Stocks Mixed in Subdued Action Ahead of Thanksgiving

Charles Schwab: On the Market

Posted: 11/22/2017 4:15 PM EST

Stocks Mixed in Subdued Action Ahead of Thanksgiving 

 

U.S. stocks were mostly lower, though the Nasdaq was able to tick higher with volume subdued ahead of the Thanksgiving break. In equity action, a flood of mixed earnings reports were highlighted by Deere & Co, while in economic news, a drop in durable goods orders was met with upward revisions to the prior month's solid advance. Treasury yields and the U.S. dollar were lower. Gold and crude oil prices gained ground.

The Dow Jones Industrial Average (DJIA) declined 65 points (0.3%) to 23,526, the S&P 500 Index shed nearly 2 points (0.1%) to 2,597, and the Nasdaq Composite increased 5 points (0.1%) to 6,867. In light volume, 661 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.19 to $58.02 per barrel and wholesale gasoline was unchanged at $1.77 per gallon. Elsewhere, the Bloomberg gold spot price increased $11.02 to $1,291.63 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.7% to 93.28.

Deere & Co. (DE $145) reported Q4 earnings-per-share (EPS) of $1.57, versus the $1.47 FactSet estimate, as equipment sales rose 25.6% year-over-year (y/y) to $7.1 billion, topping the expected $6.9 billion. The company noted improving markets for farm and construction equipment. DE issued earnings guidance for next year that exceeded the Street's forecasts. Shares traded nicely higher.

Hewlett Packard Enterprise Co. (HPE $13) posted Q4 profits of $0.23 per share, or $0.29 ex-items, compared to the projected $0.28, as revenues grew 5.0% y/y to $7.7 billion, north of the estimated $7.3 billion. HPE issued Q1 EPS guidance that missed forecasts. The company announced that Antonio Neri will succeed Meg Whitman, who will step down as Chief Executive Officer, effective February 1, 2018. Shares were solidly lower.

HP Inc. (HPQ $21) announced Q4 EPS of $0.39, or $0.44 ex-items, versus the expected $0.44, with revenues rising 11.0% y/y to $13.9 billion, above the estimated $13.4 billion. The company issued Q1 profit guidance that had a midpoint just shy of projections, while its full-year earnings outlook had a midpoint that was north of expectations. Shares lost ground.

Salesforce.com Inc. (CRM $107) reported fiscal Q3 profits of $0.07 per share, or $0.39 ex-items, compared to the expected $0.37, as revenues increased 25.0% y/y to $2.7 billion, roughly in line with forecasts. The company issued Q4 EPS and billings guidance that was below expectations, overshadowing its revenue outlook that was slightly above estimates and its raised full-year guidance. Shares finished lower.

Durable goods orders mixed, Fed releases its recent meeting minutes

October preliminary durable goods orders (chart) were down 1.2% month-over-month (m/m), compared to the Bloomberg estimate of a 0.3% gain, and September's 2.0% rise was revised to a 2.2% increase. Ex-transportation, orders were 0.4% higher m/m, versus forecasts of a 0.5% gain and compared to September's favorably-revised 1.1% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 0.5%, versus projections of a 0.5% increase, and following the upwardly-revised 2.1% rise posted in the month prior.

Weekly initial jobless claims (chart) dropped by 13,000 to 239,000 last week, versus forecasts of a decrease to 240,000, with the prior week’s figure being upwardly revised to 252,000. The four-week moving average rose by 1,250 to 239,750, while continuing claims increased 36,000 to 1,904,000, north of estimates of 1,880,000.

The final November University of Michigan Consumer Sentiment Index (chart) was revised higher to 98.5, above forecasts of 98.0, from the preliminary level of 97.8. The index is below October's level of 100.7. Compared to last month, the expectations and current conditions components of the survey both dipped. The 1-year inflation outlook ticked higher to 2.5% from October's 2.4% rate, and the 5-10 year forecast dipped to 2.4% from 2.5%.

The MBA Mortgage Application Index ticked 0.1% higher last week, following the prior week's 3.1% gain. The slight increase came as a 4.8% drop in the Refinance Index was met by a 5.3% jump in the Purchase Index. The average 30-year mortgage rate rose 2 basis points (bps) to 4.20%.

At 2:00 p.m. ET, the Federal Reserve released the minutes from its monetary policy meeting that ended on November 1st. The information contained in the report showed that labor market conditions generally continued to strengthen and that real GDP expanded at a solid pace in Q3 despite disruptions from Hurricanes Harvey and Irma. Also, several participants indicated that an increase in the target range for the federal funds rate in the near term "would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee's objective." And participants "agreed that they would continue to monitor closely and assess incoming data before making any further adjustment to the target range for the federal funds rate."

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, the selection of the new head of the Fed is seen as representing continuity as the Central Bank continues its policy normalization and given the strong economic backdrop, along with signs of wage growth picking up, we believe the Fed will hike rates for the third time this year next month.

Treasuries were higher with the yield on the 2-year note falling 5 bps to 1.73% and the yield on the 10-year note dropping 4 bps to 2.32%, while the 30-year bond rate was 2 bps lower at 2.74%.
Treasury yields and the U.S. dollar found some pressure as the markets grappled with Fed Chief Yellen's comments, as well as U.S. tax reform uncertainty ahead of next week's expected Senate vote on its plan that differs significantly from the House's that passed last week. This is being countered by Q3 earnings season that is winding down and mostly above expectations against a positive global economic backdrop.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Reform Bills Progress, but Many Hurdles Remain, we believe the prospects for a tax reform bill being signed into law before the end of the year are improving, but a number of tricky steps must still be overcome. Schwab's Chief Investment Strategist Liz Ann Sonders points out in her newest article, Green Grass and High Tides: Earnings Stellar But Not Without Risk, both earnings and revenues were strong; and importantly, the "beat rates" were well above average. The outlook for 2018 is bright, but we are on watch for an expectations bar that gets set too high.

Please note: All U.S. markets will be closed tomorrow in observance of the Thanksgiving Day holiday, and will close early on Friday.

The U.S. economic calendar will round out the week on Friday with the release of the preliminary Markit Manufacturing and Services PMI Indexes for November, with economists forecasting readings of 55.0 and 55.3, respectively, with manufacturing ticking higher and services unchanged from the final October prints.

Europe gives up early advance as euro gains ground, Asia advances 

European equity markets relinquished early gains and finished mostly lower, with the euro moving higher versus the U.S. dollar, ahead of the release of the Fed minutes and following comments about inflation from Chairwoman Yellen. The British pound also rose compared to the greenback after overcoming a brief drop as the markets digested the nation's budget release, which included a lowered economic growth forecast. Bond yields in the region finished mixed. Energy issues managed to eke out gains as crude oil prices recovered somewhat from a recent bout of weakness as the markets awaited next week's OPEC meeting. Stocks in Germany led to the downside with focus still on the flared-up political uncertainty as nation may face a snap election following the recently failed coalition talks, which joined continued scrutiny of the possibility for U.S. tax reform. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans.

Stocks in Asia finished higher on the heels of the back-to-back gains registered in the U.S. yesterday, with global economic optimism appearing to overshadow flared-up political concerns in Germany and lingering tax reform uncertainty in the U.S. Japanese equities rose ahead of tomorrow's holiday, even as the yen regained some of yesterday's drop. Stocks trading in mainland China and Hong Kong finished higher. South Korean and Australian securities traded to the upside, while Indian equities also advanced. Schwab's 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 and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks.

Tomorrow, the international economic docket will yield Markit Manufacturing and Services PMI reads for Germany, France and the Eurozone, while Germany will also release Q3 GDP and the U.K. will report Q3 GDP and total business investment. On Friday, reports will include leading indicators from Japan, the Ifo Business Climate Survey from Germany and industrial orders from Italy.

FINANCIAL REVIEW

Time For Pie

Sinclair Noe — November 26, 2014

 

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 12 = 17,827
SPX + 5 = 2072
NAS + 29 = 4787
10 YR YLD – .03 = 2.23%
OIL – .35 = 73.75
GOLD – 3.20 = 1199.00
SILV – .13 = 16.64

Another record high close for the Dow Industrial Average and the S&P 500 index. That’s the 47th record high for the S&P this year. Volume was light, heading into the holiday. The markets will be open for a half day on Friday, but volume will be incredibly light.

Yesterday we told you about the New York Fed report that consumers were taking on more debt; household debt increased $78 billion in the third quarter, and the NY Fed thought that meant the end of deleveraging. It was the end of an era. Good news for the economy as well. American households have been cleaning up their finances during the painful post-crisis era, with less debt and lower financing costs for the debts they still owe. They are now in a better position to spend in the years ahead, good for the economy and their own sense of well-being.

I said “not so fast”, let’s wait and see if a trend develops. Today, the Commerce Department reports consumer spending increased 0.2 percent last month after being flat in September. Maybe Americans have cleaned up their debt problems, or not, but we aren’t yet in a spending mood. The amount of money individuals save was flat at 5%, but the saving rate was revised down sharply to 5% in September from a first read of 5.6%.

Meanwhile, inflation as gauged by the PCE price index rose 0.1% last month, while the core rate excluding food and energy climbed 0.2%. And over the past 12 months this gauge of inflation is up just 1.4%, well below the Fed’s target of 2%. Annual price gains have undershot that target since April 2012. The Fed, in its Oct. 29 policy statement, said that “inflation in the near term will likely be held down by lower energy prices and other factors,” though it’s expected to move back toward 2% over time as the economy heals.

Low gasoline prices are lifting confidence; the Thomson Reuters/University of Michigan’s consumer sentiment index was revise down from 89.4 to 88.9 in November, that is still the highest level since July 2007, but that increase in confidence is not resulting in more spending, at least not now.

And just as consumers are holding onto their dollars, businesses are holding back on purchases. Aside from a huge bump in military aircraft contracts, orders for durable goods were surprisingly weak in October for the second straight month. Orders for durable goods rose a seasonally adjusted 0.4% last month, but that includes a huge 45% spike in orders for military aircraft. We’re still fighting a few wars. Excluding defense, orders fell 0.6%. They fell an even sharper 0.9% if the large and volatile auto and commercial aircraft sectors are stripped out.

Outside the defense sector, orders were weak. Bookings for primary metals used in the production of many industrial goods fell 2.4%, the biggest drop since December. Orders also declined 1.2% for heavy machinery and 3.1% for electrical equipment. A broad measure of business investment known as core capital orders sank by 1.3% for the second month in a row. That’s the biggest two-month decline since the beginning of the year and perhaps a sign that companies might be paring back. Shipments of core capital goods, a category used to calculate quarterly economic growth, also fell 0.4% in October.

The number of people who applied for new unemployment benefits in the week before Thanksgiving jumped to an 11-week high and topped the 300,000 mark for the first time since early September. This is just one week, and does not indicate a trend, but it is a move in the wrong direction.

Also today, the Commerce Department reported that sales of new single-family homes ticked up 0.7% in October to a seasonally adjusted annual rate of 458,000, the fastest pace in five months. For October the sales pace rose 15.8% in the Midwest and 7.1% in the Northeast, but fell 2.7% in the West and 1.9% in the South. The median price of new homes sold rose to a record high of $305,000 in October.

The National Association of Realtors says pending home sales fell 1.1% in October. The index of pending home sales hit a seasonally adjusted 104.1 in October, compared with 105.3 in September.

So, we’ve had a lot of economic data crammed into just a holiday shortened week, and most of the data was not strong; the exception was the third quarter GDP, revised from 3.5% growth to 3.9% growth, but as we are in the fourth quarter, it looks more like the global slowdown is starting to affect the US economy and the indications are that fourth quarter GDP will be about half the third quarter number.

If you are driving for the holiday, you might be thankful for lower gas prices; the flip side is that more people will be driving this holiday, so the traffic might be problematic. Earlier, the Energy Information Administration said U.S. crude inventories rose by 1.9 million barrels last week, defying forecasts for a 100,000 barrel drop. Nymex crude has dropped nearly 3.7% since the beginning of the week. Oil futures are down more than 30% from their midyear high. The Organization of the Petroleum Exporting Countries will meet on Thursday to decide whether to lower oil production levels to alleviate the current glut in global markets, and, more importantly, whether to boost oil production prices. Saudi Arabia’s oil minister indicated that he wouldn’t push for a cut in production targets, but we’ll have to wait and see.

If you’re flying somewhere for the holiday, good luck. The east coast is getting pounded with another storm, and even though the weather in the southwest is fantastic, the flight cancellations tend to ripple across the country. So far today there have been a little over 600 flight cancellations. If you are calling on family or friends back east, just a reminder that it is not polite to gloat.

When the weather gets bad enough, not only does it ruin travel plans, it starts ruining economic data and forecasts. So far, there’s no reason to believe this winter’s storms will wreak exceptional havoc on the data. Because most winters feature some disruption, seasonally adjusting economic reports helps prevent every winter from reducing our visibility into the economy’s strength. But it’s worth remembering that unusually bad weather is not always an “excuse” for bad data, sometimes it really is just the weather.

And neither rain nor snow nor sleet nor dark of night shall keep shoppers from their holiday rounds. Over the next few weeks, and especially this weekend, we will hear stories about the importance of holiday shopping on the economy. And it is important, but most of the stories are hyped up. The National Retail Federation forecasts that holiday sales this year will total $616.9 billion, which is a lot of money but it is not the amount of holiday sales. You see, we spend money in other months, not just November and December. You buy gas in October, just like you do in December and just because you fill up the tank in December, it doesn’t make that gas a “holiday purchase”. There’s no question that December is the strongest month for retail sales. From 1992 to 2013, December retail sales averaged 23 percent higher than the rate from January through October. November was also a good month, averaging 4 percent higher than January through October. So, to get a realistic idea on holiday sales we should compare the difference between sales in November and December with the rest of the year. Using this measure, if retail sales in November and December of this year exceed normal months this year by the long-term averages, a reasonable forecast for holiday shopping in 2014 would be $16 billion in November and $90 billion in December.

In other words, holiday sales should be about $106 billion this year. Maybe more, maybe less; could be as much as $150 billion; could be as little as $80 billion. It is a lot of money, but the difference between a good holiday spending season and a bad holiday spending season is about 0.4% of the economy. And it isn’t enough to make the economy take off like a rocket or fall like a rock.

Anyway, I hope you have things you are thankful for. I hope you have family or friends that you will be around this weekend. And I am thankful that we get together on a regular basis right here.
Happy Thanksgiving.