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Tuesday, December 05, 2017

Stocks Lower as Tech Rebound Fizzles

Charles Schwab: On the Market
Posted: 12/5/2017 4:15 PM EST

Stocks Lower as Tech Rebound Fizzles
U.S. equities finished lower, with an early rebound for tech stocks losing steam in late-day action, while attention has shifted to the looming likely highly-contentious reconciliation process for tax reform. Treasury yields were mixed but little changed despite reports showing services sector output remained solid and the trade deficit widened more than expected. Crude oil prices moved higher and gold was lower, while the U.S. dollar also gained ground.

The Dow Jones Industrial Average (DJIA) fell 109 points (0.5%) to 24,181, the S&P 500 Index lost 10 points (0.4%) to 2,629, and the Nasdaq Composite declined 13 points (0.2%) to 6,762. In moderate volume, 885 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.15 higher to $57.62 per barrel and wholesale gasoline gained $0.03 to $1.72 per gallon. Elsewhere, the Bloomberg gold spot price decreased $9.39 to $1,266.79 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 93.38.

Toll Brothers Inc. (TOL $47) reported fiscal Q4 earnings-per-share (EPS) of $1.17, compared to the $1.19 FactSet estimate, as revenues rose 9.0% year-over-year (y/y) to $2.0 billion, versus the projected $2.1 billion. The luxury homebuilder's Q4 deliveries came in below expectations. TOL issued full-year revenue guidance that had a midpoint just above estimates. Shares fell.

AutoZone Inc. (AZO $710) posted fiscal Q1 EPS of $10.00, compared to the forecasted $9.78, with revenues increasing 4.9% y/y to $2.6 billion, exceeding the projected $2.5 billion. The auto parts retailer said its Q1 same-store sales rose 2.3% y/y, north of the expected 0.9% gain. Shares were modestly higher.

Services sector growth slows but remains solid, trade deficit widens more than expected

The November Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 57.4 from October's unrevised 60.1 reading, which was only the fourth time in its history above 60 and the highest level since August 2005. The Bloomberg forecast called for a decline to 59.0. A reading above 50 denotes expansion. New orders fell 4.1 points month-over-month (m/m) to 58.7, business activity dipped 0.8 points to 61.4, and employment decreased 2.2 points to 55.3. Prices declined 2 points but remained elevated at 60.7. Non-manufacturing activity accounts for a large majority of U.S. economic output and the ISM said respondents' comments indicate that the economy and sector will continue to grow for the remainder of the year.

This report joins a host of global PMIs that continue to suggest global growth could continue to underpin the world stock market rally. Schwab's Chief Investment Strategist Liz Ann Sonders points out in her latest article, I Melt with You: Anatomy of a Market Melt Up, we believe it's been the actual fundamentals that have driven the calm surge in stocks with all 45 OECD countries growing. Liz Ann adds that coupled with the start of a sharp turn-for-the-better in U.S. corporate earnings and you have the recipe for yet another leg up in the ongoing secular bull market. However, she cautions that melt ups can be fun while they’re underway; but they don’t tend to end well, and it’s tricky to time the inevitable failure, concluding that discipline is more important now than it’s been in quite some time.

The final Markit U.S. Services PMI Index was revised to 54.5 in November from the preliminary 54.7 level, versus expectations of an upward adjustment to 55.2, and below October's 55.3 level. A reading above 50 denotes expansion and the release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The trade balance (chart) showed that the deficit came in at $48.7 billion in October, compared to estimates of $47.5 billion. September's deficit was upwardly revised to $44.9 billion. Exports were flat month-over-month (m/m) at $195.9 billion, while imports rose by 1.6% to $244.6 billion.
Treasuries were mixed to little changed, as the yield on the 2-year note increased 1 basis point (bp) to 1.84%, while the yield on the 10-year note was flat at 2.35% and the 30-year bond rate lost 1 bp to 2.73%.

The U.S. dollar modestly extended yesterday's gain and Treasury yields remain near the top end of the range traded at this year as the markets continue to digest the weekend's Senate tax reform bill passage and prepare for the expected competitive reconciliation process between the House and Senate as they try to find compromises on some key differences of their bills.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Bill Passes Senate, Clearing Key Hurdle, reaching consensus between the two chambers won’t be easy; there are significant differences between the two bills that will need to be resolved. The conference process will begin this week and Republican leaders are optimistic that a deal can be struck within a matter of days. Complicating matters, the two chambers also must find time this week to avert a government shutdown and approve legislation that extends funding to keep the government open and operating. With regard to the tax bill, until the agreement is finalized, there is little for investors to do. But a year-end conversation with your financial advisor is always a good idea, and a discussion of the potential impacts to your tax situation as a result of the legislation would be prudent.

An initial look at job data for November will likely headline tomorrow's economic calendar ahead of Friday's November nonfarm payroll report, with the ADP Employment Change report expected to show private sector jobs increased by 190,000 following October's 235,000 increase. Final Q3 nonfarm productivity and unit labor costs will also be released, with the former forecasted to be upwardly revised to a 3.3% quarter-over-quarter (q/q) increase from the preliminarily-reported 3.0% and the latter to be adjusted downward to a 0.2% q/q rise from the 0.5% posted originally. MBA Mortgage Applications will also be released.

Europe dips on mixed data and Brexit uncertainty, Asia mostly lower

European equity markets finished mostly lower even as technology issues rebounded with a softer-than-expected eurozone retail sales report slightly more than offsetting Markit's data showing eurozone output from the manufacturing and services sectors continued to show solid growth. The euro saw some pressure versus the U.S. dollar, with the markets continuing to grapple with the prospects of U.S. tax reform and yesterday's failed Brexit talks putting some uncertainty regarding if negotiations can move forward. Talks are expected to continue this week, and the British pound traded lower compared to the greenback. Bond yields in the region were mostly lower and financials moved to the downside. Volatility has shown some signs of ticking higher as the markets assess the global market rally this year and in his article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, tackles 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.

Stocks in Asia finished mixed after the U.S. markets gave back most of their gains late yesterday as the recent pressure on the technology sector persisted and an early boost from the weekend's Senate tax reform bill faded. Japanese securities declined, with the yen gaining ground, while those in Australia were also lower after the Reserve Bank of Australia expectedly held its monetary policy stance steady including leaving its benchmark interest unchanged at 1.50%. Mainland Chinese stocks and listings in Hong Kong fell, despite a report by Caixin showing growth in output in the nation's key services sector accelerated. Meanwhile, markets in India declined modestly and stocks in South Korea were slightly higher. The markets have shown some signs of pausing from this year's strong global rally that has been fueled by the broadest economic growth in a decade, which Schwab's Jeffrey Kleintop, CFA, says is expected to continue in 2018 as discussed in his article, 5 Reasons Investors Should Give Thanks.

Reports from around the globe tomorrow will include GDP from Australia, manufacturing orders from Germany and CPI from Switzerland.

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