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Tuesday, November 14, 2017

U.S. Stocks Join Global Market Decline

Charles Schwab: On the Market
Posted: 11/14/2017 4:15 PM EST

U.S. Stocks Join Global Market Decline
U.S. equities followed their foreign counterparts lower, as conviction waned amid continued U.S. tax reform uncertainty. Commodity issues also saw pressure on some disappointing Chinese economic data and a lowered demand forecast from the IEA, which weighed on crude oil and the energy sector. Treasury yields and the dollar were lower despite a hotter-than-expected wholesale inflation report and still-robust small business optimism, while gold was higher.

The Dow Jones Industrial Average (DJIA) fell 30 points (0.1%) to 23,410, the S&P 500 Index was 6 points (0.2%) lower at 2,579, and the Nasdaq Composite lost 20 points (0.3%) to 6,738. In moderate volume, 842 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $1.06 to $55.70 per barrel and wholesale gasoline was $0.03 lower at $1.76 per gallon. Elsewhere, the Bloomberg gold spot price rose $2.97 to $1,281.28 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.7% at 93.80.

Dow member Home Depot Inc. (HD $168) reported Q3 earnings-per-share (EPS) of $1.82, or $1.84 ex-items, versus the $1.82 FactSet estimate, with revenues growing 8.1% year-over-year (y/y) to $25.0 billion, compared to the projected $24.5 billion. Q3 same-store sales rose 7.9% y/y, above the 5.7% gain that was expected. The company raised its full-year guidance. The world's largest home improvement retailer said though the quarter was marked by an unprecedented number of natural disasters, the underlying health of its core business remains solid. Shares were higher.

Dick's Sporting Goods Inc. (DKS $26) posted Q3 earnings of $0.35 per share, or $0.30 ex-items, compared to the expected $0.26, as revenues increased 7.4% y/y to $1.9 billion, roughly in line with forecasts. Q3 same-store sales declined 0.9% y/y, versus the projected 2.7% drop, while its gross margin was well below expectations and its inventories increased y/y. DKS issued Q4 and full-year EPS guidance that topped estimates but reaffirmed its same-store sales outlook for the year and noted that next year's earnings are expected to fall solidly. Shares were solidly lower.

TJX Companies Inc. (TJX $68) announced Q3 profits of $1.00 per share, or $1.03 ex-items, versus the forecasted $1.00, as revenues grew 6.0% y/y to $8.8 billion, below the expected $8.9 billion. Q3 same-store sales were flat y/y, compared to the estimated 2.4% gain. The parent of TJ Maxx, Marshalls and HomeGoods stores said Q4 is off to a strong start and it sees numerous opportunities for the holiday selling season, though it issued EPS guidance for the quarter that had a midpoint below estimates. Shares were lower.

Wholesale price inflation comes in hotter than expected

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in October were up 0.4% month-over-month (m/m), above the Bloomberg expectation of a 0.1% gain, after matching September's unrevised increase. The core rate, which excludes food and energy, rose 0.4%, compared to forecasts of a 0.2% advance and in line with September's unrevised rise. Y/Y, the headline rate was 2.8% higher, above projections of a 2.4% gain, and the core PPI rose 2.4% last month, north of estimates of a 2.2% gain. In September, producer prices were 2.6% higher and up 2.2% for the headline and core rates, respectively.

Tomorrow, the economic docket will complete the inflation picture with the Consumer Price Index (CPI), projected to be up 0.1% m/m in October, after September's 0.5% gain, while the core CPI is expected to rise 0.2% after the prior month's 0.1% increase. Compared to last year, the CPI is forecasted to be 2.0% higher on the heels of September's 2.2% gain, while the core CPI is projected to remain at the prior month's 1.7% increase.

Also, we will get a glimpse at the consumer's propensity to spend heading into the holiday season, with the release of October retail sales, expected to be flat m/m, after September's 1.6% jump. Excluding autos, sales are forecasted to rise 0.2% after the prior month's 1.0% increase. Stripping out autos and gas, sales are estimated to grow 0.3% in the wake of September's 0.5% gain. The retail sales control group, the figure used to calculate GDP, is projected to be 0.3% higher after the prior month's 0.4% increase. Business inventories and MBA Mortgage Applications will also be released.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of the all-important consumer in his latest, Schwab Sector Views: 'Tis the Season…Almost. Brad notes that at this point in the economic expansion, it would be difficult to view the status of the consumer as anything less than mostly positive. For sure, there are still problems, but with unemployment historically low, wages trending higher and still low interest rates conspiring to boost consumer confidence, the picture is looking pretty positive to us.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for October rose to 103.8, from September's unrevised 103.0 level, versus expectations of a gain to 104.0.

Treasuries finished higher despite the inflation data, as the yield on the 2-year note was flat at 1.68%, while the yield on the 10-year note decreased 3 basis points (bps) to 2.38% and the 30-year bond rate declined 4 bps to 2.83%.

The yield curve continues to flatten and the U.S. dollar has seen some pressure as of late as the markets grapple with the recent global market rally on a favorable economic backdrop, while fiscal and monetary policy uncertainties continue to linger. However, volatility remains subdued despite a flare-up last week as the House and Senate unveiled tax reform bills that differed in some key areas.
Amid this backdrop, 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.

Europe mostly lower despite upbeat data in the region, Asia mostly lower 

European stocks traded mostly lower, with the euro rallying and some Chinese economic data disappointing to weigh on commodity-related issues. The markets lost ground despite some favorable earnings and economic data in the region. German Q3 GDP growth came in at a 0.8% quarter-over-quarter pace, above projections to match the 0.6% expansion seen in Q2. Eurozone Q3 GDP expanded at a 2.5% y/y pace to match expectations. Moreover, German investor confidence was mixed on a current view and expectation standpoint, with the former topping estimates but the latter missing forecasts. U.K. inflation statistics for October came in widely cooler than anticipated. The British pound reversed modestly to the upside and bond yields in the region finished mixed.
As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, earnings season, both in the U.S. and globally, has been solid, while economic growth has accelerated across much of the globe—all supportive of an ongoing global bull market. Elevated optimism and complacency could lead to pullbacks, but we believe it would be in the context of an ongoing bull market.

Stocks in Asia finished mostly lower, with yesterday's subdued moves in the U.S. offering little to shape market direction, while some softer-than-expected Chinese economic data stymied conviction. China reported growth in retail sales and industrial production that missed forecasts for October, though its foreign direct investment and fixed asset investment both slowed last month, pressuring stocks in the mainland as well as Hong Kong. Markets in Australia were also underwater, despite an upbeat read on the nation's business confidence. Indian securities traded lower, on the heels of the data and late-yesterday's hotter-than-expected read on consumer price inflation. After the closing bell, India reported that its exports declined 1.1% y/y last month, after surging 25.7% in September. South Korea equities declined and those traded in Japan finished flat as the yen gave back some of yesterday's gains. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, 5 Reasons Investors Should Give Thanks, the record breaking streak of gains in the global stock market this year has been supported by the broadest global economic growth in a decade. Stocks appear to closely track earnings growth, even where risks are most intense. Broad economic and earnings growth is expected to continue in 2018.

Tomorrow's international economic calendar will be fairly busy, beginning with GDP and industrial production from Japan, wage data and vehicle sales from Australia, followed by CPI from France, employment figures from the U.K., and the trade balance from the Eurozone.

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