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Thursday, December 14, 2017

Early Gains Fade to Red

Charles Schwab: On the Market
Posted: 12/14/2017 4:15 PM EST

Early Gains Fade to Red
Early gains for U.S. equities faded throughout the day and stocks finished lower, despite a jump in November retail sales and positive service sector data, and reports that a tentative tax bill deal has been reached. Consumer discretionary stocks got a boost from the sales report, but the gains were muted by a fall in the health care sector. Pressure on financials after Treasury yields pared gains contributed to the downdraft, as investors asses yesterday's Fed rate hike and a host of European monetary policy decisions. Crude oil and the U.S. dollar were higher, while gold was lower. Attention toward the equity front focused on Dow member Walt Disney’s agreement to acquire parts of Twenty-First Century Fox for $52 billion.

The Dow Jones Industrial Average (DJIA) declined 77 points (0.3%) to 24,509, the S&P 500 Index lost 11 points (0.4%) to 2,652, and the Nasdaq Composite decreased 19 points (0.3%) to 6,857. In moderate volume, 810 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.44 to $57.074 per barrel and wholesale gasoline gained $0.02 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price moved $2.42 lower to $1,253.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 93.52.

As was widely speculated, Dow member Walt Disney Co. (DIS $111) announced an agreement to acquire parts of Twenty-First Century Fox Inc. (FOXA $35), including the Twentieth Century Fox Film and Television studios, along with cable and international TV businesses, for about $52.4 billion in stock. Under the terms of the deal, Twenty-First Century Fox stockholders will receive 0.2745 Disney shares for each share they hold. Immediately prior to the acquisition, Twenty-First Century Fox will separate the Fox Broadcasting network and stations into a newly listed company that will be spun off to its shareholders. Walt Disney also announced that it has extended Robert Iger's contract and he will remain Chairman and Chief Executive Officer of the company through 2021. DIS and FOXA both gained solid ground.

Express Scripts Holding Co. (ESRX $69) raised its full-year earnings-per-share (EPS) outlook, while issuing 2018 EPS guidance that exceeded expectations. Shares finished higher.

Shares of Teva Pharmaceutical Industries Limited (TEVA $17) jumped after announcing a comprehensive restructuring plan aimed at reducing costs by $3 billion by the end of 2019, including reducing its workforce by over 25%. Also, the company suspended its dividend.

Delta Air Lines Inc. (DAL $55) gained solid ground after the airline issued 2018 revenue guidance with a midpoint above the FactSet estimate after guiding that it expects December passenger unit revenue to be up roughly 4.0%. Separately, the company announced that it agreed to order 100 of Airbus SE's (EADSY $25) A321neo aircraft with options of up to 100 additional jets.

Retail sales jump, jobless claims drop, business activity reports mixed

Advance retail sales (chart) for November rose 0.8% month-over-month (m/m), compared to the Bloomberg forecast of a 0.3% gain and compared to October's upwardly revised 0.5% increase. Last month's sales ex-autos were up by 1.0% m/m, versus expectations of a 0.6% gain, and following the favorably revised 0.4% increase seen in the previous month. Sales ex-autos and gas gained 0.8% m/m, above estimates of a 0.4% rise, and versus October's upwardly revised 0.4% gain. The retail sales control group, a figure used to help calculate GDP, increased 0.8%, north of projections of a 0.4% rise, and versus the prior month's favorably revised 0.4% gain.

The report suggests the holiday season got off to a strong start and the all-important U.S. consumer continues to be underpinned by the solid labor market and signs of wage growth. Growth was broad-based across the 13 categories, led by a 2.5% jump in sales at nonstore retailers—which includes online shopping—but auto sales were the lone group that declined. Per Bloomberg, core retail sales—ex food, gas, building materials and autos—on a three-month annualized basis rose at the fastest pace since June 2014. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, has touted the broad-based economic impact of the consumer as of late, which has led to elevated business optimism that could bolster already rising capital investments as he discusses in his latest Schwab Sector Views: 18 Thoughts Heading into '18.

Weekly initial jobless claims (chart) dropped by 11,000 to 225,000 last week, versus forecasts to remain at the prior week's unrevised 236,000 level. The four-week moving average came in at 234,750, while continuing claims fell by 27,000 to 1,886,000, south of estimates of 1,900,000.

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output surprisingly accelerated, rising to 55.0 in December, versus expectations to match November's 53.9 level. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector this month unexpectedly slowed, declining to 52.4 from November's 54.5 figure, and versus forecasts calling for it to rise to 54.7. However, readings above 50 for both indexes denote expansion.

The Import Price Index (chart) rose 0.7% m/m for November, matching projections, following October's downwardly revised 0.1% rise. Compared to last year, prices were up by 3.1%, below forecasts of a 3.2% rise and compared to October's downwardly revised 2.3% increase.
Business inventories (chart) dipped 0.1% m/m in October, matching forecasts, and versus September's unrevised flat reading.

Treasuries were mixed, as the yield on the 2-year note rose 4 basis points (bps) to 1.81%, the yield on the 10-year note was flat at 2.35%, while the 30-year bond rate dipped 2 bps to 2.71%.

Bond yields were mixed but the U.S. dollar got back on the winning path after yesterday's drop, with the markets grappling with today's data and unchanged monetary policy decisions by the European Central Bank and Bank of England, which followed yesterday's highly-expected Fed rate hike. For analysis of the Fed's monetary policy decision, check out Schwab's Senior Fixed Income Research Analyst, Collin Martin's, CFA, article,

Fed Raises Rates, Projects More to Come in 2018, as well as our commentary, Fed Rate Hike: What Does It Mean for Your Portfolio.

Tax reform also remained a source of market attention, bolstered by reports that lawmakers have reached a tentative deal on a final bill. Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of what investors should be paying attention to, in his article, Tax Reform: What Investors Should Know, while also addressing questions regarding how the potential tax overhaul may affect you as an investor in his article, Tax Reform: Frequently Asked Questions. Moreover, as you conduct your year-end tax planning, check out our latest article, Tax Reform: 11 Questions to Ask Your Advisor.

The economic calendar will round out the week with the Federal Reserve’s industrial production and capacity utilization report, with production forecasted to have increased 0.3% m/m during November and capacity utilization to tick higher to 77.2%, as well as the Empire Manufacturing Index, with economists expecting a level of 18.0, with a reading above zero indicating expansion in activity.

Europe and Asia lower as central bank action in focus

European equities finished lower, with technology issues seeing some pressure and financials extending losses late as bond yields moved to the downside and the markets digested a flood of monetary policy decisions. The European Central Bank (ECB) and the Bank of England (BoE), along with the Swiss National Bank (SNB) all kept their monetary policy stances unchanged as expected, on the heels of yesterday's highly-expected rate hike in the U.S. The euro and Swiss franc lost ground on the U.S. dollar, while the British pound reversed modestly to the upside late in the session.

The markets paid close attention to the customary press conference following the ECB's decision by President Mario Draghi, who raised the region's economic growth outlook but was seen as dovish in regard to inflation, noting that an ample degree of stimulus is still needed. Draghi said the structure of its bond-buying program nor a change in guidance were discussed at the meeting as it has only been six weeks since it announced that it will cut the amount of monthly purchases in half starting in January. He did say that it could increase asset purchases or the duration if its outlook becomes less favorable and inflation fails to make progress toward a sustained path to its goal of just under 2.0%.

The focus on monetary policy decisions overshadowed stronger-than-expected U.S. retail sales and eurozone business activity reports, along with headlines suggesting a U.S. tax reform agreement has been reached. Markit's preliminary December Composite PMI Index—a gauge of business activity in both the manufacturing and services sectors—surprisingly improved to 58.0 from 57.5 in November and compared to forecasts calling for a dip to 57.2. As noted in our 2018 Schwab Market Outlook: Executive Summary, we anticipate solid growth in 2018 and don't see a recession on the horizon. However, with markets priced for ongoing moderate growth and low volatility, the risks we’re monitoring include the potential for higher inflation and more central bank tightening than expected.

Stocks in Asia finished mostly to the downside as the markets digested a host of economic data in the region, along with yesterday's rate hike in the U.S., while awaiting today's monetary policy decisions from the European Central Bank and the Bank of England. China reported roughly in line figures on November retail sales, fixed asset investment and industrial production, while Australian employment grew more than expected last month and Indian wholesale price inflation came in a bit cooler than expected for November. The yen gained ground on the U.S. dollar to weigh on Japanese stocks, ahead of a key read on the nation's manufacturing sentiment for Q4 due out tonight. Mainland Chinese equities and those listed in Hong Kong declined, while markets in Australia and South Korea also lost ground. However, stocks in India finished higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers a look at the global markets heading into the New Year in his, 2018 Global Market Outlook: Three Actions to Take for the Year Ahead.

Tomorrow’s international economic calendar will offer the Tankan Large Manufacturing and non-Manufacturing Indexes from Japan, India’s trade balance, and wage data from France.

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