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Wednesday, December 13, 2017

Stocks Mostly Advance Amid Fed Hike and Tentative Tax Deal

Charles Schwab: On the Market
Posted: 12/13/2017 4:15 PM EST

Stocks Mostly Advance Amid Fed Hike and Tentative Tax Deal
U.S. stocks traded mostly higher mid-week as the Federal Reserve expectedly increased its federal funds rate target range and recent headlines suggest that legislators have reached a tentative agreement on a final tax bill with full House and Senate votes expected to be held next week. Treasury yields declined despite the Fed decision and the U.S. dollar lost ground on the heels of a cooler-than-forecasted core consumer price inflation reading. Crude oil prices were lower and gold ticked higher. Shares of Finisar surged after receiving an investment from Dow member Apple. 

The Dow Jones Industrial Average (DJIA) increased 81 points (0.3%) to 24,585, the S&P 500 Index ticked 1 point lower to 2,663, and the Nasdaq Composite advanced 13 points (0.2%) to 6,876. In moderate volume, 874 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.54 to $56.60 per barrel and wholesale gasoline lost $0.05 to $1.65 per gallon. Elsewhere, the Bloomberg gold spot price moved $10.93 higher to $1,255.43 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 93.46.

VeriFone Systems Inc. (PAY $18) reported Q4 earnings-per-share (EPS) of $0.03, or $0.44 ex-items, versus the $0.43 FactSet estimate, as revenues rose 2.6% year-over-year (y/y) to $477 million, compared to the projected $472 million. The payment transaction device company issued Q1 and 2018 EPS guidance that missed expectations. PAY also announced the sales of its Taxi business and a new $100 million share repurchase program. Shares were solidly lower.

Finisar Corp. (FNSR $24) jumped after Dow member Apple Inc. (AAPL $173) announced it will invest $390 million into the manufacturer of optical communications components. AAPL said the investment is part of its Advanced Manufacturing Fund and will enable Finisar to increase its production of vertical-cavity surface-emitting lasers (VCSELs) that power some of Apple's new features, including Face ID, Animoji, and Portrait mode selfies. AAPL traded higher.

Honeywell International Inc. (HON $156) reported that it expects Q4 EPS to be at the high end of its previous guidance, while issuing a 2018 profit outlook that had a midpoint below expectations as it executes its previously-announced restructuring plans that include spinning off a couple business units. HON gained ground.

Eli Lilly and Company (
LLY $88) issued 2018 EPS guidance with a midpoint slightly above the Street's expectations, while noting that in 2018 it expects continued product pipeline progress, including U.S. regulatory action for some of its experimental treatments. Shares traded higher.

Fed raises target range as expected, consumer price inflation report mixed

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, voting seven to two to increase the target range for the federal funds rate by 25 basis points (bps) to 1.25-1.50%, a move that was widely expected. The Committee noted that it expects "with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong." The Fed also updated its economic projections, increasing its GDP annual growth estimate to 2.5% from September's forecast of 2.1% and Janet Yellen held her final press conference as the Fed Chair. For in depth analysis of the Fed’s decision look for commentary later today from Schwab's Senior Fixed Income Research Analyst, Collin Martin, CFA, on the Market Commentary page and see Schwab's article, Fed Rate Hike: What Does It Mean for Your Portfolio.

As noted in the latest Schwab Market Perspective: The Big Picture Heading into 2018, uncertainty is elevated as the Fed faces several changes in 2018 but recent comments from incoming Fed Chief Jerome Powell suggest continuity and transparency are priorities. However, if inflation should flare up, or growth start to lag, the Fed may be challenged early in the new regime.

The Fed's decision will be followed by tomorrow's fully-loaded economic calendar, expected to show jobless claims remain at low levels, import prices nudged higher, business activity continued to grow solidly per Markit, business inventories dipped, and retail sales accelerated as the holiday season rolls on. The retail sales data will likely carry the most weight, given heavy impact of the U.S. consumer on economic output as we head into 2018.

The Consumer Price Index (CPI) (chart) rose 0.4% month-over-month (m/m) in November, matching the Bloomberg estimate, while October's 0.1% rise was unrevised. The core rate, which strips out food and energy, was 0.1% higher m/m, compared to expectations to match October's unrevised 0.2% increase. Y/Y, prices were 2.2% higher for the headline rate, in line with forecasts and following October's unrevised 2.0% rise. The core rate was up 1.7% y/y, versus projections to match October's unadjusted 1.8% increase.

The MBA Mortgage Application Index decreased 2.3% last week, following the prior week's 4.7% gain. The decline came as a 2.5% drop in the Refinance Index accompanied a 1.1% decrease in the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.20%.

Treasuries finished higher, with the yields on the 2-year note and the 30-year bond dipping 5 bps to 1.77% and 2.73%, respectively, and the yield on the 10-year note decreasing 6 bps to 2.35%. The yield on the 10-year note retreated after reaching the high end of its recent range and the U.S. dollar dipped after a run as of late following the inflation report, while the stock markets continue to notch record highs.

In her video, What Could Fixed Income Investors Expect in 2018?, Schwab's Chief Fixed Income Strategist Kathy Jones offers three reasons we think investors might want to be a bit more cautious about where they look for yield in 2018. As noted in our 2018 Schwab Market Outlook: Executive Summary, we anticipate solid growth 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.

As the tax reform reconciliation process continues, recent headlines suggest that the House and Senate negotiators have reached a tentative deal on a final tax bill. Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of this process and 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.

Europe declines and Asia mixed ahead of Fed decision

European equity markets finished mostly lower, with the markets treading cautiously ahead of today's Fed monetary policy decision, which will be followed by tomorrow's decisions from the European Central Bank and Bank of England. Also, some key Chinese economic data loomed on the horizon, while tax reform and the Alabama Senate election results in the U.S. garnered attention. The euro and British pound traded higher versus the U.S. dollar and bond yields in the region were mixed. In economic news, German consumer price inflation rose in line with expectations, eurozone industrial production unexpectedly increased, and U.K. employment change declined more than expected.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his, 2018 Global Market Outlook: Three Actions to Take for the Year Ahead, in which he says stay invested: with 2018 global stock market gains potentially being in the double-digits and go global: as international stocks may outperform U.S. stocks in 2018. Jeff also urges investors to rebalance: with rebalancing back to target allocations important as 2018 gains in stocks may result in a higher risk asset allocation ahead of a potential recession and bear market.

Stocks in Asia finished mixed, with tax reform reconciliation and the Alabama Senate election results in the U.S. garnering attention, while the markets awaited today's Fed monetary policy decision. Japanese equities declined, with the yen gaining solid ground and despite a stronger-than-expected rebound in machine orders—a gauge of capital investment—for October. Stocks trading in mainland China and Hong Kong advanced, led by strength in the banking sector and ahead of some key economic data due out tonight. Australian securities ticked higher and South Korean shares increased, while Indian equities declined amid some weakness in the financial sector. Schwab's Jeffrey Kleintop, CFA, offers a look at the global markets, which have rallied this year due to the broadest economic growth in a decade, in his article, 5 Reasons Investors Should Give Thanks.

In addition to the aforementioned central bank decisions, tomorrow's stacked international economic docket will yield industrial production and capacity utilization from Japan, retail sales and industrial production from China, consumer inflation expectations and employment data from Australia and wholesale prices from India. Releases from across the pond will include Markit Manufacturing and Services PMIs from the U.K., Germany, France and the eurozone, while the U.K. will also report retail sales.

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