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Saturday, November 11, 2017

Stocks Finish Mostly lower, Snap Weekly Winning Streaks

On the Market
Posted: 11/10/2017 4:15 PM EST

Stocks Finish Mostly lower, Snap Weekly Winning Streaks
U.S. stocks came off the worst levels of the day, but still finished the regular trading session mostly lower as the major domestic indexes snapped their recent weekly winning streaks with market participants weighing the potential for tax reform after the Senate released its plan yesterday. Treasury yields advanced and the U.S. dollar ticked lower, while crude oil prices and gold also lost ground. In equity news, Dow member Walt Disney's outlook overshadowed its softer-than-expected quarterly results, while J.C. Penney and NVIDIA rallied following their earnings reports. 

The Dow Jones Industrial Average (DJIA) declined 40 points (0.2%) to 23,423, the S&P 500 Index was 2 points (0.1%) lower at 2,582, and the Nasdaq Composite ticked nearly 1 point higher to 6,751. In moderate volume, 853 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.43 to $56.74 per barrel and wholesale gasoline was $0.01 lower at $1.81 per gallon. Elsewhere, the Bloomberg gold spot price was $9.49 lower at $1,275.58 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 94.39. Markets were lower for the week, as the DJIA decreased 0.5%, while the S&P 500 Index and the Nasdaq Composite declined 0.2%.

Dow member Walt Disney Co. (DIS $105) reported fiscal Q4 earnings-per-share (EPS) of $1.13, or $1.07 ex-items, versus the $1.15 FactSet estimate, as revenues declined 3.0% year-over-year (y/y) to $12.8 billion, below the projected $13.3 billion. Revenues at its media and networks unit missed expectations, along with its studio segment, while its parks and resorts topped forecasts. The Street appears to be positive about the company's outlook that included the announcement of new Star Wars Trilogy, details of its new streaming service that will launch in the new year, and investments to bolster its parks and resorts division that was the lone segment to show growth in Q3. Shares traded nicely higher.

J.C. Penney Co. Inc. (JCP $3) posted a Q3 loss of $0.41 per share, or $0.33 per share ex-items, compared to the expected $0.42 shortfall that the Street had projected, with revenues decreasing 1.8% y/y to $2.8 billion, roughly in line with estimates. Q3 same-store sales increased 1.7% y/y, well above the forecasted 0.6% gain. The company said it took aggressive actions to clear slow-moving inventory, allowing for an improved apparel assortment heading into the holiday season. Shares rallied.

NVIDIA Corp. (NVDA $216) announced Q3 EPS of $1.33, above the expected $0.95, with revenues jumping 32.0% y/y to $2.6 billion, topping the estimated $2.4 billion. The chip company issued Q4 guidance that bested forecasts and it increased its quarterly dividend by 7.1% to $0.15 per share. Shares gained solid ground.

Hertz Global Holdings Inc. (HTZ $20) reported Q3 earnings of $1.12 per share, or $1.42 ex-items, versus the estimated $1.35, as revenues rose 1.0% y/y to $2.6 billion, roughly in line with projections. The company said its operating turnaround plan, focused on growth through enhanced fleet, service, brands and technology, is showing encouraging progress. Shares traded solidly lower.

Consumer sentiment surprisingly declines from 13-year high 

The preliminary University of Michigan Consumer Sentiment Index (chart) pulled back from a 13-year high, dropping to 97.8 in November, from 100.7 in October, and compared to the Bloomberg expectation of an improvement to 100.8. The current economic conditions and expectations components of the report both fell. The 1-year inflation forecast rose to 2.6% from October's 2.4% rate, while the 5-10 year inflation outlook remained at the prior month's level of 2.5%.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of the all-important consumer heading into the key holiday period in his latest, Schwab Sector Views: 'Tis the Season…Almost. Brad notes that the status of the American consumer is vital to the overall economy, and the holiday season can go a long way to determining the fate of retailers. Low unemployment, increasing wages, and high confidence among consumers paint a positive picture for both the holiday season and the overall economy. The retail sector may not be as dire as you have been led to believe.

Treasuries traded lower with the yield on the 2-year note rising 3 basis points (bps) to 1.66%, the yield on the 10-year note gaining 6 bps to 2.40%, and the 30-year bond rate advancing 7 bps to 2.88%.

The U.S. dollar came under pressure and Treasury yields gave up gains yesterday as volatility ramped up along with tax reform uncertainty. This stemmed from the Senate unveiling its tax bill details, which differed in some key areas from the last week's House bill, notably its call for a delay of the corporate tax cut to until 2019. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend delivers his latest commentary, Tax Reform: Key Differences Between the Senate and House Plans, noting that we continue to suggest that investors take no action at this time. Investors need to understand that the bill can and will change dozens of times in the weeks ahead, making specific analysis of how the bill affects any particular taxpayer’s situation nearly impossible. Until we have more detail, investors should not overreact. And while the bills are beginning to move forward, passage of tax reform remains far from a certainty.

Europe extends yesterday's drop, Asia mostly lower

Most European equity markets added to yesterday's drop, with exacerbated U.S. tax reform uncertainty, which led to a jump in volatility on Thursday, festering to stymie sentiment. Also, U.K. Brexit negotiations continued but remain in a deadlock and the markets digested a mixed bag of earnings and economic reports. U.K. and French manufacturing and industrial production data all came in stronger than expected, while the U.K. trade deficit narrowed. The euro and the British pound rose versus the U.S. dollar, while bond yields in the region moved higher. For a look at global stock investing, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, U.S. vs international: what do earnings tell us about what may be ahead?.

Stocks in Asia finished mostly lower following the declines and ramped up volatility in the U.S. yesterday as tax reform uncertainty was exacerbated by the Senates bill that differed in several key areas from the House's plan. The yen gained ground on the increase in volatility to weigh on Japanese equities. South Korean and Australian securities declined. Mainland Chinese shares ticked higher as U.S. President Trump continued his tour of Asia and on the heels of the government's announcement that it will ease limits on foreign equity ownership, while stocks trading in Hong Kong dipped. Indian equities gained ground ahead of a read on industrial production. After the closing bell, India's industrial production rose by a smaller amount than expected for September. With volatility relatively flaring up to hamper the global markets, Schwab's Jeffrey Kleintop, CFA, and Randy Frederick discuss in the video, Is An Optimistic Outlook for Global Equities Warranted?.

Stocks snap winning streak as data yields to fiscal concerns

U.S. stock markets snapped a string of 8-straight weekly gains with the economic docket relatively quiet and earnings season winding down to open the door further for fiscal uncertainty to shape market action. Last week's House tax-reform bill continued to garner scrutiny and uncertainty regarding a timely passage was exacerbated by the Senate's plan that differed substantially and caused volatility to flare up. Financials fell despite gains in Treasury yields and healthcare stocks saw some pressure amid the political uneasiness, while technology issues, which have led the global rally, slipped. The U.S. dollar came under modest pressure as risk aversion nudged higher in the second-half of the week. Over 90% of S&P 500 companies have reported and 67% have topped revenues forecasts and 77% have bested earnings estimates, per data compiled by Bloomberg.

Next week's economic calendar will heat back up, with inflation a focus courtesy of the Producer Price Index (PPI) and Consumer Price Index (CPI), and the consumer heading into the holiday season in the form of retail sales. Moreover, housing activity will be on display as the NAHB Housing Market Index will be followed by housing starts and building permits. The Fed's Industrial production and capacity utilization report will round out the heavy dose of data.

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?,
the long-running bull market continues and has shown few signs of faltering. Even modest pullbacks have failed to gain any momentum and the uptrend has been largely intact throughout the course of 2017. But there are signs that the potential for a “melt up” is heightened. Additional support for the ongoing bull market could come from the holiday shopping season, which is shaping up to be a good one, as well as ramped up capital spending and productivity as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her articles, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle and One Thing Leads to Another: Productivity's Rebound.

International reports due out next week that deserve a mention include: Australia—employment change and consumer confidence. China—lending statistics, retail sales, and industrial production. India—trade balance, CPI and PPI. Japan—Q3 GDP and industrial production. Eurozone—industrial production, Q3 GDP, trade balance and CPI, along with German investor confidence. U.K.—CPI and PPI, employment change and retail sales.

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