Stocks Rally as Bulls Come Charging Back

Charles Schwab: On the Market

Posted: 11/16/2017 4:15 PM EST

Stocks Rally as Bulls Come Charging Back

 

U.S. stocks rallied during Thursday's trading session, bouncing back from a two-day slide as European shares also snapped a string of losses. Favorable earnings reports from Dow members Wal-Mart and Cisco Systems, along with upbeat industrial production and homebuilder sentiment reads aided in boosting equity gains. Treasury yields rebounded and the U.S. dollar ticked slightly higher, along with gold, while crude oil prices were lower. 

The Dow Jones Industrial Average (DJIA) advanced 187 points (0.8%) to 23,458, the S&P 500 Index jumped 21 points (0.8%) at 2,586, and the Nasdaq Composite rallied 87 points (1.3%) to 6,793. In moderate volume, 776 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.19 to $55.14 per barrel and wholesale gasoline was $0.03 lower at $1.71 per gallon. Elsewhere, the Bloomberg gold spot price ticked $0.59 higher to $1,278.66 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—advanced 0.1% to 93.93.

Dow member Wal-Mart Stores Inc. (WMT $100) reported Q3 earnings-per-share (EPS) of $0.58, or $1.00 ex-items, versus the $0.97 FactSet estimate, as revenues rose 4.2% year-over-year (y/y) to $123.2 billion, above the projected $121.1 billion. Q3 same-store sales at Walmart grew 2.7% y/y, topping the expected 1.9% gain. The company raised its Q4 EPS outlook and issued same-store sales guidance that was slightly above expectations. Shares traded sharply higher.

Dow component Cisco Systems Inc. (CSCO $36) posted fiscal Q1 earnings of $0.48 per share, or $0.61 ex-items, with revenues decreasing 2.0% y/y to $12.1 billion, roughly in line with expectations. CSCO issued Q2 guidance that exceeded forecasts. Shares rallied.

Best Buy Co. Inc. (BBY $55) announced Q3 EPS of $0.78, matching projections, as revenues rose 4.2% y/y to $9.3 billion, below the expected $9.4 billion. Q3 same-store sales increased 4.4% y/y, below the forecasted 4.9%. BBY issued Q4 earnings guidance that was below estimates, while its sales outlook was mostly in line with expectations. The company raised its full-year guidance. Shares fell.

Homebuilder sentiment and industrial production top forecasts

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month unexpectedly improved to an eight-month high of 70, versus the Bloomberg forecast calling for a dip to 67 from October's unrevised 68 level. The index sits decisively above the 50 mark, the point of separation for good versus poor conditions. The NAHB said builder confidence is close to a post-recession high—a strong indicator that the housing market continues to grow steadily—but its members still face supply-side constraints, such as lot and labor shortages and ongoing building material price increases.

Tomorrow, the economic calendar will bring a look at housing construction activity in the form of housing starts and building permits, with starts projected to rise 5.6% month-over-month (m/m) to an annual rate of 1,190,000 units and permits expected to increase 2.0% to a 1,250,000 unit rate. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest, Schwab Sector Views: 'Tis the Season…Almost, mortgage demand appears to be healthy, while interest rates continue to be relatively low and the high rental rates in some areas of the country provide incentive for home buying.

Industrial production (chart) rose 0.9% month-over-month (m/m) in October, above estimates of a 0.5% gain, after September's upwardly revised 0.4% increase. Manufacturing and utilities production both grew solidly, while mining output dropped. Capacity utilization rose to 77.0% from the prior month's upwardly revised 76.4% rate, and compared to forecasts of 76.3%. Capacity utilization is 2.9 percentage points below its long-run average. Industrial production has gained 2.9% over the past 12 months, and Schwab's Chief Investment Strategist Liz Ann Sonders notes that capex may be in for an even sharper recovery in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle. 

Weekly initial jobless claims (chart) surprisingly rose by 10,000 to 249,000 last week, versus the Bloomberg forecast of a decrease to 235,000, with the prior week’s figure being unrevised at 239,000. The four-week moving average grew by 6,500 to 237,750, while continuing claims fell 44,000 to 1,860,000, south of estimates of 1,900,000.

The Philly Fed Manufacturing Index (chart) in November declined more than expected to 22.7 from 27.9 in October, but a reading above zero indicates expansion. This compared to estimates of a decline to 24.6.

The Import Price Index (chart) rose 0.2% m/m for October, below projections of a 0.4% gain, following September's upwardly revised 0.8% rise. Compared to last year, prices were up by 2.5%, in line with forecasts and compared to September's unrevised 2.7% increase.

Treasuries finished lower, with the yield on the 2-year note gaining 3 basis points (bps) to 1.71%, the yield on the 10-year note increasing 5 bps to 2.37%, and the 30-year bond rate advancing 6 bps to 2.82%.

Treasury yields and the U.S. dollar rebounded somewhat from recent pressure that came from a flare-up in global risk aversion on the heels of the world stock market rally as of late. Festering U.S. tax reform uncertainty—today the House passed its bill to overhaul the tax code, which has some significant differences from the Senate's version—has fostered the change in conviction. This has countered a relatively positive economic landscape, while recent soft Chinese economic data and market skittishness as the yield curve has flattened have exacerbated sentiment. As such, 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.

Tomorrow's domestic docket will also yield the November Kansas City Fed Manufacturing Index, forecasted to dip to 21 from 23 in October, though a reading above 0 indicates growth in activity.

Europe recovers on data, Asia rebounds from recent slide

European equity markets traded higher, rebounding from the recent string of losses that has come from an apparent change in global sentiment to de-risking, while disappointing Chinese economic data as of late has weighed on commodity-related stocks. Some upbeat earnings data in the region teamed up with a rebound in eurozone new car registrations to support the recovery in the markets, while the energy sector remained under pressure as crude oil prices extended a recent selloff. Eurozone consumer price inflation rose in line with forecasts. The euro declined versus the U.S. dollar and the British pound rose following a better-than-expected U.K. retail sales report, while bond yields in the region finished mixed. Gains for Italian stocks and Europe's financial sector were limited by a drop in shares of Italy's banks. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, momentum favors the bulls for the foreseeable future, but elevated valuations and growing investor complacency pose risks that could lead to a long-awaited pullback and/or a pickup in volatility from today’s extremely low base.

Asian stocks mostly rebounded from the recent pullback, with the yen giving back some of its gains seen as of late as the global markets have stumbled amid a flare-up in risk aversion, while overnight stabilization in crude oil prices helped the energy sector recover somewhat. Japanese equities rallied, while Australian securities were also higher, with a softer-than-expected read on the nation's employment growth limiting gains. Mainland Chinese shares dipped and stocks trading in Hong Kong advanced with the recent soft economic data being met with some upbeat earnings results. Indian equities gained ground and South Korean shares advanced. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers a look at the global market rally seen this year that has been fostered by the broadest economic growth in a decade in his latest article, 5 Reasons Investors Should Give Thanks.

International economic releases for tomorrow will be light, with new vehicle sales from Australia and the current account and construction output from the Eurozone.

Stocks Shrug Geopolitics, Domestic Data

Charles Schwab: On the Market

Posted: 4/17/2017 4:15 PM ET

Stocks Shrug Geopolitics, Domestic Data

U.S. equities finished higher on the day, apparently dismissing political uncertainty of late, as well as lackluster domestic economic data. Manufacturing and housing data came in below expectations, which followed softer-than-anticipated consumer inflation and retail sales reports while the markets were closed on Good Friday. Elsewhere, Treasuries were mixed, while gold, the U.S. dollar and crude oil prices fell.

The Dow Jones Industrial Average (DJIA) rose 184 points (0.9%) to 20,637, the S&P 500 Index gained 20 points (0.9%) to 2,349, and the Nasdaq Composite increased 52 points (0.9%) to 5,857. In moderate volume, 704 million shares were traded on the NYSE and 1.4 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.53 to $52.65 per barrel and wholesale gasoline was $0.01 lower at $1.72 per gallon. Elsewhere, the Bloomberg gold spot price declined $2.91 to $1,282.78 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.3% at 100.31.

Shares of Eli Lilly and Co. (LLY $83) and Incyte Corp. (INCY $125) fell after their treatment for rheumatoid arthritis was rejected by the U.S. Food and Drug Administration (FDA). The FDA said in a letter that it is unable to approve the application in its current form and indicated clinical data are needed to determine the most appropriate doses. Both companies said they disagree with the FDA's conclusions and the timing of a resubmission will be based on further discussions with the agency. LLY reaffirmed its 2017 financial guidance and INCY said it is evaluating the impact on its previously-issued R&D expenses guidance for 2017.

Arconic Inc. (ARNC $27) announced that Chairman and Chief Executive Officer (CEO) Klaus Kleinfeld has stepped down, and David Hess will serve as Interim CEO, while Patricia Russo was appointed to serve as Interim Chair. The company said Kleinfeld stepped down by mutual agreement after the Board learned that amid a proxy fight, without consultation with or authorization by the Board, he had sent a letter directly to a senior officer of Elliot Management that the Board determined showed poor judgement. The company added that the decision was not made in response to the proxy fight or Elliot Management's criticisms of its strategy, leadership or performance and is not in any way related to the financials or records of the company. Shares were modestly higher.

Homebuilder sentiment and regional manufacturing slip more than expected

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month declined to 68 from 71 in March, which was the highest level since June 2005, and compared to the Bloomberg expectation of a dip to 70. A 50 mark separates good and poor conditions. The NAHB said even with this month's modest drop, builder confidence is on very firm ground, and builders are reporting strong interest among potential home buyers. However, builders are facing several challenges, such as hefty regulatory costs and ongoing increases in building material prices.

Along with earnings season ramping up, tomorrow's economic calendar will bring a look at housing construction activity in the form of housing starts and building permits. Starts are projected to decline 3.0% month-over-month to an annualized rate of 1,250,000 units, while permits are forecasted to rise 2.8% to an annual rate of 1,250,000 units.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his recent Schwab Sector Views: Housing—Building Bubble or Growing Trouble?, for now, we believe the housing market is a modestly positive contributor to overall U.S. economic activity. Although prices have risen, the lack of new building means that there hasn't been a surge of activity in housing that could give a real jolt to housing. At this point, we aren't overly concerned about a bubble building. Read more, as well as Brad's views on other sectors on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

The Empire Manufacturing Index showed output from the New York region fell more than expected but remained in expansion territory (a reading above zero) for April. The index dropped to 5.2 from March's unrevised 16.4 level, with the Bloomberg forecast calling for a 15.0 reading.

Treasuries finished mixed, as the yield on the 2-year note declined 2 basis points (bps) to 1.19%, while the yields on the 10-year note and the 30-year bond rose 2 bps to 2.25% and 2.91%, respectively.

Bond yields and the U.S. dollar have come under pressure recently amid flared-up geopolitical concerns, President Donald Trump's comments that he thought the greenback was getting "too strong," and some cooler-than-expected inflation data.

For a look at the moves in the bond markets, see Schwab's Senior Fixed Income Research Analyst, Collin Martin's, CFA, latest article titled, What Investors Should Know About the High-Yield Bond Rally on the Markets & Economy page at www.schwab.com, along with Collin's and Vice President of Trading and Derivatives, Randy Frederick's video Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?. Randy and Schwab's Chief Fixed Income Strategist, Kathy Jones also discuss, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond. See these and other videos at the Insights & Ideas page on www.schwab.com. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

As noted in the latest Schwab Market Perspective: Reassessing Risk and Reflation, investors appear to be shying away from risk, resulting in a pullback in stocks. We view this as temporary, although patience will be required and sharper downturns could occur within the ongoing bull market. "Hard" economic data hasn't accelerated to the same degree as "soft" data (confidence/survey-based), and some convergence is expected. Political and geopolitical uncertainty abounds, while the Fed has begun to address the slow draining of its balance sheet. Global earnings have aided stock market gains, but the expectations bar is getting higher to hurdle. The next several weeks should show whether gains will persist or if expectations may have gone too far. Read more on the Markets & Economy page at www.schwab.com.

In addition to tomorrow's housing data, the Federal Reserve's industrial production and capacity utilization report is slated for release, with production expected to show a 0.4% m/m increase during March, while utilization is forecasted to have moved higher to 76.2%.

Asia mixed as many international markets remained closed

Stocks in Asia finished mixed amid heightened geopolitical concerns after another missile test by North Korea, while European markets remained closed for the Easter holiday, along with those in Hong Kong and Australia. The yen continued to gain ground amid the elevated uneasiness, likely limiting gains in Japan as stocks ticked only slightly higher. Chinese economic data is in focus as the nation reported that its 1Q GDP grew at a 6.9% year-over-year (y/y) pace, from the 6.8% expansion posted in 4Q, where it was expected to remain. Also, China's retail sales, industrial production and fixed asset investment all topped expectations, but mainland Chinese shares declined. China's markets were hampered by the heightened North Korean tensions and exacerbated concerns about further regulatory crackdowns on the markets. For more on China, see Schwab's Director of International Research Michelle Gibley's, CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017) at www.schwab.com/oninternational. Stocks in South Korea rose modestly, while those traded in India fell. For a look at the global trade landscape, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Top Five Trade Issues Investors Should Be Watching. Read both these articles on the International Investing page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.