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Thursday, November 16, 2017

Stocks Rally as Bulls Come Charging Back

Charles Schwab: On the Market
Posted: 11/16/2017 4:15 PM EST

Stocks Rally as Bulls Come Charging Back
U.S. stocks rallied during Thursday's trading session, bouncing back from a two-day slide as European shares also snapped a string of losses. Favorable earnings reports from Dow members Wal-Mart and Cisco Systems, along with upbeat industrial production and homebuilder sentiment reads aided in boosting equity gains. Treasury yields rebounded and the U.S. dollar ticked slightly higher, along with gold, while crude oil prices were lower. 

The Dow Jones Industrial Average (DJIA) advanced 187 points (0.8%) to 23,458, the S&P 500 Index jumped 21 points (0.8%) at 2,586, and the Nasdaq Composite rallied 87 points (1.3%) to 6,793. In moderate volume, 776 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.19 to $55.14 per barrel and wholesale gasoline was $0.03 lower at $1.71 per gallon. Elsewhere, the Bloomberg gold spot price ticked $0.59 higher to $1,278.66 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—advanced 0.1% to 93.93.

Dow member Wal-Mart Stores Inc. (WMT $100) reported Q3 earnings-per-share (EPS) of $0.58, or $1.00 ex-items, versus the $0.97 FactSet estimate, as revenues rose 4.2% year-over-year (y/y) to $123.2 billion, above the projected $121.1 billion. Q3 same-store sales at Walmart grew 2.7% y/y, topping the expected 1.9% gain. The company raised its Q4 EPS outlook and issued same-store sales guidance that was slightly above expectations. Shares traded sharply higher.

Dow component Cisco Systems Inc. (CSCO $36) posted fiscal Q1 earnings of $0.48 per share, or $0.61 ex-items, with revenues decreasing 2.0% y/y to $12.1 billion, roughly in line with expectations. CSCO issued Q2 guidance that exceeded forecasts. Shares rallied.

Best Buy Co. Inc. (BBY $55) announced Q3 EPS of $0.78, matching projections, as revenues rose 4.2% y/y to $9.3 billion, below the expected $9.4 billion. Q3 same-store sales increased 4.4% y/y, below the forecasted 4.9%. BBY issued Q4 earnings guidance that was below estimates, while its sales outlook was mostly in line with expectations. The company raised its full-year guidance. Shares fell.

Homebuilder sentiment and industrial production top forecasts

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month unexpectedly improved to an eight-month high of 70, versus the Bloomberg forecast calling for a dip to 67 from October's unrevised 68 level. The index sits decisively above the 50 mark, the point of separation for good versus poor conditions. The NAHB said builder confidence is close to a post-recession high—a strong indicator that the housing market continues to grow steadily—but its members still face supply-side constraints, such as lot and labor shortages and ongoing building material price increases.

Tomorrow, the economic calendar will bring a look at housing construction activity in the form of housing starts and building permits, with starts projected to rise 5.6% month-over-month (m/m) to an annual rate of 1,190,000 units and permits expected to increase 2.0% to a 1,250,000 unit rate. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest, Schwab Sector Views: 'Tis the Season…Almost, mortgage demand appears to be healthy, while interest rates continue to be relatively low and the high rental rates in some areas of the country provide incentive for home buying.

Industrial production (chart) rose 0.9% month-over-month (m/m) in October, above estimates of a 0.5% gain, after September's upwardly revised 0.4% increase. Manufacturing and utilities production both grew solidly, while mining output dropped. Capacity utilization rose to 77.0% from the prior month's upwardly revised 76.4% rate, and compared to forecasts of 76.3%. Capacity utilization is 2.9 percentage points below its long-run average. Industrial production has gained 2.9% over the past 12 months, and Schwab's Chief Investment Strategist Liz Ann Sonders notes that capex may be in for an even sharper recovery in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle

Weekly initial jobless claims (chart) surprisingly rose by 10,000 to 249,000 last week, versus the Bloomberg forecast of a decrease to 235,000, with the prior week’s figure being unrevised at 239,000. The four-week moving average grew by 6,500 to 237,750, while continuing claims fell 44,000 to 1,860,000, south of estimates of 1,900,000.

The Philly Fed Manufacturing Index (chart) in November declined more than expected to 22.7 from 27.9 in October, but a reading above zero indicates expansion. This compared to estimates of a decline to 24.6.

The Import Price Index (chart) rose 0.2% m/m for October, below projections of a 0.4% gain, following September's upwardly revised 0.8% rise. Compared to last year, prices were up by 2.5%, in line with forecasts and compared to September's unrevised 2.7% increase.

Treasuries finished lower, with the yield on the 2-year note gaining 3 basis points (bps) to 1.71%, the yield on the 10-year note increasing 5 bps to 2.37%, and the 30-year bond rate advancing 6 bps to 2.82%.

Treasury yields and the U.S. dollar rebounded somewhat from recent pressure that came from a flare-up in global risk aversion on the heels of the world stock market rally as of late. Festering U.S. tax reform uncertainty—today the House passed its bill to overhaul the tax code, which has some significant differences from the Senate's version—has fostered the change in conviction. This has countered a relatively positive economic landscape, while recent soft Chinese economic data and market skittishness as the yield curve has flattened have exacerbated sentiment. As such, check out our article, Does Low Market Volatility Portend a Market Tumble?, as well as Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest commentary, Tax Reform: Key Differences Between the Senate and House Plans.

Tomorrow's domestic docket will also yield the November Kansas City Fed Manufacturing Index, forecasted to dip to 21 from 23 in October, though a reading above 0 indicates growth in activity.

Europe recovers on data, Asia rebounds from recent slide

European equity markets traded higher, rebounding from the recent string of losses that has come from an apparent change in global sentiment to de-risking, while disappointing Chinese economic data as of late has weighed on commodity-related stocks. Some upbeat earnings data in the region teamed up with a rebound in eurozone new car registrations to support the recovery in the markets, while the energy sector remained under pressure as crude oil prices extended a recent selloff. Eurozone consumer price inflation rose in line with forecasts. The euro declined versus the U.S. dollar and the British pound rose following a better-than-expected U.K. retail sales report, while bond yields in the region finished mixed. Gains for Italian stocks and Europe's financial sector were limited by a drop in shares of Italy's banks. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, momentum favors the bulls for the foreseeable future, but elevated valuations and growing investor complacency pose risks that could lead to a long-awaited pullback and/or a pickup in volatility from today’s extremely low base.

Asian stocks mostly rebounded from the recent pullback, with the yen giving back some of its gains seen as of late as the global markets have stumbled amid a flare-up in risk aversion, while overnight stabilization in crude oil prices helped the energy sector recover somewhat. Japanese equities rallied, while Australian securities were also higher, with a softer-than-expected read on the nation's employment growth limiting gains. Mainland Chinese shares dipped and stocks trading in Hong Kong advanced with the recent soft economic data being met with some upbeat earnings results. Indian equities gained ground and South Korean shares advanced. Schwab's Chief Global Investment Strategist 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 in his latest article, 5 Reasons Investors Should Give Thanks.

International economic releases for tomorrow will be light, with new vehicle sales from Australia and the current account and construction output from the Eurozone.

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