Charles Schwab: On the Market
Posted: 11/30/2017 4:15 PM EST
Stocks Rally Ahead of Senate Tax Vote
The Dow Jones Industrial Average (DJIA) rallied 332 points (1.4%) to 24,272, the S&P 500 Index advanced 22 points (0.8%) to 2,648, and the Nasdaq Composite gained 50 points (0.7%) to 6,874. In heavy volume, 1.5 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.10 higher to $57.40 per barrel and wholesale gasoline was unchanged at $1.73 per gallon. Elsewhere, the Bloomberg gold spot price decreased $8.30 to $1,275.34 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 93.07.
PVH Corp. (PVH $135) reported Q3 earnings-per-share (EPS) of $3.05, or $3.02 ex-items, versus the $2.91 FactSet estimate, as revenues increased 5.0% year-over-year (y/y) to $2.4 billion, above the projected $2.3 billion. PVH issued Q4 EPS guidance that was below expectations, though it raised its full-year profit outlook. The parent of Calvin Klein and Tommy Hilfiger projected Q4 and full-year revenues to be slightly above estimates. Shares declined.
Kroger Co. (KR $26) posted Q3 profits of $0.44 per share, compared to the forecasted $0.40, with revenues rising 4.5% y/y to $27.7 billion, above the expected $27.5 billion. The grocer's Q3 same-store sales grew 1.1% y/y, versus the estimated 0.9% gain. KR reaffirmed its full-year EPS outlook. Shares rallied.
Costco Wholesale Corp. (COST $184) moved nicely higher after the company said its November same-store sales grew 10.8% y/y, above the projected 7.9% increase. L Brands Inc. (LB $56) said its November same-store sales declined 1.0% y/y, versus the forecasted 0.2% gain, but noted that it sees December sales being flat to up low-single digits. LB rallied.
Personal income and spending rise, jobless claims dip
Personal income (chart) rose 0.4% month-over-month (m/m) in October, above the Bloomberg forecast of a 0.3% gain, and compared to September's unrevised 0.4% increase. Personal spending increased 0.3% last month, matching expectations, and versus September's downwardly revised 0.9% gain. The October savings rate as a percentage of disposable income was 3.2%. The PCE Deflator was 0.1% higher, in line with expectations and versus the prior month's unrevised 0.4% gain.
Compared to last year, the deflator was 1.6% higher, north of estimates of a 1.5% rise and compared to September's upwardly revised 1.7% gain. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, matching expectations, and versus the prior month's upwardly revised 0.2% gain. The index was 1.4% higher y/y, in line with estimates, and compared to September's upwardly revised 1.4% increase.
Weekly initial jobless claims (chart) declined by 2,000 to 238,000 last week, versus forecasts calling for it to match the prior week’s upwardly revised 240,000 figure. The four-week moving average rose by 2,250 to 242,250, while continuing claims grew by 42,000 to 1,957,000, north of estimates of 1,890,000.
The Chicago Purchasing Managers Index (chart) declined in November to 63.9 from October's unrevised 66.2 level, and better than expectations calling for a decline to 63.0. The index remained solidly in expansion territory (above 50) and pulled back from the highest level since March 2011, adding to a long list of signs that the manufacturing sector remains solid.
Schwab's Chief Investment Strategist Liz Ann Sonders notes that U.S. business capital spending has already picked up but an even sharper recovery could be in the cards for 2018, while tax reform—if we get it—would be an additional kicker in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle. Tomorrow, November manufacturing activity will be on display with the releases of the ISM Manufacturing Index and the final Markit Manufacturing PMI Index. The ISM index is projected to dip to 58.3 from 58.7 in October, while Markit's index is expected to be revised higher to 54.0 from the preliminary 53.8 reading, but slightly below October's 54.6 level. Readings above 50 for both reports denote expansion.
Treasuries traded lower, with the yield on the 2-year note rising 2 basis points (bps) to 1.78%, the yield on the 10-year note gaining 3 bps to 2.42%, and the 30-year bond rate ticking 1 bp higher to 2.83%.
Treasury yields added to yesterday's noticeable curve steepening after a recent bout of flattening that fostered some market weariness, while the U.S. dollar pared its modest weekly rebound.
The markets continued to grapple with the continued signs of broad-based global economic growth and mostly favorable earnings results, along with tax reform uncertainty. The Senate appears headed to vote later today or tomorrow on its bill with signs emerging the past couple days that it has been tweaked enough to find enough support to pass. This has fostered some optimism regarding tax reform becoming a reality this year, but has also resulted in some rotation in the stock market sectors, which helped lead yesterday's selloff in the tech sector.
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, if the bill passes the Senate, the House and Senate would need to convene a conference to negotiate and reconcile differences between the two bills to produce a single consensus bill. That bill would then need to be approved by both chambers before it could be sent to President Donald Trump for his signature.
Negotiations between the two chambers will likely be extremely challenging, given the differences between the two approaches. For investors, we still think it is too early to take any drastic action. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly. Regardless of the outcome of the tax bill, it’s always a good idea to meet with your tax and financial advisors before the end of the year to review your current financial situation and discuss your plans for the coming year.
Tomorrow, the U.S. economic calendar will give us a look at national manufacturing activity in November with the releases of the ISM Manufacturing Index, projected to dip to 58.3 from 58.7 in October, and the final Markit Manufacturing PMI Index, expected to be revised higher to 54.0, but down from October's 55.3 level. Readings above 50 for both depict expansion. Construction spending for October will also be reported, forecasted to have increased 0.5% after rising 0.3% in September.
Europe gives up gains as euro and pound rally, Asia mostly lower
European equity markets relinquished early gains and finished mostly lower, with the euro extending a rise amid a downside reversal for the U.S. dollar late in the session and the British pound jumping on signs of progress in deadlocked Brexit negotiations. Energy issues gave up an advance as crude oil prices were choppy ahead of today's OPEC production decision. OPEC is expected to deliver an extension of cuts to the end of 2018 but there were some uncertainties that lingered ahead of the decision. U.S. tax reform optimism continued but this fostered yesterday's noticeable rotation out of the technology sector, and the group remained under pressure on this side of the pond. In economic news, eurozone consumer price inflation estimates came in a bit cooler than expected for November, while the region's October unemployment rate dipped unexpectedly. German retail sales surprisingly fell last month. 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. Bond yields finished mostly lower to exacerbate pressure on financials.
Stocks in Asia finished mostly lower, with the global selloff in the tech sector weighing on markets, while optimism of U.S. tax reform lingered and a flood of data in the region was digested. Shares trading in mainland China and Hong Kong fell, with the weakness in tech more than offsetting the government's reports on manufacturing and the key services sectors showing growth accelerated for both, with the former surprisingly increasing. South Korean equities dropped as the tech pullback was met with an expected increase in the Bank of Korea's benchmark interest rate and an unexpected drop in the nation's industrial production. Australian securities moved lower with financials seeing some pressure after the government announced that it will launch an inquiry into the sector. Indian stocks also traded to the downside on the tech volatility and ahead of the nation's Q3 GDP report. After the closing bell, India's Q3 GDP accelerated to a 6.3% y/y pace of growth, but slightly below the projected 6.4% expansion.
However, Japanese equities rose with the yen extending yesterday's weakness and strength in financials helping counter the slide in the tech sector. Japan reported that industrial production rose at a smaller rate than expected but growth in vehicle production accelerated solidly in October. Despite the downside pressure on most markets, they remain nicely higher on the year, fostered by the broadest economic growth in a decade and is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks.
The international economic docket for tomorrow will yield a host of reports from Japan as the island nation reports its jobless rate, CPI, capital spending, company sales and vehicle sales. China, India and South Korea will deliver manufacturing PMI reads and the latter will also announce final Q3 GDP. Reports from across the pond will include Markit Manufacturing PMI reads from the U.K., Germany, France, Italy and the eurozone.
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