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Friday, November 03, 2017

Stocks Close Trading Day and Week Higher

Charles Schwab: On the Market
Posted: 11/3/2017 4:15 PM EDT

Stocks Close Trading Day and Week Higher
U.S. stocks overcame some early weakness to finish the regular trading session higher as gains were led by the tech sector in the wake of Dow member Apple's earnings results and guidance. Also, services sector growth unexpectedly jumped to a more than 12-year high to overshadow the October labor report, which showed fewer jobs were added than expected and a lack of monthly wage growth. Treasury yields were little changed and the dollar rose. Crude oil prices were higher and gold traded lower. 

The Dow Jones Industrial Average (DJIA) rose 23 points (0.1%) to 23,539, the S&P 500 Index advanced 8 points (0.3%) to 2,588, and the Nasdaq Composite increased 49 points (0.7%) to 6,764. In moderately heavy volume, 813 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.10 to $55.64 per barrel and wholesale gasoline added $0.02 to $1.79 per gallon. Elsewhere, the Bloomberg gold spot price shed $6.04 to $1,270.09 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 94.92. Markets were higher for the week, as the DJIA increased 0.5%, the S&P 500 Index gained 0.3% and the Nasdaq Composite advanced 0.9%.

Dow member Apple Inc. (AAPL $173) reported fiscal Q4 earnings-per-share (EPS) of $2.07, above the $1.87 FactSet estimate, as revenues grew 12.0% year-over-year (y/y) to $52.6 billion, exceeding the forecasted $50.7 billion. The company said it had record Q4 revenue with y/y growth for all its product categories and its best quarter ever for services. AAPL issued Q1 revenue guidance with a midpoint that was just ahead of expectations as it is "looking forward to a great holiday season," with its new products including iPhone 8, Apple Watch Series 3, and Apple TV 4K, along with the launch of iPhone X. Shares traded nicely higher.

Apple's earnings results were the latest from the heavyweights in the tech sector to exceed estimates, and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of our outperform rating we have held for some time on the group in his latest, Schwab Sector Views: Technology Trick or Treat?. Brad notes that the technology sector’s strong run could continue, but risks for the sector have risen and investors should be careful not to get overly concentrated.

Starbucks Corp. (SBUX $56) posted fiscal Q4 EPS of $0.54, or $0.55 ex-items, compared to the projected $0.55, with revenues little changed y/y at $5.7 billion, below the expected $5.8 billion. Global same-store sales increased 2.0% y/y, missing the forecast calling for 3.3% growth. SBUX issued 2018 earnings guidance that came in below estimates. Separately, the company raised its quarterly dividend by 20% to $0.30 per share. Shares rose.

Pandora Media Inc. (P $5) announced a Q3 loss of $0.34 per share, or a $0.06 per share shortfall ex-items, versus the projected loss of $0.08 per share, as revenues rose 8.0% y/y to $379 million, south of the expected $380 million. The music streaming service company's advertising revenues were softer than expected and its users shrank solidly y/y. As such, P issued Q4 guidance that missed estimates and shares fell.

October labor report misses, services sector growth hits rare territory

Nonfarm payrolls (chart) rose by 261,000 jobs month-over-month (m/m) in October, compared to the Bloomberg forecast of an 313,000 increase. The decline of 33,000 seen in September was revised to a gain of 18,000 jobs. The total upward revision to the job gains in September and August was 90,000. Excluding government hiring and firing, private sector payrolls increased by 252,000, versus the forecasted gain of 302,000, after rising by 15,000 in September, revised from the 40,000 decrease that was initially reported. The report likely continued to reflect noise from the hurricanes, but employment at food services and drinking places recovered from September's drop, while employment rose in professional and business services, manufacturing and healthcare.

The unemployment rate dipped to 4.1% from 4.2%, where it was forecasted to remain, while average hourly earnings were flat m/m, below projections of a 0.2% increase and versus September's unrevised 0.5% increase. Y/Y, wage gains were 2.4%, versus estimates of a 2.7% increase and September's downwardly revised 2.8% rise. Finally, average weekly hours remained at September's unrevised 34.4 rate, matching forecasts.

Despite the disappointing wage growth figure, December Fed rate hike expectations remain elevated as this week's monetary policy decision reinforced the likelihood of an increase next month as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her article, Fed Stands Pat in November; Gets Ready to Go in December. Liz Ann also notes that we expect two-to-three rate hikes in 2018, and the market's expectations may have to rise to meet the Fed's, representing a shift.
The trade balance (chart) showed that the deficit came in at $43.5 billion in September, compared to estimates of $43.2 billion. August's deficit was upwardly revised to $42.8 billion. Exports rose 1.1% m/m to $196.8 billion, while imports increased by 1.2% to $240.3 billion.

Factory orders (chart) rose 1.4% m/m in September, above expectations to match August's unrevised gain. Stripping out the volatile transportation component, orders advanced 0.7% and August's 0.4% rise was revised to a 0.6% gain. September durable goods orders—preliminarily reported last week to have grown 2.2%—were downwardly revised to a 2.0% increase, matching forecasts. Also, nondefense capital goods orders excluding aircraft, a gauge of business spending, were revised up to a 1.7% gain from the initially-reported 1.3% increase, posting the third-straight monthly rise of over 1.0%.

The October Institute for Supply Management (ISM) non-Manufacturing Index (chart) unexpectedly jumped to a level above 60 for only the fourth time in its history and the highest level since August 2005. The Index rose to 60.1from September's unrevised 59.8 level, and compared to forecasts of a decline to 58.5. A reading above 50 denotes expansion. New orders dipped m/m to 62.8, business activity rose to 62.2, and employment improved to 57.5. Prices fell but remained elevated at 62.7. Non-manufacturing activity accounts for a large majority of U.S. economic output and the ISM said respondents' comments continue to indicate a positive outlook for business conditions, and the economy as we begin the fourth quarter.

The final Markit U.S. Services PMI Index was revised to 55.3 in October from the preliminary 55.9 level, where it was expected to remain, and matching September's level. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

Treasuries were little changed, with the yield on the 2-year flat at 1.61%, while the yields on the 10-year note and the 30-year bond declined 1 basis point to 2.33% and 2.81%, respectively.
Treasury yields and the U.S. dollar were relatively quiet as the markets grappled with data that bolstered the continued favorable global economic landscape, along with President Donald Trump's pick of Fed Governor Jay Powell as the next Fed Chairman. Also, tax reform uncertainty lingered in the wake of Thursday's release of the House's bill.

Schwab's Chief Fixed Income Strategist Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick discuss in the video, Should a Change in Fed Leadership Matter to Investors?, while Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest commentary, House Tax Reform Bill: What Investors Need to Know.

Europe mixed and Asia mostly higher to close out the week 

European equity markets finished mixed, with technology issues getting a slight boost from Apple's favorable earnings report, while the markets digested the mixed U.S. nonfarm payroll report, which was countered by the jump in services sector activity. Yesterday's pick of a new Fed Chief by President Trump and the House's tax reform bill in the U.S. fostered some uncertainty. The British pound rebounded modestly from yesterday's drop that came courtesy of the Bank of England's rate hike that was accompanied by a dovish outlook for future increases. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the changed global monetary policy landscape in his article, How the Shift by Central Banks May Affect the Stock Market. In economic news, Markit's U.K. business activity report for October showed growth in output unexpectedly jumped. The euro was down and bond yields in the region lost ground. Spanish stocks fell amid festering political tensions.

Stocks in Asia finished mostly to the upside as the markets grappled with Thursday's pick of a new Fed Chief by President Trump and details of the House's tax reform bill in the U.S. Technology issues got a boost from Apple's stronger-than-expected earnings and outlook. However, volume was lighter than usual as markets in Japan were closed for a holiday. Mainland Chinese shares declined and stocks trading in Hong Kong rose following Markit's services sector output report that showed growth accelerated in October, while concerns about regulatory crackdowns by the government and the recent selloff in the bond markets festered. Australian securities gained ground with mining issues seeing strength, while Indian listings advanced. South Korean stocks traded to the upside. Schwab's Liz Ann Sonders and Randy Frederick discuss the recent global market rally in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?.

Stocks tilt toward the upside amid data and lingering uncertainties

The S&P 500 Index finished largely flat but skewed to the upside, and the Dow and Nasdaq posted their eighth-straight weekly gains, as earnings and economic data remained robust and mostly painted an upbeat picture. Personal spending, productivity, Consumer Confidence, and the ISM Manufacturing Index all showed solid growth leading into Friday's host of data. Earnings season rolled down the home stretch and remained on track to top expectations, with 67% of the 405 companies in the S&P 500 that have reported exceeding revenue forecasts and 77% besting earnings estimates, per data compiled by Bloomberg. However, momentum for stocks was likely stunted by lingering fiscal and monetary policy uncertainties. Along with the Fed's monetary policy decision that preserved December rate hike expectations, and a rate increase by the Bank of England, President Trump announced his pick for the next head of the Central Bank and the House's tax reform bill was highly scrutinized. Technology issues extended their rally as upside earnings surprises continued, headlined by Apple, while energy stocks led to the upside as crude oil prices extended a weekly string of gains. The telecom sector was the worst performer as earnings results have lagged to exacerbate ongoing concerns toward the group. Healthcare stocks also saw pressure in the wake of mixed results from Dow member Pfizer Inc. (PFE $35) and Aetna Inc. (AET $171), along with the heightened political trepidations. Amid the flood of events and data, the Treasury yield curve flattened and the U.S. dollar was little changed.

Next week, earnings season will continue to downshift and the economic calendar will be relatively light, with the JOLTS Job Openings report and the preliminary November University of Michigan Consumer Sentiment Index headlining the docket. However, fiscal and monetary policy grappling is poised to continue and possibly add some volatility for the markets.

As noted in the latest Schwab Market Perspective: Stocks Aren't so Spooky, global and domestic economic growth, along with a solid earnings picture and a potential tax reform tailwind, suggest investors should remain at their target equity allocations. Pullbacks are possible but a recession doesn’t appear to be in the cards in the near term, which historically has meant the risk of a pullback turning into a bear market is low.

International reports due out next week that deserve a mention include: Australia—Reserve Bank of Australia monetary policy decision. China—trade balance, CPI and PPI. India—industrial production. Japan—machine orders and trade balance. Eurozone—Markit's business activity reports, investor confidence and retail sales, along with German factory orders and trade balance. U.K.—industrial and manufacturing production, Markit's business activity reports and trade balance.

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