Tech Earnings Power Market Gains

Charles Schwab: On the Market

Posted: 10/27/2017 4:15 PM EDT

Tech Earnings Power Market Gains

 

U.S. equities finished out the week higher, as technology issues jumped on a number of favorable earnings reports, including Google's parent Alphabet and Dow members Microsoft and Intel. Meanwhile, the consumer discretionary sector got a boost from Amazon's strong report. Treasury yields were lower, with Fed leadership uncertainty overshadowing favorable reads on Q3 GDP and consumer sentiment. Crude oil and gold prices were higher, and the U.S. dollar added to its recent run. 

The Dow Jones Industrial Average (DJIA) rose 33 points (0.1%) to 23,434, the S&P 500 Index increased 21 points (0.8%) to 2,581, while the Nasdaq Composite soared 145 points (2.2%) to 6,701. In moderate-to-heavy volume, 892 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.26 to $53.90 per barrel and wholesale gasoline gained $0.02 to $1.72 per gallon. Elsewhere, the Bloomberg gold spot price rose $5.98 to $1,272.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 94.87. Markets were nicely higher for the week, as the DJIA increased 0.5%, the S&P 500 Index gained 0.2% and the Nasdaq Composite advanced 1.1%.

Amazon.com Inc. (AMZN $1,101) reported Q3 earnings-per-share (EPS) of $0.52, well above the $0.07 FactSet estimate, as revenues rose 34.0% year-over-year (y/y) to $43.7 billion, topping the expected $41.6 billion. The results included the contribution from its recent acquisition of Whole Foods. AMZN issued Q4 revenue guidance with a midpoint below expectations. Shares rallied.

Google parent Alphabet Inc. (GOOGL $1,034) posted Q3 EPS of $9.57, exceeding the projected $8.35, with revenues excluding traffic acquisition costs (TAC) growing 21.9% y/y to $22.3 billion, north of the forecasted $21.9 billion. Shares were decisively higher.

Dow member Microsoft Corp. (MSFT $84) announced fiscal Q1 earnings of $0.84 per share, versus the expected $0.71, as revenues rose 12.0% y/y to $24.5 billion, above the projected $23.5 billion. Shares were solidly higher.

Dow component Intel Corp. (INTC $44) reported Q3 EPS of $0.94, or $1.01 ex-items, compared to the forecasted $0.80, with revenues rising 2.0% y/y to $16.1 billion, topping the expected $15.7 billion. INTC issued Q4 guidance that bested estimates, while it raised its full-year outlook. INTC moved solidly higher.

With the flurry of key earnings reports from the tech sector, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of our outperform rating we have held for some time on the group in his latest, Schwab Sector Views: Technology Trick or Treat?. Brad notes that the technology sector’s strong run could continue, with improving global growth prospects and continued high consumer confidence providing support. But risks for the sector have risen and investors should be careful not to get overly concentrated in the tech sector.

Dow member Merck & Co. Inc. (MRK $58) posted a Q3 loss of $0.02 per share, or a profit of $1.11 per share ex-items, compared to the estimated $1.03, as revenues declined 2.0% y/y to $10.3 billion, below the forecasted $10.5 billion. MRK increased its full-year guidance. Shares of MRK came under heavy pressure.

Dow component Exxon Mobil Corp. (XOM $84) announced Q3 EPS of $0.93, north of the expected $0.86, on revenues of $66.2 billion, versus the projected $62.8 billion. Shares are ticked higher.

Dow member Chevron Corp. (CVX $114) achieved Q3 earnings of $1.03 per share, while excluding one-time items reflecting asset sales and write offs, EPS was $0.85, but it is unclear if it is comparable to the anticipated $0.98. Revenues were $36.2 billion, versus the forecasted $34.5 billion. Shares were lower.

First read on Q3 GDP tops forecasts, consumer sentiment remains at 13-year high

The first look (of three) at Q3 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 3.0%, after the unrevised 3.1% expansion in Q2, and above the 2.6% growth forecasted by Bloomberg. Personal consumption gained 2.4%, topping forecasts of a 2.1% rise and following the unadjusted 3.3% increase recorded in Q2.

Private inventory investment, nonresidential fixed investment, exports and federal government spending joined personal consumption to contribute to the stronger-than-expected growth, and more than offset negative contributions from residential fixed investment, as well as state and local government spending.

On inflation, the GDP Price Index came in at a 2.2% rise, well above expectations of a 1.7% gain and the unrevised 1.0% increase seen in Q2, while the core PCE Index, which excludes food and energy, moved 1.3% higher, matching expectations, and following the unadjusted 0.9% advance in Q2.

The GDP report suggests that business capital spending (capex) continues to gain steam and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle, that an even sharper recovery could be in the cards for 2018, while tax reform—if we get it—would be an additional kicker. She adds that the pick-up in capex is a relatively new bright spot for the U.S. economy; and in 2018 it will likely be a shining characteristic of the latter innings of an economic expansion.

The final October University of Michigan Consumer Sentiment Index (chart) was revised lower to 100.7, matching forecasts, from the preliminary level of 101.1. The index was up solidly versus September's level of 95.1 and sits at a level not seen since January 2004. Compared to last month, the expectations and current conditions components of the survey both improved decisively. The 1-year inflation outlook fell to 2.4% from September's 2.7% rate, and the 5-10 year forecast remained at 2.5%.

Treasuries were higher as the data was met with Fed leadership speculation, as the yield on the 2-year note dropped 3 basis points (bps) to 1.60%, while the yields on the 10-year note and the 30-year bond fell 4 bps to 2.42% and 2.93%, respectively.

The U.S dollar continues to climb, bolstered by global economic and earnings optimism, along with the euro's extended drop following yesterday monetary policy decision by the European Central Bank and relative optimism of U.S. tax reform as it appears to be nudging down the long road to fruition.
Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Vice President of Trading and Derivatives, Randy Frederick, discuss tax reform in the video, Where Does Tax Reform Stand?, while Chief Fixed Income Strategist, Kathy Jones delivers the video with Randy about Should a Change in Fed Leadership Matter to Investors?.

Europe mixed on data and Spanish political turmoil, Asia higher

European equity markets finished mixed, with global earnings optimism rising in the wake of the host of upbeat results from U.S. tech sector heavyweights. Also, a positive global economic backdrop was bolstered by the stronger-than-expected U.S. Q3 GDP growth. The euro added to yesterday's drop that came courtesy of the European Central Bank's monetary policy decision to cut and extend its stimulus measures, which appeared to foster a dovish takeaway. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the global monetary policy front in his article, How the Shift by Central Banks May Affect the Stock Market, and talks with Randy Frederick in the video about Is An Optimistic Outlook for Global Equities Warranted?. The British pound also saw some pressure as Brexit uncertainty lingered, while bond yields in the region traded mixed. Spanish stocks fell amid ramped up political uncertainty as tensions with Catalonia remain elevated, with the Catalan parliament declaring independence from Spain.

Stocks in Asia finished mostly higher following the flood of upbeat earnings reports out of the U.S. tech sector after yesterday's close, while the markets continued to digest the dovish takeaway from the European Central Bank's monetary policy decision to trim and extend its stimulus measures. Japanese equities rallied to extend their recent run to highs not seen since 1996, with the yen losing ground and a report showing the nation's consumer price inflation rose in September. Improved global earnings sentiment helped lift mainland stocks in China and Hong Kong, while those traded in South Korea also gained solid ground. However, markets in Australia declined amid flared-up political uncertainty after Prime Minister Turnbull lost his parliamentary majority, and securities in India finished flat. Schwab's Liz Ann Sonders discusses with Randy Frederick in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?.

Stocks grind out another positive week

Stocks managed to squeak out a seventh-straight weekly gain, with upbeat Q3 GDP, durable goods, new home sales, and business activity reports preserving global economic optimism, though action was choppy as a ramped-up earnings season fostered mixed responses. The technology sector was a standout winner, buoying the markets amid a glut of positive earnings reports from heavyweights in the group, while telecommunications and healthcare issues fell solidly, bogged down by AT&T Inc's (T $34) results and guidance from Celgene Corp. (CELG $97). Energy stocks dipped as Dow member Chevron's results appeared to fail to live up to lofty expectations for the sector and offset the continued climb in crude oil prices. With earnings season more than half way done, of the 273 S&P 500 companies that have reported, 68% have topped revenue forecasts and 79% have bested profit projections, per data compiled by Bloomberg. Treasury yields climbed to support financials amid the improved economic sentiment, which also helped the U.S. dollar extend a rally, along with the euro tumbling in the wake of a seemingly dovish takeaway from the European Central Bank's monetary policy decision.

Next week, earnings season will remain robust, but a fully-loaded economic calendar will likely go a long way in shaping market direction, headlined by the midweek Federal Open Market Committee (FOMC) monetary policy decision, the ISM Manufacturing and non-Manufacturing Indexes, monthly auto sales, and the nonfarm payroll report. Other releases that deserve a mention include: personal income and spending, Consumer Confidence, Q3 nonfarm productivity and labor costs, the trade balance, and factory orders.

As noted in the latest Schwab Market Perspective: Stocks Aren't so Spooky, along with new records being set by stocks, investor sentiment measures are showing widespread optimism; yet households’ exposure to equities is not at an extreme. We believe the bull market will continue, and suggest investors remain at their target allocations, but worry a bit about complacency. Third quarter earnings season has been solid so far and economic growth has picked up. But the pick of the next Fed chair could cause an uptick in volatility. Globally earnings have been strong as well and are helping to support stocks, but geopolitical and trade issues could cause some consternation.

International reports due out next week to keep an eye on include: Australia—trade balance, building approvals and retail sales. China—Manufacturing and non-Manufacturing PMIs. India—Manufacturing and Services PMIs. Japan—retail sales, household spending, industrial production, and the Bank of Japan monetary policy decision. Eurozone—Q3 GDP and consumer price inflation, along with German unemployment change. U.K.—Bank of England monetary policy decision.

Financial Review

Boring Record Highs

Sinclair Noe — October 16, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

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DOW + 85 = 22,956
SPX + 4 = 2557 (Record)
NAS + 18 = 6624 (Record)
RUT + 0.02 = 1502
10 Y + .03 = 2.31%
OIL + .42 = 51.87
GOLD – 8.80 = 1295.50

Cryptocurrency

• Number of Currencies: 879
• Total Market Cap: $172,368,733,175
• 24H Volume: $5,079,040,463

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	5,630.4	$93.83B	$2.02B	39.87%	1	-2.33%	+17.30%
	Ethereum	ETH	328.70	$31.21B	$653.51M	12.87%	0.0580434	-1.70%	+10.33%
	Ripple	XRP	0.25810	$9.99B	$992.48M	19.54%	0.00004592	+0.47%	+4.45%
	Bitcoin Cash	BCH	310.19	$5.19B	$111.39M	2.19%	0.0549922	-1.29%	-5.04%
	Litecoin	LTC	62.630	$3.34B	$196.10M	3.86%	0.0110818	-3.23%	+24.30%
	Dash	DASH	302.36	$2.31B	$38.49M	0.76%	0.0536745	+0.12%	+5.98%
	NEM	XEM	0.22402	$2.04B	$14.73M	0.29%	0.00004015	+0.88%	+11.51%
	Monero	XMR	94.51	$1.44B	$32.29M	0.64%	0.0167811	-1.26%	+9.31%
	NEO	NEO	28.205	$1.41B	$31.54M	0.62%	0.00498581	-0.87%	-3.03%
	BitConnect	BCC	195.007	$1.40B	$14.05M	0.28%	0.0345448	+1.17%	+21.68%

This year, the S&P 500 index has hit records on almost four dozen different occasions, with the single biggest drop from the latest record amounting to less than 3 percent. More than $3.2 trillion of market value has been added to U.S. equities, and volatility is at an all-time low. With the S&P already up, 14 percent so far this year, investors are looking to justify the relatively high valuation of stocks through the earnings.

The S&P 500 hasn’t experienced a decline of at least 3% since Nov. 7, 2016. That 237-day span registers as the second-longest period without a single-session drop of that magnitude since the 241 days from Jan. 26, 1995 to Jan. 9, 1996 – so, if we make it to next Wednesday without breaking down – this will officially become the most boring stock market of all time. The VIX index is reflecting that complacency, hovering around levels last seen in 1993. Just a reminder – the absence of risk doesn’t mean the elimination of risk.

Asian shares rallied to a decade high after figures showed China’s producer prices beat market expectations to rise 6.9 percent in September from a year earlier, suggesting the Chinese economy is growing much faster than expected. Upbeat data from China came before the Communist Party Congress on Wednesday and third-quarter economic data on Thursday. Japan’s Nikkei climbed to a level not seen since 1996.

Wide-ranging comments from Trump on tax cuts and health-care reforms following a luncheon meeting with Senator Majority Leader Mitch McConnell did not move the market. However, both issues are critical for the market as lower taxes are as crucial to supporting a continued rally in stocks. The House is on recess this week, and when it returns, it will have just 28 days left on its calendar to tackle issues including taxes and funding the government.

Trump also told reporters he is looking at reforming the welfare system. The White House began circulating a draft order in late September, calling on agencies to review regulations and propose new rules that conform to a broad set of principles, streamline or eliminate duplicative services, set metrics to measure accountability and create greater cooperation with state and local governments.

Trump’s proposed fiscal 2018 budget called for a massive reduction in funding for social safety nets, such as food stamps, Social Security disability insurance benefits, and the Temporary Assistance for Needy Families program. The problem is that there’s very little welfare left to reform. The Temporary Assistance for Needy Families program has a budget of $16 billion, which is unchanged since 1996; even though inflation has reduced its actual value by a third since then.

In 1979, more than 80 percent of families living below the federal poverty line received welfare benefits under the old Aid to Families with Dependent Children program. By 2015, that figure had fallen to just 23 percent. That doesn’t mean poverty has been reduced significantly, just that the states have made it much tougher to get welfare assistance.

Iraqi government forces captured the major Kurdish-held oil city of Kirkuk. The military action was in response to a Kurdish election 3 weeks ago, that called for Kurdish independence. Baghdad refuses to recognize Kurdish control of the area. Iraq is the second-largest producer within the Organization of Petroleum Exporting Countries, pumping most of its 4.47 million barrels a day from fields in the south and shipping it from the Persian Gulf port of Basra.

Kirkuk’s oil fields and deposits inside the adjacent Kurdish region were exporting about 600,000 barrels a day through a Kurdish-controlled pipeline to Turkey. Best estimate is that Iraq taking control in Kirkuk could cut shipments by 450,000 barrels daily until the federal government repairs its own disused pipeline to Turkey or reaches a revenue-sharing deal with the Kurds. Crude oil climbed to a 2-week high intra-day.

The Spanish government has given Catalan leaders until Thursday to drop their push for independence, signaling to could act to strip the Catalonia region of its autonomy if they do not comply. The move came after Catalan President Carles Puigdemont ignored an ultimatum from Madrid to provide a clear answer on whether the region has declared independence.

That lack of response, seen as an act of defiance, has opened the door for the central government to take over control of the region. Meanwhile, Monday night in Spain, 2 Catalan leaders were arrested for investigation of acts of sedition.

Federal Reserve Chair Janet Yellen said that the central bank expects to continue to raise interest rates gradually as solid growth, a strong labor market and a healthy global economy lift prices even as she recognized that inflation has been surprisingly low. Yellen said: “The biggest surprise in the U.S. economy this year has been inflation,” or more specifically the lack of inflation, which according to the Fed’s preferred gauge is running at 1.3%, for the core rate.

Still, it looks more and more that the Fed will raise rates at their December policy meeting. The Fed voted last month to begin unwinding their balance sheet, and Yellen reiterated on Sunday that they do not intend to use that process as an active monetary policy tool.

Here’s a thought – maybe the Fed could keep buying debt for just one more month – they could buy all of Puerto Rico’s debt, probably pick it up for about 30 cents on the dollar, and then just let it fade away on their balance sheet. Just a thought.

After the closing bell, Netflix report earnings of 37 cents per share, topping estimates of 32 cents. Revenue of $2.98 billion just barely beat estimates. But for Netflix, the key number is new subscribers. The company now has about 109.3 million subscribers globally.

Netflix said it added 850,000 subscribers in the U.S., ahead of the 810,000 estimates for the quarter. It boomed internationally, signing up 4.45 million subscribers versus the 3.69 million estimates. The subscription additions were up 49 percent year over year.

It’s official: Nordstrom’s quest to go private is over — at least for now. This morning, the family members who own the department store chain suspended their attempt to sell the company to a private equity firm through the end of the year. The family struggled to raise enough debt to finance the deal. The news sent Nordstrom’s shares down more than 6%, and then the declines rippled throughout the rest of the retailers.

Food services company Aramark said it would buy Avendra LLC, majority owned by Marriott International, and uniform and linen supplier AmeriPride Services for a total of $2.35 billion.

Reuters reports T-Mobile and Sprint plan to announce a merger agreement without any immediate asset sales, as they seek to preserve as much of their spectrum holdings and cost synergies as they can before regulators ask for concessions. The companies are expected to make a merger announcement within the next month.

The Supreme Court agreed to resolve a privacy dispute between the Justice Department and Microsoft over whether prosecutors should get access to emails stored on company servers overseas. The justices will hear the Trump administration’s appeal of a lower court’s ruling last year preventing federal prosecutors from obtaining emails stored in Microsoft computer servers in Dublin, Ireland in a drug trafficking investigation.

The Microsoft dispute is the second that the justices have agreed to hear in their current term that touches upon digital privacy rights. The other case concerns whether police officers need a warrant to access information on the past locations of cell phone users that is held by wireless carriers. Rulings in both cases are due by the end of June.

The Supreme Court also agreed to decide whether American Express is violating federal antitrust law by forbidding merchants that accept its credit cards from encouraging customers to use rival cards that charge lower fees. The justices will hear an appeal by 11 states led by Ohio that had sued American Express of a 2016 lower court ruling that endorsed the legality of the company’s “anti-steering” provisions in contracts with merchants.

Merchants annually pay more than $50 billion in so-called swipe fees to process credit card transactions, and these fees can be passed along to customers through higher prices. American Express charges merchants higher fees relative to the other credit card networks.

Financial Review

Trifecta of Records

Sinclair Noe — October 11, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: Android | RSS

DOW + 42 = 22,872 (Record)
SPX + 4 = 2555 (Record)
NAS + 16 = 6603 (Record)
RUT – 1 = 1506
10 Y un = 2.35%
OIL + .39 = 51.31
GOLD + 3.60 = 1292.10

Cryptocurrency

• Number of Currencies: 874
• Total Market Cap: $156,026,671,244
• 24H Volume: $2,398,072,736

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	4,850.1	$80.49B	$1.21B	50.50%	1	+0.52%	+14.92%
	Ethereum	ETH	304.63	$28.94B	$260.03M	10.84%	0.0628673	+0.41%	+4.26%
	Ripple	XRP	0.26500	$10.32B	$161.04M	6.72%	0.00005519	+0.95%	+20.90%
	Bitcoin Cash	BCH	311.00	$5.22B	$123.95M	5.17%	0.0646502	-0.60%	-12.01%
	Litecoin	LTC	50.900	$2.72B	$56.85M	2.37%	0.0105321	+0.26%	-0.29%
	Dash	DASH	297.00	$2.26B	$26.15M	1.09%	0.0612835	-0.35%	-1.68%
	NEM	XEM	0.21342	$1.93B	$2.68M	0.11%	0.00004419	-0.78%	-0.78%
	NEO	NEO	30.170	$1.51B	$33.17M	1.38%	0.00623998	+0.23%	-0.83%
	IOTA	MIOTA	0.48320	$1.35B	$6.68M	0.28%	0.0001002	+0.33%	-9.64%
	Monero	XMR	87.58	$1.33B	$20.99M	0.88%	0.0181158	+0.12%	-2.62%

The Dow Industrials, S&P 500 and Nasdaq Composite all closed at record highs. With the S&P 500 up 14 percent in 2017, investors are betting on strong earnings growth across the S&P 500. Banks take the focus as JPMorgan Chase and Citigroup report results on Thursday, with analysts warning that results in the sector will largely be held back by low trading volumes compared with a year earlier.

Profits at companies in the S&P 500 stock index are expected to increase by 4.6% in the July-thru-September quarter, once corporations have finished reporting results, according to earnings-tracker Thomson Reuters. That’s a sharp deceleration from the 10%-plus gains in the first two quarters of 2017.

The Federal Reserve released the minutes from their September 20^th FOMC meeting. At that meeting, the Fed decided to begin quantitative tightening, by selling off some of the Treasuries and mortgage backed securities held on their balance sheet; they also left interest rates unchanged.

It is widely expected the Fed will hike rates at the December meeting but the minutes reveal policymakers are a bit skeptical. Inflation is still well below the Fed’s target of 2%. They don’t want to wait until inflation goes flying past 2% but they are also at a loss to explain why inflation remains stubbornly low.

Minutes portray the Fed as roughly divided into three camps. The first, which included “many” Fed officials, thought another increase in interest rates “later this year” was likely to be warranted “if the medium-term outlook remained broadly unchanged.”

The second camp, comprising fewer officials, said they were data-dependent and were looking for “confidence that inflation was moving up.” And the remaining “few” said rate hikes should be deferred until inflation “was clearly on a path toward the Fed’s symmetric 2% objective over the medium term.” Bottom line is that the Fed will probably hike rates in December.

For the “data dependent” camp, they are at a disadvantage. The hurricanes have skewed economic reports on inflation and jobs. The September jobs report showed a loss of 33,000 jobs, breaking an 83-month string of consecutive gains, but today’s JOLT survey shows the labor market remains strong.

The Job Openings and Labor Turnover Survey showed job openings in the country fell slightly to 6.08 million in August from a record 6.14 million in July. Some 5.43 million people were hired and 5.23 million lost their jobs. Job openings declined for most industries, though the biggest drop was in education. Educational employment is always hard to capture at the start and end of school years.

Hurricane Harvey may have also had a negative impact at the end of the month. The quits rate among private-sector employees was unchanged at 2.4%. It slipped a notch to 2.1% if government workers are included. Quitting a job is a positive because people voluntarily quit one job before accepting another, hopefully better job. Many firms complain they can’t find enough skilled workers, but available jobs tend to stay open longer. We still have not seen companies willing to pay more to make a good hire.

If you have a Twitter account, or just follow the news, you know that Trump takes credit whenever the stock market hits a record high. It’s a routine that has played out in 2017. The bull market has been running since mid-2009. Trump had nothing to do with the first 7-1/2 years of that rally.

While there have been times this year when the so-called Trump trade — or the promise of business-friendly policies — has undoubtedly been responsible for the gains, there have also been long stretches when other factors were driving returns.

Earnings growth exploded for the first- and second-quarter reporting periods, which largely occurred in April and July. The S&P 500 saw profit growth of 14% during the first three months of the year and 11% for the second quarter, its best stretch since 2011. Trump had nothing to do with that earnings growth. At some point the bull market will end. If Trump takes credit for the past 9 months, he must also be willing to take the blame when the market inevitably crashes, but you know this is a one-way street.

Today, Trump tweeted: “It would be really nice if the Fake News Media would report the virtually unprecedented Stock Market growth since the election. Need tax cuts.” As a matter of economics, Trump’s tax pitch is nonsensical. “Virtually unprecedented stock market growth” is not a problem for tax cuts to solve. The argument for tax cuts is that they might boost a sluggish economy.

During a recession or depression, tax cuts may provide stimulus to get money circulating through the economy, especially if the tax cuts are directed at the middle class. A tax cut directing half the benefits to the richest percentile is more likely to distort the price action of already extended valuations – something that never ends well.

Republicans have “basically just given up on trying to pay for the tax cuts that they’re going to do. They’re now just trying to figure out what size of tax cut could they pass and how could they put together a coalition of 50 percent plus one. A tax cut now would explode the deficit, at the exact time when the Fed is starting quantitative tightening.

Considering the Fed won’t be the big buyer of all that debt, you could reasonably expect debt prices to tumble, pushing yields much higher and slowing economic growth. And this is a tax plan predicated on dynamic scoring and much faster economic growth. The timing for this tax plan is completely wrong. And that is one reason why Trump is having a hard time trying to sell it.

Japan’s main stock index rose to its highest level in almost 21 years on Wednesday. In large part, Japan’s stronger stock market is part of a global rise in optimism. But Japan has some of its own good news to share. Japan’s gross domestic product has expanded for six consecutive quarters, the first time it has gone that long without a contraction in 11 years.

Unemployment is at multi-decade lows, and corporations are experiencing a surge in profits. Even Japan’s longtime economic bugbear — persistent wage and price deflation — has eased, with both consumer prices and incomes showing modest gains.

Spanish authorities gave Catalonia’s separatist leader five days to explain whether his ambiguous statement on secession was a formal declaration of independence and warned that his answer dictated whether they would apply never-used constitutional powers to curtail the region’s autonomy.

Threatening to invoke a section of the Spanish Constitution to assert control over the region, Prime Minister Mariano Rajoy said Catalan president Carles Puigdemont’s response to the central government’s ultimatum would be crucial in deciding “events over the coming days.”

Puigdemont announced on Tuesday that he was using the victory in a banned Oct. 1 referendum to proceed with a declaration of Catalan independence, but proposed freezing its implementation for a few weeks to allow for dialogue and mediation with the government in Madrid.

Airlines are feeling the impact of a brutal hurricane season. Delta Air Lines said net income fell 6% to nearly $1.2 billion during its July to September quarter, with $120 million of the decline blamed on Hurricane Irma last month. JetBlue Airways, meanwhile, projected that operating income could be affected by as much as $105 million through the end of the year.

Meanwhile, Delta Air Lines pledged not to pay import duties on Bombardier’s jetliner, which was socked in the last two weeks with 300 percent tariffs by the U.S. Commerce Department. It’s possible Delta will delay deliveries of the C Series planes, which are scheduled to begin next year. The airline is also considering “various other plans” if the preliminary duties are finalized, he said without elaborating. Delta last year agreed to buy at least 75 of the jets at a list price of more than $5 billion.

Luxury handbag maker Coach is changing its name to Tapestry. Perhaps they are changing names because they think the new name is a good metaphor, or something – but I think they’re just Carole King fans.

Technology Shares Lead Mild Advance

Charles Schwab: On the Market

Posted: 10/11/2017 4:15 PM EDT

Technology Shares Lead Mild Advance 

 

U.S. stocks finished the trading session higher with technology shares leading the advance, while financials lagged ahead of tomorrow's quarterly results from some key banking sector heavyweights. In economic news, a measure of unmet demand for labor and weekly mortgage applications declined ahead of the afternoon release of the Fed's September meeting minutes. Treasury yields and the U.S. dollar were lower, gold was higher and crude oil prices were mixed. Delta Air Lines and BlackRock topped quarterly earnings expectations and Kroger announced it is exploring strategic options.

The Dow Jones Industrial Average (DJIA) increased 42 points (0.2%) to 22,873, the S&P 500 Index gained 5 points (0.2%) to 2,555, and the Nasdaq Composite added 16 points (0.2%) to 6,604. In moderate volume, 742 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.38 to $51.30 per barrel and wholesale gasoline was $0.02 higher at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price was up $5.21 to $1,293.24 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 92.90.

Delta Air Lines Inc. (DAL $53) reported Q3 earnings-per-share (EPS) of $1.64, or $1.57 ex-items, versus the $1.53 FactSet estimate, as revenues rose 5.5% year-over-year (y/y) to $11.1 billion, compared to the projected $11.0 billion. The company cited challenges from multiple hurricanes and an earthquake in Mexico, but said three of its four entities reported positive unit revenues and it sees continued opportunity in business yields. DAL issued a positive outlook for Q4 passenger revenue. Shares traded higher.

BlackRock Inc. (BLK $474) posted Q3 EPS of $5.78, or $5.92 ex-items, versus the projected $5.57, with revenues growing 14.0% y/y to $3.2 billion, above the expected $3.1 billion. The company noted strong organic asset and base fee growth amid continued growth of its global investment and technology platform. BLK closed higher.

Kroger Co. (KR $21) reaffirmed its 2017 guidance, while announcing plans to redefine its food and grocery customer experience and the exploration of strategic alternatives for its convenience-store business, including a potential sale. Shares finished higher.

Job openings slip from record highs, Fed release's meeting minutes

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, declined to a level of 6.08 million jobs available to be filled in August, from July's downwardly revised record high of 6.14 million jobs. The Bloomberg forecast called for a decrease to 6.13 million. The hiring rate dipped to 3.7% from July's 3.8% pace, and the separation rate declined to 3.6% from the prior month's 3.7% rate.

The MBA Mortgage Application Index declined 2.1% last week, following the prior week's 0.4% dip. The decrease came as a 4.2% drop in the Refinance Index The average 30-year mortgage rate rose 4 basis points (bps) to 4.16%.

At 2:00 p.m. ET, the Federal Reserve released the minutes from its September monetary policy meeting. The information contained in the report showed that labor market conditions continued to strengthen and that real GDP appeared to be moderately rising ahead of Hurricanes Harvey and Irma. The minutes also indicated that many participants thought that another increase in the target range for the federal funds rate before the end of the year "was likely to be warranted if the medium-term outlook remained broadly unchanged." And "all agreed that they would closely monitor and assess incoming data before making any further adjustment to the federal funds rate."

Treasuries were mostly higher, with the yield on the 2-year note flat at 1.51%, while the yields on the 10-year note and the 30-year bond declined 2 bps to 2.34% and 2.87%, respectively.

Bond yields and the U.S. dollar have pulled back somewhat from recent rallies to multi-month highs, with the markets grappling with uncertainty regarding the long road to tax-reform as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend, in his article,  

Tax Reform Framework Released, But The Road Ahead Is Long.

Treasury yields and the greenback have been bolstered by an upbeat global economic backdrop, as well as signs that inflation may be starting to nudge higher, notably the strong wage growth figure of last week's September nonfarm payroll report. As such, the Fed, the Bank of England and European Central Bank have signaled shifts in monetary policy, with the former expected to continue to raise rates in December and begin to shrink its massive $4.5 trillion balance sheet this month.
Inflation has gained more global market attention and Schwab's Chief Investment Strategist Liz Ann Sonders notes that with wage growth picking up and the labor market even tighter, it’s time to put even traditional measures of inflation back on the radar screen in her article, The Waiting: Wage Growth and Inflation Finally Getting in Gear?.

Also, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, points out in his commentary, Inflation May Be The Biggest Question For Investors In 2018, that central banks are behaving as if wages and inflation will revive in the year ahead. If they don’t, and central banks don’t alter their policy path, the global stock markets could be in for a rough 2018. Jeff also discusses, How the Shift by Central Banks May Affect the Stock Market, noting that despite the coming shift by central banks towards trimming/tapering their balance sheets, we don’t believe the bull market is at risk.

Read these articles and other timely commentary from our Schwab experts on the Market Commentary page at www.schwab.com. Follow Liz Ann, Jeff and Schwab on Twitter: @lizannsonders, @jeffreykleintop, and @schwabresearch.

Tomorrow, investors will get a look at some inflation data for the month of September from the Producer Price Index (PPI), with the measure of prices at the wholesale level expected to have increased 0.4% m/m, while excluding food and energy, the core rate is forecasted to have risen 0.2% m/m. Weekly initial jobless claims will also be reported, forecasted to have declined by 10,000 to a level of 250,000 from 260,000 the week prior.

Europe mixed on data and political focus, Asia mostly higher 

European equity markets finished mixed, with Japan's strong machine orders data joining yesterday's larger-than-expected rise in German exports to preserve optimism regarding global economic growth. Spanish stocks rallied amid eased political concerns after yesterday's speech from Catalan President Puigdemont in which he said he would hold off on an immediate declaration of independence for now as he seeks talks with the Spanish government. However, uncertainty remained as Spain's Prime Minister Rajoy held a special session of cabinet that concluded with a formal request to the Catalan government to clarify if independence had been declared. This move by Rajoy is a precursor to triggering Article 155, which could lead to suspension of Catalonia's government. U.K. political and Brexit uncertainties also festered as Prime Minister Theresa May faced questions in parliament today and as the fifth round of complicated Brexit negotiations continue. May stressed that there would not be a second vote on whether to exit the European Union and reiterated that Brexit will happen in March 2019. The euro gained ground on the U.S. dollar and the British pound was flat, while bond yields in the region finished mixed. For analysis, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

Stocks in Asia finished mostly higher following the advance in the U.S. yesterday back to near record high territory. Global economic optimism continues to support the markets, bolstered by today's much stronger-than-expected rise in Japan's core machine orders, which suggested business spending is ramping up. Following the report, Japanese equities rose to their highest level since December 1996, despite some strength in the yen. Australian securities advanced and South Korean shares rallied. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick discuss in the video, Are Investors Underestimating the Stock Market Rally?, on the Insights & Ideas page at www.schwab.com.

Mainland Chinese stocks nudged higher, though those trading in Hong Kong declined amid weakness in property developers amid disappointment regarding a policy address by the government that failed to deliver details on farmland conversion into residential projects which was anticipated, per Bloomberg. Indian equities snapped a three-day winning streak on some caution ahead of earnings season.

The international economic docket for tomorrow will yield PPI from Japan, CPI and industrial production from India, consumer inflation and home loans data from Australia, CPI from France and industrial production for the Eurozone.

Last Week's Record Run Pauses

Charles Schwab: On the Market

Posted: 10/9/2017 4:15 PM EDT

Last Week's Record Run Pauses

 

U.S. equities finished modestly lower, pausing from last week's rally that notched record highs, as investors weighed upbeat global economic sentiment and cautious tax-reform optimism, along with political and monetary policy uncertainties. Volume was lighter than usual with the U.S. economic calendar dormant and the bond markets closed for Columbus Day. The U.S. dollar dipped, while crude oil and gold were higher. News on the equity front focused on Dow member General Electric after announcing a plethora of management changes.

The Dow Jones Industrial Average (DJIA) decreased 13 points (0.1%) to 22,761, the S&P 500 Index fell 5 points (0.2%) to 2,545, and the Nasdaq Composite lost 10 points (0.2%) to 6,580. In light-to-moderate volume, 620 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.29 to $49.58 per barrel and wholesale gasoline was unchanged at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price was up $8.01 to $1,284.69 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 93.66.

Honeywell International Inc. (HON $144) was in focus after a Reuters report that the company is planning on spinning off its non-core assets and creating at least two publicly listed companies, per people familiar with the matter. HON has not commented on the report. Shares were higher.

Dow member General Electric Co. ( GE $23) also garnered attention following late-Friday's announcement that Jamie Miller has been named Chief Financial Officer as Jeffrey Bornstein will leave the company. GE also announced that two additional executives will leave the company and said today that Ed Garden, a founding partner of activist shareholder Trian Fund Management, has been elected to the Board. Shares finished lower.

Bond markets take a break, U.S. dollar pauses ahead of earnings and economic data

The economic calendar was void of any major releases today and the U.S. bond markets were closed in observance of the Columbus Day holiday. The yield on the 2-year note sits at 1.50%, the yield on the 10-year note is at 2.36%, and the 30-year bond rate is at 2.89%. Treasury yields and the U.S. dollar have rebound solidly to multi-month highs amid a continued positive global economic growth backdrop, with signs of inflation ticking higher, while the Fed is highly expected to announce another rate hike in December and begin the process of shrinking its behemoth $4.5 trillion balance sheet this month. This comes as uncertainty festers regarding who will be the next Chairman of the Fed. Also, fiscal policy optimism has nudged higher amid the recently-released tax reform framework, but it faces a long road as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend in his article, Tax Reform Framework Released, But The Road Ahead Is Long.

Inflation will remain in focus this week and the stock markets continue to trade in record high territory. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his commentary, Inflation May Be The Biggest Question For Investors In 2018, and Schwab's Chief Investment Strategist Liz Ann Sonders discusses the stock market's resiliency in her article, Comfortably Numb? An Update on Investor Sentiment. Follow Liz Ann and Jeff on Twitter: @lizannsonders and @jeffreykleintop. Read all these articles and other timely commentary from our Schwab experts on the Market Commentary page at www.schwab.com.

This brings us to this week's plethora of data that could drive volatility, beginning with tomorrow's NFIB Small Business Optimism Index, with economists expecting a reading of 105.4 for September, a slight uptick from August's 105.3 reading. For the rest of the week, the headlining events will be the Producer Price Index (PPI) and Consumer Price Index (CPI), the minutes from the Fed's September meeting, retail sales and the preliminary October University of Michigan Consumer Sentiment Index, as well as the JOLTS Job Openings report. However, the economic front will have to contend with the ramp up of Q3 earnings season, with the financial sector in focus as some banking heavyweights are slated to report.

As noted in the latest Schwab Market Perspective: Fourth Quarter Fun…or Folly?, the resiliency of stocks continues but risks of a pullback exist with signs of investor complacency and heightened political and geopolitical uncertainties. Earnings reporting season begins with elevated expectations and valuations, so the ability to hurdle the bar is getting tougher, but if surprises are biased to the upside, stocks should perform well. But that doesn't mean that there won’t be some Fed-induced volatility in the fourth quarter if inflation begins to kick in in earnest, it could push the Fed to be more aggressive than currently believed. Read more on the Market Commentary page at www.schwab.com.

Europe mostly higher on eased Spanish political concerns, Asia mixed

Most European equity markets finished modestly higher, with Spanish stocks leading to the upside following weekend protests against independence for Catalonia and amid a report from Bloomberg citing a call for dialogue with Spain from a member of the Catalan administration. This comes in the wake of last week's volatility stemming from the independence vote that was deemed illegal by national authorities. However, U.K. stocks saw pressure as the British pound gained ground on an upward revision to the nation's Q2 unit labor costs and as talk of a cabinet reshuffling by U.K. Prime minister Theresa May appeared to foster eased political uncertainty. However, U.K. Brexit negotiations entered a fifth round today as progress has been hard to come by and Brexit uncertainty continues to linger. The euro ticked higher versus the U.S. dollar even as German industrial production rose much more than expected and eurozone investor confidence improved more than projected. Bond yields in the region lost ground.

For analysis of political and Brexit uncertainties, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick. Fed uncertainty continues to fester amid the backdrop of hawkish sentiment toward the European Central Bank and the Bank of England. As such, Schwab's Jeffrey Kleintop, CFA, offers analysis in his article, How the Shift by Central Banks May Affect the Stock Market, on the Market Commentary page at www.schwab.com.

Stocks in Asia finished mixed as the markets digested Friday's noisy U.S. September nonfarm payroll report and a lackluster read on Chinese services sector activity. Caixin's China PMI Services Index declined to 50.6 in September from 52.7 in August, though continued to depict growth due to a reading above 50. Stocks in Hong Kong declined, but those in mainland China gained ground in a return to action following a week-long holiday break, during which optimism ramped up on the announcement that the People's Bank of China will lower the amount banks will have to keep on reserve for next year. Volume was lighter than usual as markets in Japan were closed for a holiday and South Korean markets remained on a holiday break. Stocks in Australia and India advanced. Check out Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's discussion of global investing in the video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page at www.schwab.com.

Tomorrow's international economic calendar will offer business confidence from Australia, trade data from Germany, and industrial and manufacturing production from France, Italy and the U.K.

Markets Add to Record Run

Charles Schwab: On the Market

Posted: 10/3/2017 4:15 PM EDT

Markets Add to Record Run

 

The U.S. equity markets moved further into record territory, as global economic sentiment continued to get a tailwind from yesterday's plethora of upbeat manufacturing reports and favorable September auto sales figures released today. Treasury yields inched lower after a recent rally and the U.S. dollar was little changed, while crude oil prices were mixed and gold was modestly higher.

The Dow Jones Industrial Average (DJIA) increased 84 points (0.4%) to 22,643, the S&P 500 Index was 5 points (0.2%) higher at 2,535, and the Nasdaq Composite advanced 15 points (0.7%) to 6,532. In moderate volume, 724 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.16 to $51.42 per barrel and wholesale gasoline was $0.01 higher at $1.57 per gallon. Elsewhere, the Bloomberg gold spot price rose $0.69 to $1,271.82 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was unchanged at 93.59.

Tesla Inc. (TSLA $348) announced that total Q3 deliveries of vehicles came in above expectations, led by its Model S and X cars, though its Model 3 shipments were well below estimates. The company said Model 3 production was less than anticipated due to production bottlenecks, but it pointed out that there are no fundamental issues with the Model 3 production or supply chain. Shares overcame early weakness and were higher.

Lennar Corp. (LEN $55) reported Q3 earnings-per-share (EPS) of $1.06, above the $1.00 FactSet estimate, as revenues rose 15.0% year-over-year (y/y) to $3.3 billion, topping the forecasted $3.2 billion. The homebuilder said its results were supported by strong demand for homes, low unemployment, favorable interest rates, and increased consumer confidence. LEN is gained solid ground.

The major automakers reported September sales today, with General Motors Co's (GM $43) sales rising 11.9% y/y, compared to FactSet's projected 8.1% increase. Ford Motor Co (F $12) reported an 8.7% rise in sales, versus the expected gain of 1.4%. Fiat Chrysler Automobiles NV's (FCAU $18) Chrysler sales fell 9.7%, compared to the expected 13.4% drop. GM and F were solidly higher, while shares of FCAU dipped.

Treasury yields and U.S. dollar take a breather

Treasuries finished higher, amid an economic calendar void of any major releases today. The yields on the 2-year and the 10-year notes, as well as the 30-year bond, declined 1 basis point (bp) to 1.48%, 2.33%, and 2.87%, respectively.

Treasury yields and the U.S. dollar have seen noticeable increases as of late as the Fed is set to begin to shrink its behemoth $4.5 trillion balance sheet, while signs of an uptick in inflation have joined the backdrop of a tight labor market to boost December Fed rate hike expectations. Global economic growth is widespread and the markets have appeared to become relatively optimistic in the wake of last week's release of the tax reform framework as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend in his latest article, Tax Reform Framework Released, But The Road Ahead Is Long, on the Insights & Ideas page. Follow Schwab on Twitter: @schwabresearch.

The European Central Bank and Bank of England have also signaled moves to tighten monetary policy and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis in his article, How the Shift by Central Banks May Affect the Stock Market, on the Market Commentary page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Meanwhile, the stock market has moved back to record high territory, showing resiliency in the face of a plethora of things to worry about as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her article, Comfortably Numb? An Update on Investor Sentiment, on the Market Commentary page at www.schwab.com. Follow Liz Ann on Twitter: @lizannsonders.

Tomorrow, the economic docket will bring a couple September reads on the key U.S. services sector—the largest contributor to economic output—in the form of the ISM non-Manufacturing Index and Markit's final Services PMI Index. The ISM Index is expected to tick higher to 55.5 from 55.3 in August, while Markit's Index is projected to be unrevised at 55.1, but down from the prior month's 56.0 level. Readings above 50 for both indicate expansion. The consumer drives services sector activity and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, points out that the likelihood of gradually rising short-term interest rates, a continued solid employment picture, and improved wage growth are helping paint a healthy picture. However, he points out some potential negative factors, while providing our current view of the economic cycle that leads us to maintain our neutral stances on the consumer staples and discretionary sectors. You can read this in Brad's latest, Schwab Sector Views: Consumer Staples: More than Meets the Eye on the Market Commentary page at www.schwab.com.

Other reports set for release tomorrow include the ADP Employment Change report, with the measure of private sector jobs expected to decline sharply to a level of 135,000 added for September from the 237,000 posted in August, as well as MBA Mortgage Applications.

Europe ticks higher as Spanish political uneasiness remains, Asia mixed

European equity markets showed some late-day strength to finish mostly higher with yesterday's upbeat global manufacturing data supporting sentiment and overshadowing lingering Spanish political uncertainty in the wake of the weekend's independence vote in Catalonia, which was deemed as illegal. The euro was higher versus the U.S. dollar and bond yields in the region gained ground.

The British pound saw some pressure following a read on construction output, which unexpectedly fell into contraction territory for September, and as Brexit uncertainty festered. For a look at the Brexit process, see our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at www.schwab.com. The pound jumped last month as the Bank of England signaled that a rate hike could happen in the coming months. Schwab's Jeffrey Kleintop, CFA, discusses the shift in monetary policy and points out that Inflation May Be The Biggest Question For Investors In 2018, on the Market Commentary page at www.schwab.com. German markets were closed for a holiday.

Stocks in Asia finished mixed, with global market sentiment continuing to be buoyed by recent upbeat economic data, bolstered by yesterday's favorable manufacturing reports out of the U.S., China, Japan and eurozone. The yen continued to see pressure, helping stocks in Japan finish at a two-year high. Markets rallied in Hong Kong after returning to action following yesterday's holiday, with financials leading the way on the weekend announcement that the People's Bank of China will reduce the amount of cash lenders must hold in reserve. Markets in mainland China and South Korea extended holiday breaks. Listings in India moved to the upside, but Australian securities declined in the wake of the Reserve Bank of Australia's (RBA) expected unchanged monetary policy decision.

However, the markets appeared disappointed by RBA Governor Lowe's remarks after the decision, which provided a mixed outlook to foster policy uncertainty. Amid this backdrop, Schwab's Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick note in the video, Is An Optimistic Outlook for Global Equities Warranted?, all of the world's top 20 economies are growing this year—a rare occurrence over the last decade, underpinning our positive outlook for global earnings. Read more on the Insights & Ideas page at www.schwab.com and follow Randy on Twitter: @randyafrederick.

Similar to the U.S., reads on the all-important services sector will dominate tomorrow's international economic calendar, while other items of note include retail sales from the Eurozone, and the Reserve Bank of India's monetary policy decision, with no change to the nation's interest rates expected.