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Wednesday, November 29, 2017

Stocks Mixed As Techs Take a Hit

Charles Schwab: On the Market
Posted: 11/29/2017 4:15 PM EST

Stocks Mixed As Techs Take a Hit
The U.S. equity markets diverged amid continued global economic optimism following an upward revision to Q3 GDP and optimistic signs of progress in the Senate's tax reform bill. Treasury yields rose on the heels of a favorable economic outlook from Fed Chair Yellen, to the benefit of financials, but technology stocks tumbled, severely pressuring the Nasdaq. Crude oil prices were lower, extending losses ahead of tomorrow's OPEC meeting and following mixed oil inventory data, while gold was lower and the U.S. dollar was little changed.

The Dow Jones Industrial Average (DJIA) rose 104 points (0.4%) to 23,940, the S&P 500 Index fell nearly a point to 2,626, and the Nasdaq Composite tumbled 88 points (1.3%) to 6,824 In heavy volume, 922 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.69 to $57.30 per barrel and wholesale gasoline lost $0.04 to $1.73 per gallon. Elsewhere, the Bloomberg gold spot price decreased $8.94 to $1,285.04 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 93.24.

Tiffany & Co. (TIF $93) reported Q3 earnings-per-share (EPS) of $0.80, compared to the $0.76 FactSet estimate, as revenues grew 3.0% year-over-year (y/y) to $976 million, exceeding the projected $958 million. Q3 same-store sales were flat y/y, versus the forecasted 0.2% dip. TIF reaffirmed its full-year guidance. Shares finished lower.

Marvell Technology Group Ltd. (MRVL $22) posted Q3 EPS of $0.30, or $0.34 ex-items, compared to the forecasted $0.33, as revenues decreased 1.2% y/y to $616 million, just above the estimated $615 million. The chip company issued Q4 guidance that topped expectations. Shares were lower despite the results with the markets appearing to rotate out of the tech sector on the heels of the group's strong run this year, with chip companies seeing noticeable pressure.

Chipotle Mexican Grill Inc. (CMG $302) announced that Chairman and Chief Executive Officer (CEO)—and the founder of the company in 1993—Steve Ells will step down as CEO but will become Executive Chairman following the completion of a search to identify a new CEO. Shares were higher.

Shares of Autodesk Inc. (ADSK $109) tumbled over 15% after the application software company's Q3 billings figure missed expectations, resulting in a lowered full-year subscriptions outlook, despite reporting slightly stronger-than-expected Q3 top-and-bottomline results. The company also announced restructuring measures including the reduction of 1,150 employees to its workforce.

Q3 GDP revised higher, Fed comes into focus

The second look (of three) at Q3 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 3.3%, up from the first release's 3.0% gain. The Bloomberg forecast called for an adjusted 3.2% pace of expansion. Q2 GDP grew by an unrevised 3.1% rate. Personal consumption came in at a 2.3% gain for Q3, lower than the preliminary estimate of a 2.4% increase, and compared to the expectations of a 2.5% increase. Personal consumption grew by an unrevised 3.3% in Q2.

On inflation, the GDP Price Index was revised to a 2.1% increase, versus expectations of an unrevised 2.2% gain, while the core PCE Index, which excludes food and energy, was adjusted to a 1.4% increase, compared to forecasts of an unrevised 1.3% rise.

Pending home sales rose 3.5% month-over-month in October, versus projections of a 1.0% rise, and following the negatively-revised 0.4% decline registered in September. Compared to last year, sales were 1.2% higher, versus estimates of a 3.0% gain. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected in October.

The MBA Mortgage Application Index declined 3.1% last week, following the prior week's 0.1% gain. The decrease came as a 7.7% drop in the Refinance Index more than overshadowed a 1.8% increase in the Purchase Index. The average 30-year mortgage rate remained at 4.20%.

Today the Fed is garnering attention as Chairwoman Janet Yellen delivered her U.S. economic outlook to the Joint Economic Committee of Congress, noting the economic expansion is increasingly broad-based and she continues to expect gradual adjustments in the stance of monetary policy. However, she pointed out that although recent lower readings on inflation likely reflect transitory factors, it is possible that this year's low inflation could reflect something more persistent.
In afternoon action, the Central Bank released its Beige Book, an anecdotal look at business activity across the nation used as a monetary policy preparation tool for the two-day meeting set to end December 13th. The report showed that economic activity progressed at "a modest to moderate pace," through mid-November, while also noting that "price pressures have strengthened since the last report" and that the labor market remains tight. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, President Trump's nomination of current Fed governor Jerome “Jay” Powell to replace Janet Yellen as Chairman of the Federal Reserve when her term ends early next year was largely expected and greeted relatively favorably by the market. He is, like Yellen, a relatively dovish consensus builder; and therefore will represent continuity as the Fed continues its monetary policy normalization process. Given strong economic data and the pickup in some measures of wage growth, we believe the Fed will hike rates for the third time this year next month.

Treasuries finished lower, as the yield on the 2-year note increased 2 basis points (bps) to 1.77%, the yield on the 10-year note gained 5 bps to 2.38%, and the 30-year bond rate rose 6 bps to 2.82%.
The yield curve has steepened somewhat after a recent bout of flattening that appeared to foster some market weariness, while the U.S. dollar dipped after a two-day rebound, extending a pullback as of late.

The markets shrugged off flared-up geopolitical concerns following yesterday's missile launch by North Korea, aided by the positive global backdrop and signs of progress regarding the Senate's tax reform bill, which is expected to be voted on later this week. The House passed its bill two weeks ago, with several key differences setting the stage for a complicated reconciliation process.
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 we still think it is too early for investors to take any drastic action. The bill is virtually certain to be changed many times in the weeks ahead. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly.

Personal income and spending will highlight tomorrow's economic calendar, with both measures forecasted to have gained 0.3% m/m during October following their respective 0.4% and 1.0% m/m gains the month prior, while weekly initial jobless claims will also be released, expected to tick higher to a level of 240,000 from the prior week's 239,000. The Chicago Purchasing Manager Survey will be released later in the morning, with economists anticipating a decline in the index to 63.0 for November from October's 66.2 reading.

Europe and Asia mixed ahead of data, North Korean missile launch has little impact

European equity markets traded mixed, with financials getting a boost as bond yields in the region gained solid ground. Global economic optimism remained elevated, bolstered by signs of progress in tax reform and today's upbeat revision to Q3 GDP out of the U.S., along with cooled political concerns on this side of the pond. In his latest article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, addresses the question Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years. However, the apparent rotation out of the tech sector that intensified in the U.S. made its way over to Europe late in the session to cause the markets to give up some solid early gains. Crude oil prices extended a weekly loss ahead of tomorrow's OPEC meeting and following some mixed inventory data in the U.S. The pound rallied against the U.S. dollar to hamstring the U.K. markets after Britain and the European Union reportedly agreed to reach a Brexit divorce bill, which could pave the way for negotiations of the exit to move forward. German consumer price inflation was mostly hotter than expected, French Q3 GDP rose at a pace that matched forecasts and eurozone economic confidence improved. The euro moved higher versus the greenback.

Stocks in Asia finished mixed, following the solid gains in the U.S. yesterday on further signs the economy is running healthy and progress toward tax reform. However, the markets likely treaded with some caution ahead of key economic data out of Japan and China tomorrow, which will coincide with the highly-anticipated OPEC production meeting and potential U.S. tax reform vote, and follow today's U.S. GDP revision and testimony from Fed Chief Yellen. The markets mostly shrugged off yesterday's latest missile launch by North Korea. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans, while offering analysis of the global stock market rally that has been bolstered by broad economic growth and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks.

The yen gave back some recent gains to help lift Japanese equities and overshadow a softer-than-expected retail sales report, while markets in South Korea and India dipped. Mainland Chinese stocks ticked slightly higher, but those traded in Hong Kong fell and Australian listings saw modest gains.

A whole host of reports are slated for tomorrow's international economic calendar, including industrial production from South Korea and Japan, building approvals and consumer credit from Australia, manufacturing data out of China, retail sales and employment data from Germany, CPI and PPI from France and Italy, GDP from Spain, and CPI and employment figures from the Eurozone.

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