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Wednesday, November 22, 2017

Stocks Mixed in Subdued Action Ahead of Thanksgiving

Charles Schwab: On the Market
Posted: 11/22/2017 4:15 PM EST

Stocks Mixed in Subdued Action Ahead of Thanksgiving 
U.S. stocks were mostly lower, though the Nasdaq was able to tick higher with volume subdued ahead of the Thanksgiving break. In equity action, a flood of mixed earnings reports were highlighted by Deere & Co, while in economic news, a drop in durable goods orders was met with upward revisions to the prior month's solid advance. Treasury yields and the U.S. dollar were lower. Gold and crude oil prices gained ground.

The Dow Jones Industrial Average (DJIA) declined 65 points (0.3%) to 23,526, the S&P 500 Index shed nearly 2 points (0.1%) to 2,597, and the Nasdaq Composite increased 5 points (0.1%) to 6,867. In light volume, 661 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.19 to $58.02 per barrel and wholesale gasoline was unchanged at $1.77 per gallon. Elsewhere, the Bloomberg gold spot price increased $11.02 to $1,291.63 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.7% to 93.28.

Deere & Co. (DE $145) reported Q4 earnings-per-share (EPS) of $1.57, versus the $1.47 FactSet estimate, as equipment sales rose 25.6% year-over-year (y/y) to $7.1 billion, topping the expected $6.9 billion. The company noted improving markets for farm and construction equipment. DE issued earnings guidance for next year that exceeded the Street's forecasts. Shares traded nicely higher.

Hewlett Packard Enterprise Co. (HPE $13) posted Q4 profits of $0.23 per share, or $0.29 ex-items, compared to the projected $0.28, as revenues grew 5.0% y/y to $7.7 billion, north of the estimated $7.3 billion. HPE issued Q1 EPS guidance that missed forecasts. The company announced that Antonio Neri will succeed Meg Whitman, who will step down as Chief Executive Officer, effective February 1, 2018. Shares were solidly lower.

HP Inc. (HPQ $21) announced Q4 EPS of $0.39, or $0.44 ex-items, versus the expected $0.44, with revenues rising 11.0% y/y to $13.9 billion, above the estimated $13.4 billion. The company issued Q1 profit guidance that had a midpoint just shy of projections, while its full-year earnings outlook had a midpoint that was north of expectations. Shares lost ground. Inc. (CRM $107) reported fiscal Q3 profits of $0.07 per share, or $0.39 ex-items, compared to the expected $0.37, as revenues increased 25.0% y/y to $2.7 billion, roughly in line with forecasts. The company issued Q4 EPS and billings guidance that was below expectations, overshadowing its revenue outlook that was slightly above estimates and its raised full-year guidance. Shares finished lower.

Durable goods orders mixed, Fed releases its recent meeting minutes

October preliminary durable goods orders (chart) were down 1.2% month-over-month (m/m), compared to the Bloomberg estimate of a 0.3% gain, and September's 2.0% rise was revised to a 2.2% increase. Ex-transportation, orders were 0.4% higher m/m, versus forecasts of a 0.5% gain and compared to September's favorably-revised 1.1% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 0.5%, versus projections of a 0.5% increase, and following the upwardly-revised 2.1% rise posted in the month prior.

Weekly initial jobless claims (chart) dropped by 13,000 to 239,000 last week, versus forecasts of a decrease to 240,000, with the prior week’s figure being upwardly revised to 252,000. The four-week moving average rose by 1,250 to 239,750, while continuing claims increased 36,000 to 1,904,000, north of estimates of 1,880,000.

The final November University of Michigan Consumer Sentiment Index (chart) was revised higher to 98.5, above forecasts of 98.0, from the preliminary level of 97.8. The index is below October's level of 100.7. Compared to last month, the expectations and current conditions components of the survey both dipped. The 1-year inflation outlook ticked higher to 2.5% from October's 2.4% rate, and the 5-10 year forecast dipped to 2.4% from 2.5%.

The MBA Mortgage Application Index ticked 0.1% higher last week, following the prior week's 3.1% gain. The slight increase came as a 4.8% drop in the Refinance Index was met by a 5.3% jump in the Purchase Index. The average 30-year mortgage rate rose 2 basis points (bps) to 4.20%.

At 2:00 p.m. ET, the Federal Reserve released the minutes from its monetary policy meeting that ended on November 1st. The information contained in the report showed that labor market conditions generally continued to strengthen and that real GDP expanded at a solid pace in Q3 despite disruptions from Hurricanes Harvey and Irma. Also, several participants indicated that an increase in the target range for the federal funds rate in the near term "would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee's objective." And participants "agreed that they would continue to monitor closely and assess incoming data before making any further adjustment to the target range for the federal funds rate."

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, the selection of the 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.

Treasuries were higher with the yield on the 2-year note falling 5 bps to 1.73% and the yield on the 10-year note dropping 4 bps to 2.32%, while the 30-year bond rate was 2 bps lower at 2.74%.
Treasury yields and the U.S. dollar found some pressure as the markets grappled with Fed Chief Yellen's comments, as well as U.S. tax reform uncertainty ahead of next week's expected Senate vote on its plan that differs significantly from the House's that passed last week. 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. Schwab's Chief Investment Strategist Liz Ann Sonders points out in her newest article, Green Grass and High Tides: Earnings Stellar But Not Without Risk, both earnings and revenues were strong; and importantly, the "beat rates" were well above average. The outlook for 2018 is bright, but we are on watch for an expectations bar that gets set too high.

Please note: All U.S. markets will be closed tomorrow in observance of the Thanksgiving Day holiday, and will close early on Friday.

The U.S. economic calendar will round out the week on Friday with the release of the preliminary Markit Manufacturing and Services PMI Indexes for November, with economists forecasting readings of 55.0 and 55.3, respectively, with manufacturing ticking higher and services unchanged from the final October prints.

Europe gives up early advance as euro gains ground, Asia advances 

European equity markets relinquished early gains and finished mostly lower, with the euro moving higher versus the U.S. dollar, ahead of the release of the Fed minutes and following comments about inflation from Chairwoman Yellen. The British pound also rose compared to the greenback after overcoming a brief drop as the markets digested the nation's budget release, which included a lowered economic growth forecast. Bond yields in the region finished mixed. Energy issues managed to eke out gains as crude oil prices recovered somewhat from a recent bout of weakness as the markets awaited next week's OPEC meeting. Stocks in Germany led to the downside with focus still on the flared-up political uncertainty as nation may face a snap election 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.

Stocks in Asia finished higher on the heels of the back-to-back gains registered in the U.S. yesterday, with global economic optimism appearing to overshadow flared-up political concerns in Germany and lingering tax reform uncertainty in the U.S. Japanese equities rose ahead of tomorrow's holiday, even as the yen regained some of yesterday's drop. Stocks trading in mainland China and Hong Kong finished higher. South Korean and Australian securities traded to the upside, while Indian equities also advanced. 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 and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks.

Tomorrow, the international economic docket will yield Markit Manufacturing and Services PMI reads for Germany, France and the Eurozone, while Germany will also release Q3 GDP and the U.K. will report Q3 GDP and total business investment. On Friday, reports will include leading indicators from Japan, the Ifo Business Climate Survey from Germany and industrial orders from Italy.

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