.2% y/y, exceeding the expected 2.5% increase. DLTR issued Q4 earnings guidance that topped expectations, while it raised its full-year outlook. Shares were higher.

Palo Alto Networks Inc. (PANW $150) announced a fiscal Q1 loss of $0.70 per share, or EPS of $0.74 ex-items, versus the expected profit of $0.68, as revenues rose 27.0% y/y to $506 million, exceeding the estimated $489 million. The next-generation security company issued Q2 guidance that topped forecasts and raised its full-year outlook. Shares were solidly higher.

Intuit Inc. (INTU $152) reported a fiscal Q1 loss of $0.07 per share, or EPS of $0.11 ex-items, compared to the expected earnings of $0.05, with revenues rising 14.0% y/y to $886 million, north of the estimated $855 million. The maker of QuickBooks and TurboTax issued Q2 guidance that was mostly above estimates, while it reaffirmed its full-year outlook. Shares were lower.

Campbell Soup Co. (CPB $46) posted fiscal Q1 EPS of $0.91, or $0.92 ex-items, versus the expected $0.97, as revenues declined 2.0% y/y to $2.2 billion, roughly in line with forecasts. The company said this was a difficult quarter, particularly for its U.S. soup business, amid a continued volatile operating environment with a rapidly evolving retailer landscape and competitive activity pressuring the top line. CPB lowered its full-year EPS outlook, while reaffirming its revenue guidance. Shares fell.

Continued rebound in existing home sales stronger than expected

Existing-home sales in October rose 2.0% month-over-month (m/m) to a 5.48 million annual rate, compared to the Bloomberg forecast of a 5.40 million pace, and versus September's downwardly revised 5.37 million rate. Sales of single-family homes rose 2.1% m/m but were 1.0% below year ago levels, while purchases of multi-family structures were up 1.7% m/m and flat y/y. The median existing-home price was 5.5% above year ago levels at $247,000, marking the 68th-straight month of y/y gains. Unsold inventory came in at a 3.9-months pace at the current sales rate—a record low—down from the 4.4 months rate a year ago. Inventory of homes for sale decreased and is down 10.4% y/y, falling for 29 consecutive months. Sales were higher m/m in all regions. Existing home sales are based on contract closings instead of signings and account for the majority of the housing sales market.

The National Association of Realtors (NAR) noted job growth in most of the country continues to carry on at a robust level and is starting to slowly push up wages, which is in turn giving households added assurance that now is a good time to buy a home. However, supply constraints for both new and previously-owned homes are posing headwinds for the housing sector and may be offsetting solid demand, with prices rising sharply to dampen affordability, which could be exacerbated by rising interest rates.

Housing has helped strong Q3 earnings results from the financial sector as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her newest article, Green Grass and High Tides: Earnings Stellar But Not Without Risk. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, maintains his outperform rating on financials, noting in his latest, Schwab Sector Views: 'Tis the Season…Almost, that mortgage demand appears healthy and high rental rates in some parts of the country could provide further incentive for home buying.

Treasuries were mixed, as the yield on the 2-year note rose 2 basis points (bps) to 1.77%, while the yield on the 10-year note dipped 1 bp to 2.36% and the 30-year bond rate fell 2 bp to 2.76%.
Treasury yields continue to diverge and the U.S. dollar has dipped as the markets grapple with U.S. tax reform uncertainty ahead of next week's expected Senate vote on its plan that differs significantly from the House's plan that passed last week, along with the failed coalition talks in Germany. This is being countered by Q3 earnings season that is winding down and mostly above expectations against a positive global economic backdrop.

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.

Ahead of Thursday's Thanksgiving holiday break for all U.S. markets, tomorrow's economic calendar will be jam-packed with data, with weekly mortgage applications being followed by weekly jobless claims, preliminary durable goods orders and the final University of Michigan Consumer Sentiment Index. The data is expected to show the employment front remains solid, manufacturing demand continues to pick up and elevated consumer sentiment persists. However, the afternoon release of the minutes from the Fed's most recent monetary policy meeting that ended November 1st with an unchanged stance will likely garner the heaviest attention as a December rate hike is highly expected. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, that new head of the Fed is seen as representing continuity as the Central Bank continues its policy normalization and given the strong economic backdrop, along with signs of wage growth picking up, we believe the Fed will hike rates for the third time this year next month.

Europe and Asia higher, taking lead from U.S. action yesterday

European equity markets traded higher, with energy issues getting a boost with crude oil prices moving modestly higher after a bout of weakness and ahead of next week's OPEC meeting. The markets continued to shrug off flared-up political uncertainty as the potential for a German election redux rose following the recently failed coalition talks, which joined continued scrutiny of the possibility for U.S. tax reform. 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. In economic news, Switzerland's exports declined for a second-straight month, while U.K. public sector net borrowing came in above expectations. The euro and the British pound were little changed versus the U.S. dollar, while bond yields in the region finished mostly lower.

Stocks in Asia finished higher following the gains in the U.S. yesterday, with a solid jump in the nation's Leading Indicators helping foster some resiliency in the face of tax reform concerns and a flare-up in German political uncertainty. Japanese equities advanced, aided by some weakness in the yen, rebounding from a recent pullback from recent highs not seen in over two decades. 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 in his latest article, 5 Reasons Investors Should Give Thanks, adding that stocks appear to closely track earnings growth, even where risks are most intense, while broad economic and earnings growth is expected to continue in 2018.

Stocks in mainland China and Hong Kong moved nicely higher, with financials jumping as earnings optimism toward the sector ramped up, while markets in South Korea and India also finished to the upside. Markets in Australia gained modest ground, with the markets digesting the minutes from the Reserve Bank of Australia's (RBA) monetary policy meeting earlier this month, which resulted in an unchanged policy decision, as well as a speech from RBA Governor Lowe. Both suggested the economy is improving but the central bank was not in a hurry to begin normalizing policy through rate increases.

Tomorrow’s international economic calendar will be quiet, save the lone report of consumer confidence from the Eurozone.

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