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Thursday, November 09, 2017

Stocks Log Losses as Senate Reveals Tax Plan

Charles Schwab: On the Market
Posted: 11/9/2017 4:15 PM EST

Stocks Log Losses as Senate Reveals Tax Plan
U.S. stocks traded lower and Treasury yields gave up early gains and finished mixed as volatility rose ahead of today's release of the Senate's tax reform plan, which differed from the House's version in several areas. Crude oil prices and gold gained ground, while the U.S. dollar traded lower. In equity news, earnings reports continued to roll out, headlined by Macy's better-than-expected results. The economic docket showed weekly jobless claims rose more than forecasted and a monthly gain in wholesale inventories matched estimates. 

The Dow Jones Industrial Average (DJIA) declined 101 points (0.4%) to 23,462, the S&P 500 Index fell 10 points (0.4%) to 2,585, and the Nasdaq Composite dropped 39 points (0.6%) to 6,750. In moderate volume, 886 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.36 to $57.17 per barrel and wholesale gasoline was unchanged at $1.82 per gallon. Elsewhere, the Bloomberg gold spot price was $4.88 higher at $1,286.24 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 94.51.

Macy's Inc. (M $20) reported Q3 earnings-per-share (EPS) of $0.12, or $0.23 ex-items, versus the $0.19 FactSet estimate, as revenues declined 6.1% year-over-year (y/y) to $5.3 billion, roughly in line with projections. Q3 same-store sales fell 3.6% y/y, larger than the expected 2.9% decline. The company's gross margin improved slightly y/y and topped forecasts, while it noted that inventories declined. M reaffirmed its full-year guidance, pointing out that it expects continued improvement in trends in the holiday quarter, including a lift from loyalty and digital, and it intends to head into 2018 with momentum. Shares traded higher.

Kohl's Corp. (KSS $41) posted Q3 EPS of $0.70, below estimates of $0.72, with revenues inching 0.1% higher y/y to $4.3 billion, roughly in line with forecasts. Quarterly same-store sales ticked 0.1% higher y/y, versus the expected 0.7% decrease. The company's gross and operating margins came in below the Street's forecasts. KSS raised the low end of its full-year profit outlook. Shares pared heavy early losses and finished modestly lower as analysts expressed some optimism regarding the unexpected positive same-store sales growth in Q3 heading into the holiday season.

D.R. Horton Inc. (DHI $46) announced fiscal Q4 earnings of $0.82 per share, one penny north of expectations, as revenues grew 11.0% y/y to $4.1 billion, above the projected $4.0 billion. The homebuilder's closings, net orders and backlog all topped projections. DHI issued full-year revenue guidance that was just above estimates. Separately, the company increased its quarterly dividend by 25.0% to $0.125 per share. Shares were higher.

Monster Beverage Corp. (MNST $59) reported Q3 EPS of $0.38, or $0.40 ex-items, compared to the anticipated $0.40, as revenues gained 15.4% y/y to $910 million, versus the forecasted $905 million. Shares were little changed.

Jobless claims rise

Weekly initial jobless claims (chart) grew by 10,000 to 239,000 last week, above the Bloomberg forecast of an increase to 232,000, with the prior week’s figure being unrevised at 229,000. The four-week moving average declined by 1,250 to 231,250, while continuing claims rose 17,000 to 1,901,000, north of estimates of 1,885,000.

Wholesale inventories (chart) were unrevised at the preliminary estimate of 0.3% month-over-month (m/m) gain for September, matching forecasts and compared to August's 0.8% gain. Sales grew 1.3% m/m, compared to forecasts of a 0.9% increase and August's upwardly revised 1.9% jump. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dipped to a 1.27 months pace from August's 1.28 rate.

Treasuries finished mixed, with the yield on the 2-year note declining 2 basis points (bps) to 1.63%, while the yields on the 10-year note and the 30-year bond ticked 1 bp higher to 2.33% and 2.80%, respectively.

Treasury yields relinquished gains and the U.S. dollar extended its loss amid uncertainty regarding the long road to tax reform as the markets received the Senate's tax overhaul plan today. The plan differs on some key points from the House's bill released last week, for example, the Wall Street Journal reported that the Senate's bill will delay the corporate tax cut until 2019. This has opened the door for what could be a highly contentious reconciliation process and was cited as a source of an afternoon jump in volatility in the markets. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses this in his latest commentary, House Tax Reform Bill: What Investors Need to Know, noting that we don’t suggest investors take any action at this time.

The release of the House’s bill is the first step in what will surely be a lengthy process, and changes to the bill are inevitable. The biggest stumbling block remains the Senate, where getting to 50 votes isn’t a sure thing. Clarity will come only as the process unfolds in the weeks ahead.
The markets are also contended with Fed leadership that is heading for some major changes, including at the Chairman position after President Trump picked Fed Governor Jay Powell to lead the Central Bank. Schwab's Chief Fixed Income Strategist Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick provide analysis in the video, Should a Change in Fed Leadership Matter to Investors?.

This all comes amid the positive global economic backdrop, which Schwab's Chief Investment Strategist Liz Ann Sonders points out could be bolstered by ramped up capital spending and productivity in her articles, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle and One Thing Leads to Another: Productivity's Rebound.

Tomorrow, the U.S. economic calendar will limit releases to the preliminary University of Michigan Consumer Sentiment Survey for November, forecasted to have ticked higher to 100.9 from October's final read of 100.7.

Europe mostly lower, Asia mixed

European equities moved lower, with U.S. tax reform uncertainties appearing to stymie conviction amid the recent global market rally, while U.K. Brexit talks garnered attention as they resumed after hitting a deadlock last month. For analysis, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?. The euro gained ground and the British pound ticked higher versus the U.S. dollar, while bond yields in the region moved to the upside. Moreover, mixed earnings results were in focus, while in economic news, German exports declined by a smaller amount than expected for September.

Stocks in Asia finished mixed as the markets contended with the tax-reform uncertainty in the U.S., some economic data in the region and as U.S. President Trump continued his tour with a stop in China. Japanese equities reversed to the downside late in the trading session as the yen rallied versus the U.S. dollar and as a report showed the nation's machine orders—a gauge of capital spending—fell more than expected in September. Shares trading in mainland China and Hong Kong advanced, while data showed the country's consumer and producer price inflation came in hotter than expected for October. Australian securities increased and Indian equities also ticked higher, while South Korean stocks dipped. With the global market rally appearing to pause somewhat amid the fiscal policy uncertainties in the U.S., Schwab's Jeffrey Kleintop, CFA, and Randy Frederick offer the video, Is An Optimistic Outlook for Global Equities Warranted?.

The international economic docket for tomorrow will yield the Tertiary Industry Index from Japan, industrial production from India and industrial and manufacturing production from the U.K. and France.

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