Markets Notch Solid Weekly Gains

Charles Schwab: On the Market

Posted: 12/15/2017 4:15 PM EST

Markets Notch Solid Weekly Gains

 

U.S. equities finished out the week solidly in the green on optimism surrounding reports that final-hour tweaking of the tax reform bill appears to be enough to pass it after yesterday's uncertainty. Treasury yields were mixed as industrial production missed expectations but the prior month's jump was revised higher, crude oil prices also diverged, while the U.S. dollar and gold finished higher. Upbeat results from Costco and yesterday's jump in retail sales upped the consumer outlook.

The Dow Jones Industrial Average (DJIA) increased 143 points (0.6%) to 24,652, the S&P 500 Index was 24 points (0.9%) higher at 2,676, and the Nasdaq Composite jumped 80 points (1.2%) to 6,937. In heavy volume due to quadruple witching, or the simultaneous expiration of options and futures contracts, 2.4 billion shares were traded on the NYSE and 3.2 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.26 to $57.30 per barrel and wholesale gasoline lost $0.02 to $1.65 per gallon. Elsewhere, the Bloomberg gold spot price moved $2.84 higher to $1,255.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 93.93. Markets were higher for the week, as the DJIA increased 1.3%, the S&P 500 Index rose 0.8%, and the Nasdaq Composite advanced 1.4%.

Costco Wholesale Corp. (COST $193) reported fiscal Q1 earnings-per-share (EPS) of $1.45, or $1.36 ex-items, versus the $1.34 FactSet estimate, as revenues rose 13.2% year-over-year (y/y) to $31.8 billion, above the projected $31.1 billion. Q1 same-store sales grew 10.5% y/y, versus the expected 10.2% gain. Shares were nicely higher.

Oracle Corp. (ORCL $48) posted fiscal Q2 EPS of $0.52, or $0.70 ex-items, compared to the projected $0.68, with revenues rising 6.0% y/y to $9.6 billion, roughly in line with forecasts. ORCL increased its share repurchase plan by $12 billion, but the company issued Q3 guidance that was below expectations. Shares saw solid pressure.

Adobe Systems Inc. (ADBE $177) announced Q4 EPS of $1.00, or $1.26 ex-items, versus the expected $1.16, as revenues grew 25.0% y/y to $2.0 billion, mostly matching estimates. The company issued Q1 and 2018 revenue guidance that matched forecasts, while its Q1 EPS outlook was above expectations. Shares were higher.

CSX Corp. (CSX $53) announced that its Chief Executive Officer (CEO) Hunter Harrison is on medical leave due to unexpected complications from a recent illness. The board has named Chief Operating Officer James Foote as acting CEO. Shares finished decisively lower.

Shares of Sirius XM Holdings Inc. (SIRI $5) fell after announcing a decision by the Copyright Royalty Board (CRB) of the Library of Congress that will require the royalty rate it has to pay for a five-year period starting January 1, 2018 to increase. The rate will rise to 15.5% of gross revenues from its current rate of 11.0% and well above expectations.

Industrial production slightly misses, but prior month's strong gain revised higher

Industrial production (chart) rose 0.2% month-over-month (m/m) in November, slightly below the Bloomberg estimate of a 0.3% gain, but October's solid 0.9% rise was upwardly revised to a 1.2% jump. Manufacturing production ticked higher and mining output jumped, though utilities production dropped. Capacity utilization ticked higher to 77.1% from the prior month's unrevised 77.0% rate, and compared to forecasts of 77.2%. Capacity utilization is 2.8 percentage points below its long-run average.

The Empire Manufacturing Index showed output from the New York region slowed more than expected but remained solidly at a level depicting expansion (a reading above zero) for December. The index decreased to 18.0 from November's unrevised 19.4 level, with forecasts calling for a decline to 18.7.

Treasuries were mixed, as the yield on the 2-year note rose 3 basis points (bps) to 1.84% and the yield on the 10-year note was flat at 2.35%, while the 30-year bond rate dipped 3 bps to 2.68%. 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.

The Treasury yield curve continues to flatten and the U.S. dollar found support after yesterday's jump in retail sales followed Wednesday's highly-expected Fed rate hike as discussed by Schwab's Senior Fixed Income Research Analyst, Collin Martin, CFA, in his article, Fed Raises Rates, Projects More to Come in 2018, as well as Schwab's Chief Investment Strategist Liz Ann Sonders' and Vice President of Trading and Derivatives Randy Frederick's video, How Will Rate Hike Affect Investors?.

Tax reform continued to be in focus and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend analyzes in his latest commentary, Tax Plan Set for Final Vote, the deal reached on Capitol Hill regarding a massive tax package that would cut the corporate tax rate and make sweeping changes to individual taxes. Late-yesterday's flared up uncertainty regarding if the bill has enough support is being calmed by headlines suggesting final-hour adjustments to the bill will likely be enough ahead of next week's expected vote. Also, Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of 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 and Asia mixed on U.S. tax reform uncertainty

European equity markets traded mixed, with the euro giving back early gains versus the U.S. dollar amid choppy trading to help provide some late-day support and help offset a flare-up in U.S. tax reform uncertainty ahead of an expected vote sometime next week. Technology issues remained hamstrung, and consumer discretionary stocks led to the downside. Bond yields in the region pared losses to help financials limit a downside move and German markets finished higher, while the nation's central bank upped its economic growth forecast. The U.K. markets rose as the British pound fell, pressured by increased Brexit uncertainty as talks move on to the next stage but revolve around trade, which is seen to be a tougher hurdle to overcome than previous negotiations that have been contentious. In economic news, the eurozone trade surplus narrowed more than expected for October.

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 as the scrutiny of the deal reached on tax reform by lawmakers in the U.S. heats up as it moves closer to a final vote. Also, the markets are digesting this week's Fed rate hike that was followed by unchanged monetary policy decisions from the European Central Bank and the Bank of England yesterday. The yen moved higher to pressure Japanese equities, and while the nation's Q4 Tankan Large Manufacturing Index improved more than expected, suggesting sentiment is improving, the Tankan outlook component came in a bit below forecasts. Stocks in mainland China and Hong Kong fell amid some continued paring of solid gains seen this year amid the market uncertainty. The Global markets have been bolstered by the broadest economic growth in a decade and is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks. Meanwhile, stocks in Australia declined, but South Korean listings rose, and markets in India advanced amid some supporting exit polls that suggested continued support for Prime Minister Modi's party, per Bloomberg. After the closing bell, India reported a sharp jump in the country's exports for November.

Stocks move higher as tax reform and data bolster fresh record highs

Stock markets moved back to record high territory this week amid optimism tax reform successfully scaled the reconciliation hurdle clearing a way to a final vote, while a jump in retail sales suggested the health of the all-important U.S. consumer was strong. Moreover, Dow member Walt Disney Co's (DIS $111) $52 billion agreement to acquire a large portion of Twenty-First Century Fox Inc. (FOXA $35) fueled a positive M&A sentiment. The telecommunications sector extending its recent run, and consumer-related stocks rallied to lead a broad-based advance, which saw technology issues regain some of its momentum that has led the year's decisive rally as the tax-reform sector rotation out of the group seemed to ease. However, the utilities sector was the lone group in the red after the Fed's highly-expected rate hike and forecast for more to come in 2018.

Outside the stock market trading was choppy as the Fed's hike was followed by unchanged monetary policy decisions from the European Central Bank, Bank of England and Swiss National Bank. The Treasury yield curve continued to flatten, with the 2-year rate rallying but the 10-year note finished little changed and the 30-year bond yield slipped. The U.S. dollar was extending last week's gain but following a mid-week slide and flared-up tax reform uncertainty the greenback lost momentum and finished little changed to slightly down. Crude oil prices rallied early on amid exacerbated supply concerns on a key pipeline crack and a gas plant explosion overseas, but lost ground and finished near the unchanged mark on the heels of mixed oil & gas inventory data.

Next week will the last before the Christmas holiday and the economic calendar will hopefully bring more gifts than coal, with a fully-loaded sleigh of releases including: the NAHB Housing Market Index, housing starts and building permits, existing home sales, the final revision of Q3 GDP, the Leading Index, personal income and spending, durable goods orders, new home sales, and the final December University of Michigan Consumer Sentiment Index.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in our 2018 Market Outlook: U.S. Stocks and Economy, animal spirits are keeping business optimism alive and well: U.S. growth broadly—and capex and productivity specifically—should remain healthy in 2018. Late cycle tendencies should be on investors’ radar screen: A tight labor market augurs for higher wage growth, higher inflation and tighter monetary policy. Tax reform would be a plus, but skepticism is warranted: Failure to pass tax reform would dent business and investor confidence, but not necessarily actual growth or corporate earnings.

International reports due out next week include: China—property prices. Japan—trade balance and the Bank of Japan's monetary policy decision. Eurozone—consumer price inflation and German business confidence. U.K.—consumer confidence and final read on Q3 GDP.

Early Gains Fade to Red

Charles Schwab: On the Market

Posted: 12/14/2017 4:15 PM EST

Early Gains Fade to Red

 

Early gains for U.S. equities faded throughout the day and stocks finished lower, despite a jump in November retail sales and positive service sector data, and reports that a tentative tax bill deal has been reached. Consumer discretionary stocks got a boost from the sales report, but the gains were muted by a fall in the health care sector. Pressure on financials after Treasury yields pared gains contributed to the downdraft, as investors asses yesterday's Fed rate hike and a host of European monetary policy decisions. Crude oil and the U.S. dollar were higher, while gold was lower. Attention toward the equity front focused on Dow member Walt Disney’s agreement to acquire parts of Twenty-First Century Fox for $52 billion.

The Dow Jones Industrial Average (DJIA) declined 77 points (0.3%) to 24,509, the S&P 500 Index lost 11 points (0.4%) to 2,652, and the Nasdaq Composite decreased 19 points (0.3%) to 6,857. In moderate volume, 810 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.44 to $57.074 per barrel and wholesale gasoline gained $0.02 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price moved $2.42 lower to $1,253.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 93.52.

As was widely speculated, Dow member Walt Disney Co. (DIS $111) announced an agreement to acquire parts of Twenty-First Century Fox Inc. (FOXA $35), including the Twentieth Century Fox Film and Television studios, along with cable and international TV businesses, for about $52.4 billion in stock. Under the terms of the deal, Twenty-First Century Fox stockholders will receive 0.2745 Disney shares for each share they hold. Immediately prior to the acquisition, Twenty-First Century Fox will separate the Fox Broadcasting network and stations into a newly listed company that will be spun off to its shareholders. Walt Disney also announced that it has extended Robert Iger's contract and he will remain Chairman and Chief Executive Officer of the company through 2021. DIS and FOXA both gained solid ground.

Express Scripts Holding Co. (ESRX $69) raised its full-year earnings-per-share (EPS) outlook, while issuing 2018 EPS guidance that exceeded expectations. Shares finished higher.

Shares of Teva Pharmaceutical Industries Limited (TEVA $17) jumped after announcing a comprehensive restructuring plan aimed at reducing costs by $3 billion by the end of 2019, including reducing its workforce by over 25%. Also, the company suspended its dividend.

Delta Air Lines Inc. (DAL $55) gained solid ground after the airline issued 2018 revenue guidance with a midpoint above the FactSet estimate after guiding that it expects December passenger unit revenue to be up roughly 4.0%. Separately, the company announced that it agreed to order 100 of Airbus SE's (EADSY $25) A321neo aircraft with options of up to 100 additional jets.

Retail sales jump, jobless claims drop, business activity reports mixed

Advance retail sales (chart) for November rose 0.8% month-over-month (m/m), compared to the Bloomberg forecast of a 0.3% gain and compared to October's upwardly revised 0.5% increase. Last month's sales ex-autos were up by 1.0% m/m, versus expectations of a 0.6% gain, and following the favorably revised 0.4% increase seen in the previous month. Sales ex-autos and gas gained 0.8% m/m, above estimates of a 0.4% rise, and versus October's upwardly revised 0.4% gain. The retail sales control group, a figure used to help calculate GDP, increased 0.8%, north of projections of a 0.4% rise, and versus the prior month's favorably revised 0.4% gain.

The report suggests the holiday season got off to a strong start and the all-important U.S. consumer continues to be underpinned by the solid labor market and signs of wage growth. Growth was broad-based across the 13 categories, led by a 2.5% jump in sales at nonstore retailers—which includes online shopping—but auto sales were the lone group that declined. Per Bloomberg, core retail sales—ex food, gas, building materials and autos—on a three-month annualized basis rose at the fastest pace since June 2014. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, has touted the broad-based economic impact of the consumer as of late, which has led to elevated business optimism that could bolster already rising capital investments as he discusses in his latest Schwab Sector Views: 18 Thoughts Heading into '18.

Weekly initial jobless claims (chart) dropped by 11,000 to 225,000 last week, versus forecasts to remain at the prior week's unrevised 236,000 level. The four-week moving average came in at 234,750, while continuing claims fell by 27,000 to 1,886,000, south of estimates of 1,900,000.

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output surprisingly accelerated, rising to 55.0 in December, versus expectations to match November's 53.9 level. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector this month unexpectedly slowed, declining to 52.4 from November's 54.5 figure, and versus forecasts calling for it to rise to 54.7. However, readings above 50 for both indexes denote expansion.

The Import Price Index (chart) rose 0.7% m/m for November, matching projections, following October's downwardly revised 0.1% rise. Compared to last year, prices were up by 3.1%, below forecasts of a 3.2% rise and compared to October's downwardly revised 2.3% increase.
Business inventories (chart) dipped 0.1% m/m in October, matching forecasts, and versus September's unrevised flat reading.

Treasuries were mixed, as the yield on the 2-year note rose 4 basis points (bps) to 1.81%, the yield on the 10-year note was flat at 2.35%, while the 30-year bond rate dipped 2 bps to 2.71%.

Bond yields were mixed but the U.S. dollar got back on the winning path after yesterday's drop, with the markets grappling with today's data and unchanged monetary policy decisions by the European Central Bank and Bank of England, which followed yesterday's highly-expected Fed rate hike. For analysis of the Fed's monetary policy decision, check out Schwab's Senior Fixed Income Research Analyst, Collin Martin's, CFA, article,

Fed Raises Rates, Projects More to Come in 2018, as well as our commentary, Fed Rate Hike: What Does It Mean for Your Portfolio.

Tax reform also remained a source of market attention, bolstered by reports that lawmakers have reached a tentative deal on a final bill. Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of 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.

The economic calendar will round out the week with the Federal Reserve’s industrial production and capacity utilization report, with production forecasted to have increased 0.3% m/m during November and capacity utilization to tick higher to 77.2%, as well as the Empire Manufacturing Index, with economists expecting a level of 18.0, with a reading above zero indicating expansion in activity.

Europe and Asia lower as central bank action in focus

European equities finished lower, with technology issues seeing some pressure and financials extending losses late as bond yields moved to the downside and the markets digested a flood of monetary policy decisions. The European Central Bank (ECB) and the Bank of England (BoE), along with the Swiss National Bank (SNB) all kept their monetary policy stances unchanged as expected, on the heels of yesterday's highly-expected rate hike in the U.S. The euro and Swiss franc lost ground on the U.S. dollar, while the British pound reversed modestly to the upside late in the session.

The markets paid close attention to the customary press conference following the ECB's decision by President Mario Draghi, who raised the region's economic growth outlook but was seen as dovish in regard to inflation, noting that an ample degree of stimulus is still needed. Draghi said the structure of its bond-buying program nor a change in guidance were discussed at the meeting as it has only been six weeks since it announced that it will cut the amount of monthly purchases in half starting in January. He did say that it could increase asset purchases or the duration if its outlook becomes less favorable and inflation fails to make progress toward a sustained path to its goal of just under 2.0%.

The focus on monetary policy decisions overshadowed stronger-than-expected U.S. retail sales and eurozone business activity reports, along with headlines suggesting a U.S. tax reform agreement has been reached. Markit's preliminary December Composite PMI Index—a gauge of business activity in both the manufacturing and services sectors—surprisingly improved to 58.0 from 57.5 in November and compared to forecasts calling for a dip to 57.2. As noted in our 2018 Schwab Market Outlook: Executive Summary, we anticipate solid growth in 2018 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.

Stocks in Asia finished mostly to the downside as the markets digested a host of economic data in the region, along with yesterday's rate hike in the U.S., while awaiting today's monetary policy decisions from the European Central Bank and the Bank of England. China reported roughly in line figures on November retail sales, fixed asset investment and industrial production, while Australian employment grew more than expected last month and Indian wholesale price inflation came in a bit cooler than expected for November. The yen gained ground on the U.S. dollar to weigh on Japanese stocks, ahead of a key read on the nation's manufacturing sentiment for Q4 due out tonight. Mainland Chinese equities and those listed in Hong Kong declined, while markets in Australia and South Korea also lost ground. However, stocks in India finished higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers a look at the global markets heading into the New Year in his, 2018 Global Market Outlook: Three Actions to Take for the Year Ahead.

Tomorrow’s international economic calendar will offer the Tankan Large Manufacturing and non-Manufacturing Indexes from Japan, India’s trade balance, and wage data from France.

Stocks Lower as Tech Rebound Fizzles

Charles Schwab: On the Market

Posted: 12/5/2017 4:15 PM EST

Stocks Lower as Tech Rebound Fizzles

 

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

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

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

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

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

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

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

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

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

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

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

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

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

European equity markets finished mostly lower even as technology issues rebounded with a softer-than-expected eurozone retail sales report slightly more than offsetting Markit's data showing eurozone output from the manufacturing and services sectors continued to show solid growth. The euro saw some pressure versus the U.S. dollar, with the markets continuing to grapple with the prospects of U.S. tax reform and yesterday's failed Brexit talks putting some uncertainty regarding if negotiations can move forward. Talks are expected to continue this week, and the British pound traded lower compared to the greenback. Bond yields in the region were mostly lower and financials moved to the downside. Volatility has shown some signs of ticking higher as the markets assess the global market rally this year and in his article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, tackles the question, Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years.

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

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

Dow Continues Rally, Techs Sock Nasdaq

Charles Schwab: On the Market

Posted: 12/4/2017 4:15 PM EST

Dow Continues Rally, Techs Sock Nasdaq

 

The Dow added to its recent surge, with economic optimism getting a boost from another strong read on domestic business spending, while the Senate's passage of its tax reform bill over the weekend added to the enthusiasm. However, sustained weakness in the tech sector continued to weigh on the Nasdaq. Treasury yields and the U.S. dollar were higher ahead of a busy week of economic reports that will culminate with Friday's nonfarm payroll report, while crude oil and gold were lower.

The Dow Jones Industrial Average (DJIA) rose 58 points (0.2%) to 24,290, the S&P 500 Index lost 3 points (0.1%) to 2,639, and the Nasdaq Composite tumbled 72 points (1.1%) to 6,775. In heavy volume, 987 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.89 to $57.47 per barrel and wholesale gasoline declined $0.05 to $1.69 per gallon. Elsewhere, the Bloomberg gold spot price decreased $4.42 to $1,276.20 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 93.23.

CVS Health Corp. (CVS $72) announced an agreement to acquire Aetna Inc. (AET $179) for $207 per share in cash and stock, valued at about $69 billion, excluding debt. Under the terms of the deal, Aetna stockholders will receive $145 in cash and 0.8378 CVS Health shares for each share owned. Shares of both companies were lower.

Italy's Prysmian SpA (PRYMY $16) announced an agreement to acquire Kentucky-based General Cable Corp. (BGC $30) for $30 per share in cash, for a total value of about $3 billion, including the assumption of debt. Shares of BGC rallied over 35%.

Dollar, rates and stocks gain ground on tax reform and continued robust business spending

Treasuries finished lower, as the yield on the 2-year note rose 3 basis points (bps) to 1.80%, while the yields on the 10-year note and the 30-year bond advanced 1 bp to 2.37% and 2.76%, respectively.
Treasury yields and the U.S. dollar moved to the upside and the stock markets added to last week's strong gains, bolstered by the Senate's passing of its tax reform bill over the weekend. Now the reconciliation process looms as the House and Senate have to find some key areas of compromise before a tax reform bill can go to President Donald Trump's desk for a signature.

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, negotiations between the House and Senate will likely be extremely challenging, given the differences between the two approaches. For investors, we still think it is too early to take any drastic action. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly. Regardless of the outcome of the tax bill, it’s always a good idea to meet with your tax and financial advisors before the end of the year to review your current financial situation and discuss your plans for the coming year.

Factory orders (chart) dipped 0.1% month-over-month (m/m) in October, better than the Bloomberg expectation of a 0.4% decline, and versus September's upwardly revised 1.7% gain. Stripping out the volatile transportation component, orders rose 0.8% and September's 0.7% gain was revised to a 1.1% increase. October durable goods orders—preliminarily reported last week to have dropped 1.2%—were favorably adjusted to a 0.8% decrease, and compared to forecasts of a revised 1.0% decline. Also, nondefense capital goods orders excluding aircraft, a gauge of business spending, were revised higher to a 0.3% decrease from the initially-reported 0.5% decline.

The highlight of the report was the upward revision to the gauge of business spending, which has risen for four-straight months, with an average month gain of 1.3% for the period. This adds credence to Schwab's Chief Investment Strategist Liz Ann Sonders' view that an even sharper recovery could be in the cards for U.S. business capital spending in 2018, while tax reform—if we get it—would be an additional kicker in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle.

Today's release kicked off a busy economic calendar that will continue tomorrow with a look at the all-important services sector in the form of the ISM non-Manufacturing Index, with economists forecasting a slight decline in the reading for November to a level of 59.0 from October's 60.1, as well as Markit's final Services PMI Index for November, expected to post a reading of 54.7, in line with its preliminary report, but below the 55.3 registered the month prior, while the trade balance will round out the day's docket, with the deficit expected to widen to $47.1 billion during October from September's $43.5 billion.

Europe higher on U.S. tax reform, Brexit negotiations in focus, Asia mixed

The European equity markets rallied, with financials a noticeable gainer along with industrials. Bond yields in the region were mostly higher, while the euro declined versus the U.S. dollar on the weekend's tax reform bill passage by the Senate and upbeat U.S. business spending data, which bolstered global economic optimism. The British pound reversed to the downside on the greenback after the meeting between Prime Minister Theresa May and European Commission President Juncker ended without reaching a deal on an Irish border issue. The meeting was highly expected to produce a deal and likely help Brexit talks end a deadlock. With volatility showing some signs of life last week, in his article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, tackles the question, Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years.

Stocks in Asia finished mixed as the markets grapple with the weekend's tax reform bill passing in the U.S. Senate, along with flared-up uncertainty regarding what possible ramifications former U.S. NSA advisor Mike Flynn's guilty plea for lying to the FBI may have for the Trump administration. This news on Friday caused the U.S. stock markets to dip but they held onto solid weekly gains. Stocks in Japan, mainland China and Australia all lost ground, but securities traded in South Korea, Hong Kong and India saw modest gains. Although showing some signs of choppiness, the global stock markets remain nicely higher for the year that has been bolstered by the broadest economic growth in a decade. This is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks.

Services PMI readings from across the globe will dominate tomorrow's international economic calendar, with other reports of note to include retail sales from the U.K. and the Eurozone, new home sales from Australia, and industrial production from Spain. In central bank action, the Reserve Bank of Australia will meet, with no change to its benchmark interest rate expected.

Stocks Mixed As Techs Take a Hit

Charles Schwab: On the Market

Posted: 11/29/2017 4:15 PM EST

Stocks Mixed As Techs Take a Hit

 

The U.S. equity markets diverged amid continued global economic optimism following an upward revision to Q3 GDP and optimistic signs of progress in the Senate's tax reform bill. Treasury yields rose on the heels of a favorable economic outlook from Fed Chair Yellen, to the benefit of financials, but technology stocks tumbled, severely pressuring the Nasdaq. Crude oil prices were lower, extending losses ahead of tomorrow's OPEC meeting and following mixed oil inventory data, while gold was lower and the U.S. dollar was little changed.

The Dow Jones Industrial Average (DJIA) rose 104 points (0.4%) to 23,940, the S&P 500 Index fell nearly a point to 2,626, and the Nasdaq Composite tumbled 88 points (1.3%) to 6,824 In heavy volume, 922 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.69 to $57.30 per barrel and wholesale gasoline lost $0.04 to $1.73 per gallon. Elsewhere, the Bloomberg gold spot price decreased $8.94 to $1,285.04 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 93.24.

Tiffany & Co. (TIF $93) reported Q3 earnings-per-share (EPS) of $0.80, compared to the $0.76 FactSet estimate, as revenues grew 3.0% year-over-year (y/y) to $976 million, exceeding the projected $958 million. Q3 same-store sales were flat y/y, versus the forecasted 0.2% dip. TIF reaffirmed its full-year guidance. Shares finished lower.

Marvell Technology Group Ltd. (MRVL $22) posted Q3 EPS of $0.30, or $0.34 ex-items, compared to the forecasted $0.33, as revenues decreased 1.2% y/y to $616 million, just above the estimated $615 million. The chip company issued Q4 guidance that topped expectations. Shares were lower despite the results with the markets appearing to rotate out of the tech sector on the heels of the group's strong run this year, with chip companies seeing noticeable pressure.

Chipotle Mexican Grill Inc. (CMG $302) announced that Chairman and Chief Executive Officer (CEO)—and the founder of the company in 1993—Steve Ells will step down as CEO but will become Executive Chairman following the completion of a search to identify a new CEO. Shares were higher.

Shares of Autodesk Inc. (ADSK $109) tumbled over 15% after the application software company's Q3 billings figure missed expectations, resulting in a lowered full-year subscriptions outlook, despite reporting slightly stronger-than-expected Q3 top-and-bottomline results. The company also announced restructuring measures including the reduction of 1,150 employees to its workforce.

Q3 GDP revised higher, Fed comes into focus

The second 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 growth of 3.3%, up from the first release's 3.0% gain. The Bloomberg forecast called for an adjusted 3.2% pace of expansion. Q2 GDP grew by an unrevised 3.1% rate. Personal consumption came in at a 2.3% gain for Q3, lower than the preliminary estimate of a 2.4% increase, and compared to the expectations of a 2.5% increase. Personal consumption grew by an unrevised 3.3% in Q2.

On inflation, the GDP Price Index was revised to a 2.1% increase, versus expectations of an unrevised 2.2% gain, while the core PCE Index, which excludes food and energy, was adjusted to a 1.4% increase, compared to forecasts of an unrevised 1.3% rise.

Pending home sales rose 3.5% month-over-month in October, versus projections of a 1.0% rise, and following the negatively-revised 0.4% decline registered in September. Compared to last year, sales were 1.2% higher, versus estimates of a 3.0% gain. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected in October.

The MBA Mortgage Application Index declined 3.1% last week, following the prior week's 0.1% gain. The decrease came as a 7.7% drop in the Refinance Index more than overshadowed a 1.8% increase in the Purchase Index. The average 30-year mortgage rate remained at 4.20%.

Today the Fed is garnering attention as Chairwoman Janet Yellen delivered her U.S. economic outlook to the Joint Economic Committee of Congress, noting the economic expansion is increasingly broad-based and she continues to expect gradual adjustments in the stance of monetary policy. However, she pointed out that although recent lower readings on inflation likely reflect transitory factors, it is possible that this year's low inflation could reflect something more persistent.
In afternoon action, the Central Bank released its Beige Book, an anecdotal look at business activity across the nation used as a monetary policy preparation tool for the two-day meeting set to end December 13th. The report showed that economic activity progressed at "a modest to moderate pace," through mid-November, while also noting that "price pressures have strengthened since the last report" and that the labor market remains tight. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, President Trump's nomination of current Fed governor Jerome “Jay” Powell to replace Janet Yellen as Chairman of the Federal Reserve when her term ends early next year was largely expected and greeted relatively favorably by the market. He is, like Yellen, a relatively dovish consensus builder; and therefore will represent continuity as the Fed continues its monetary policy normalization process. Given strong economic data and the pickup in some measures of wage growth, we believe the Fed will hike rates for the third time this year next month.

Treasuries finished lower, as the yield on the 2-year note increased 2 basis points (bps) to 1.77%, the yield on the 10-year note gained 5 bps to 2.38%, and the 30-year bond rate rose 6 bps to 2.82%.
The yield curve has steepened somewhat after a recent bout of flattening that appeared to foster some market weariness, while the U.S. dollar dipped after a two-day rebound, extending a pullback as of late.

The markets shrugged off flared-up geopolitical concerns following yesterday's missile launch by North Korea, aided by the positive global backdrop and signs of progress regarding the Senate's tax reform bill, which is expected to be voted on later this week. The House passed its bill two weeks ago, with several key differences setting the stage for a complicated reconciliation process.
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 we still think it is too early for investors to take any drastic action. The bill is virtually certain to be changed many times in the weeks ahead. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly.

Personal income and spending will highlight tomorrow's economic calendar, with both measures forecasted to have gained 0.3% m/m during October following their respective 0.4% and 1.0% m/m gains the month prior, while weekly initial jobless claims will also be released, expected to tick higher to a level of 240,000 from the prior week's 239,000. The Chicago Purchasing Manager Survey will be released later in the morning, with economists anticipating a decline in the index to 63.0 for November from October's 66.2 reading.

Europe and Asia mixed ahead of data, North Korean missile launch has little impact

European equity markets traded mixed, with financials getting a boost as bond yields in the region gained solid ground. Global economic optimism remained elevated, bolstered by signs of progress in tax reform and today's upbeat revision to Q3 GDP out of the U.S., along with cooled political concerns on this side of the pond. In his latest article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, addresses the question Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years. However, the apparent rotation out of the tech sector that intensified in the U.S. made its way over to Europe late in the session to cause the markets to give up some solid early gains. Crude oil prices extended a weekly loss ahead of tomorrow's OPEC meeting and following some mixed inventory data in the U.S. The pound rallied against the U.S. dollar to hamstring the U.K. markets after Britain and the European Union reportedly agreed to reach a Brexit divorce bill, which could pave the way for negotiations of the exit to move forward. German consumer price inflation was mostly hotter than expected, French Q3 GDP rose at a pace that matched forecasts and eurozone economic confidence improved. The euro moved higher versus the greenback.

Stocks in Asia finished mixed, following the solid gains in the U.S. yesterday on further signs the economy is running healthy and progress toward tax reform. However, the markets likely treaded with some caution ahead of key economic data out of Japan and China tomorrow, which will coincide with the highly-anticipated OPEC production meeting and potential U.S. tax reform vote, and follow today's U.S. GDP revision and testimony from Fed Chief Yellen. The markets mostly shrugged off yesterday's latest missile launch by North Korea. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans, while offering analysis of the global stock market rally that has been bolstered by broad economic growth and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks.

The yen gave back some recent gains to help lift Japanese equities and overshadow a softer-than-expected retail sales report, while markets in South Korea and India dipped. Mainland Chinese stocks ticked slightly higher, but those traded in Hong Kong fell and Australian listings saw modest gains.

A whole host of reports are slated for tomorrow's international economic calendar, including industrial production from South Korea and Japan, building approvals and consumer credit from Australia, manufacturing data out of China, retail sales and employment data from Germany, CPI and PPI from France and Italy, GDP from Spain, and CPI and employment figures from the Eurozone.

Markets Break Out of Midday Anxiety

Charles Schwab: On the Market

Posted: 11/28/2017 4:15 PM EST

Markets Break Out of Midday Anxiety

U.S. equities were solidly in the green, with the major indexes notching fresh highs, shrugging continued tax reform uncertainty and anxiety over North Korea's latest missile test. The gains came courtesy of a 17-year high in Consumer Confidence, reports of record-breaking Cyber Monday figures, and a more than two-decade high in regional manufacturing activity. Treasury yields were slightly lower and the U.S. dollar gained ground, while crude oil prices fell ahead of Thursday's OPEC meeting, and gold reversed to the downside.

The Dow Jones Industrial Average (DJIA) jumped 256 points (1.1%) to 23,837, the S&P 500 Index rose 26 points (1.0%) to 2,627, and the Nasdaq Composite gained 34 points (0.5%) to 6,912. In moderate-to-heavy volume, 834 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.12 lower to $57.99 per barrel and wholesale gasoline lost $0.02 to $1.77 per gallon. Elsewhere, the Bloomberg gold spot price decreased $1.28 to $1,293.24 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.4% higher to 93.25.

Arby's Restaurant Group Inc., owned by Roark Capital Group, announced an agreement to acquire Buffalo Wild Wings Inc. (BWLD $156) for $157 per share in cash, for a total transaction value of about $2.9 billion, including the assumption of debt. BWLD traded solidly higher.

Dow memberUnitedHealth Group Inc. (UNH $216) issued mixed 2018 guidance with its earnings-per-share outlook having a midpoint below the Street's expectations, while its revenue forecast was above estimates. UNH reaffirmed its 2017 guidance. Shares were higher.

Thor Industries Inc. (THO $154) rallied nearly 20% after posting fiscal Q1 earnings-per-share (EPS) of $2.43, well above the $1.84 FactSet estimate, as revenues grew 30.6% year-over-year (y/y) to $2.2 billion, north of the forecasted $2.0 billion. The Recreational Vehicle (RV) maker said industry demand remains exceedingly high and it believes the industry will continue to grow for the foreseeable future.

Consumer Confidence hits fresh 17-year high, home prices rise more than expected

The Consumer Confidence Index (chart) unexpectedly rose to a fresh 17-year high of 129.5 in November from the upwardly revised 126.2 in October, and compared to the Bloomberg estimate of a 124.0 reading. Both the Present Situation Index and the Expectations Index of business conditions for the next six months increased. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 20.2 from the 19.6 level posted in October.

Consumer sentiment is running high and has shown up in record high Cyber Monday sales that came on the heels of robust year-over-year (y/y) Black Friday weekend sales to bolster the outlook for the holiday season. Also, as Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in our article, Holiday Shopping Season: Are Consumers Set to Stuff Some Stockings?, a strong consumer bodes well for the overall U.S. economy as consumer spending makes up nearly 70% of economic output.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 6.2% year-over-year (y/y) gain in home prices in September, versus the Bloomberg expectation of a 6.0% gain. Month-over-month (m/m), home prices were up 0.5% on a seasonally adjusted basis for September, above forecasts calling for a 0.3% rise.

The advance goods trade deficit widened much more than expected to $68.3 billion in October, from the unrevised $64.1 billion in September, and compared to expectations of $64.9 billion.
Preliminary wholesale inventories unexpectedly declined, dropping 0.4% m/m in October, versus forecasts for a 0.4% increase, and following September's downwardly revised 0.1% rise.

The Richmond Fed Manufacturing Activity Index jumped to 30 in November, the highest since 1993, from 12 in October, and versus estimates of a rise to 14, with a reading above zero denoting expansion.

Treasuries were mostly higher, with the yield on the 2-year note flat at 1.74%, while the yields on the 10-year note and the 30-year bond dipped 1 basis point to 2.32% and 2.76%, respectively.
The broadest global economic growth in a decade and solid earnings performance have conspired to keep stocks near record highs and be up every month this year. However, the U.S. dollar has pulled back and the markets appear to be getting a bit concerned with what the recent flattening of the yield may be signaling.

In his latest article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, addresses the question Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years.

The markets are also grappling with OPEC's looming production meeting this week, as well as flared-up European political uncertainty, which has joined scrutiny of U.S. tax reform. The Senate could vote on its tax reform plan this week after the House passed its bill two weeks ago, with several key differences setting the stage for a complicated reconciliation process.

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 we still think it is too early for investors to take any drastic action. The bill is virtually certain to be changed many times in the weeks ahead. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly.

Tomorrow, investors will get the second look (of three) at Q3 Gross Domestic Product, the broadest measure of economic output, with economists expecting a revised 3.2% quarter-over-quarter (q/q) rate of expansion from the 3.0% in the first report, personal consumption to be adjusted slightly higher to 2.5% from the previously-reported 2.4%, and the GDP Price Index and core PCE to remain at their initial increases of 2.2% and 1.3%, respectively. Later in the morning pending home sales will be reported, with the conduit of existing home sales expected to have increased 1.2% m/m during October, while in afternoon action the Fed will release its Beige Book. MBA Mortgage Applications will also be reported (economic calendar).

Europe higher as U.K. bank stress test results were positive, Asia mixed

European equity markets traded higher, with energy stocks rebounding from a recent pullback that has come amid the weakness in crude oil prices leading up to this week's OPEC meeting. Financials were modestly higher as the markets digest the Bank of England's (BoE) banking sector stress test results that showed all banks passed with no need to strengthen their capital positions for the first time, per Bloomberg. However, U.K. banks were mixed as BoE Governor Carney continued to warn about the risk of a bumpy Brexit process for the sector. Brexit talks remain deadlocked but developments in Ireland, which averted an election, appeared to help ease some of the concerns. Moreover, reports suggesting German coalition talks could resume helped cool political uneasiness, along with polls in Spain ahead of next month's vote in Catalonia. However, uncertainty regarding U.S. tax reform continued to fester.

Schwab's 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. The euro and the British pound were lower versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed on the heels of the lackluster session in the U.S. yesterday. The markets remained relatively skittish amid lingering U.S. tax reform and European political uncertainties, the looming OPEC meeting that has weighed on crude oil prices, exacerbated by flared-up geopolitical concerns after reports suggested Japan had noticed radio signals that North Korea could be making preparations for another missile launch. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. However, despite some resurfacing uneasiness, Asian markets remain near record levels and Jeffrey Kleintop, CFA, notes that the global market rally seen this year has been fostered by broad economic growth and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks.
Stocks in Japan and Hong Kong finished flat, with the yen paring gains seen on the North Korean reports, while headlines regarding the possibility that China could limit investor flows into Hong Kong-listed shares stymied conviction. Meanwhile, mainland Chinese equities rose, rebounding from a recent fall, while those listed in South Korea also moved to the upside, but markets in Australia and India declined.

Items on tomorrow's international economic calendar include retail sales and the trade balance from Japan, consumer spending and GDP from France, CPI from Spain and Germany, and confidence data from the Eurozone.

Markets Mixed in Lackluster Session

Charles Schwab: On the Market

Posted: 11/27/2017 4:15 PM EST

Markets Mixed in Lackluster Session

 

U.S. equities finished mixed with energy stocks finding pressure amid a drop in crude oil prices ahead of this week's OPEC production meeting. However, consumer discretionary stocks got a boost on upbeat holiday spending data, while an unexpected jump in new home sales to a decade high also added some optimism. Treasury yields were little changed and the U.S. dollar ticked higher, while gold gained modest ground. 

The Dow Jones Industrial Average (DJIA) rose 23 points (0.1%) to 23,581, the S&P 500 Index declined 1 point to 2,601, and the Nasdaq Composite fell 11 points (0.2%) to 6,879. In moderate volume, 766 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.84 to $58.11 per barrel and wholesale gasoline was $0.01 higher at $1.79 per gallon. Elsewhere, the Bloomberg gold spot price increased $6.05 to $1,294.42 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.2% higher to 92.92.

Meredith Corp. (MDP $67) announced an agreement to acquire Time Inc. (TIME $18) for $18.50 per share in cash, for a total transaction value of about $2.8 billion, including the assumption of debt. Shares of both companies rallied.

The retail sector was mostly higher with the markets paying attention to reports on how the holiday shopping season unofficially kicked off during the Black Friday weekend, and bolstered by today's online shopping deals known as Cyber Monday. According to Adobe Analytics, online sales on Thanksgiving Day and Black Friday rose 17.9% year-over-year (y/y) to about $7.9 billion and are estimated to be up 16.5% today to a record $6.6 billion.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in our article, Holiday Shopping Season: Are Consumers Set to Stuff Some Stockings?, that we do think the picture entering the season is a positive one, with unemployment low, wages trending higher and consumer confidence the highest in almost 17 years. There are 32 days between Thanksgiving and Christmas this year, the second largest number of days possible between the two holidays. And Christmas falls on a Monday, giving shoppers one last weekend to ring the register. However, Brad cautions investors that at this point this rosy picture for consumers doesn't mean you should run out and buy retailers as discussed in his latest Schwab Sector Views: 'Tis the Season…Almost.

New home sales surprisingly jump to kick off busy week

New home sales (chart) unexpectedly jumped to the highest since October 2007, rising 6.2% month-over-month (m/m) in October to an annual rate of 685,000 units, versus the Bloomberg forecast calling for a drop to 625,000 units and the downwardly revised 645,000 unit pace in September. The median home price was up 3.3% y/y to $312,800. New home inventory fell to 4.9 months of supply at the current sales pace from 5.2 in September.

Sales surged m/m in the Northeast and jumped in the Midwest, while also rising solidly in the South and West. New home sales are based on contract signings instead of closings. Sales of properties in which construction has not yet started reached the highest in over a decade, suggesting housing starts could start to accelerate. The heightened confidence and status of the consumer appears to be translating into increased willingness to make major purchases, adding credence to Schwab's Brad Sorensen's, CFA, latest analysis of how important the consumer is not only to the holiday season but for the overall economy in his latest Schwab Sector Views.

The Dallas Fed Manufacturing Activity Index dropped more than expected but remained solidly in expansion territory (a reading above zero). The index fell to 19.4 in November from 27.6 in October—the highest since March 2006—and versus forecasts of a decline to 24.0.

Today's reports kick off the week that will return to normal operating hours and bring plenty of reports and events for the markets to contend with. OPEC will conduct a production meeting, the Senate could vote on its tax reform plan that differs significantly from the House's plan that passed two weeks ago, and Fed Chairwoman Janet Yellen is expected to address the Joint Economic Committee of Congress. Moreover, we will get a number of economic reports, continuing with tomorrow's releases of Consumer Confidence, forecasted to show sentiment remains elevated at a level of 124.0 for November, but slightly lower than the 125.9 posted in October, as well as the advance goods trade balance, wholesale inventories, the Richmond Fed Manufacturing Index and the S&P CoreLogic Case-Shiller Home Price Index. Late in the week, investors will be treated to the second look (of three) at Q3 GDP, the Fed's Beige Book, personal income and spending, Markit's Manufacturing PMI Index, the ISM Manufacturing Index, and November auto sales.

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, the bull market continues to be undisturbed by myriad actual or potential negative events and momentum favors the bulls for the foreseeable future. However, 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.

Treasuries were little changed, as the yield on the 2-year note and the 30-year bond were flat at 1.74% and 2.77%, respectively, while the yield on the 10-year note dipped by 1 bp to 2.34%. The yield curve has flattened and the U.S. dollar has found pressure as of late with the markets grappling with tax reform uncertainty, subdued inflation expectations, and broad-based global economic growth.

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.

Europe dips despite eased German political concerns, Asia mostly lower

European equity markets finished mostly lower, even as the euro dipped slightly after a recent run to a two-month high versus the U.S. dollar. Energy issues saw noticeable pressure as crude oil prices fell ahead of this week's OPEC production meeting, while the markets shrugged off cooling political concerns in Germany after reports suggested coalition talks could resume after collapsing last week. This joins deadlocked U.K. Brexit talks and festering U.S. tax reform uncertainty to keep the markets on edge. However, Spanish stocks rose slightly amid eased concerns as polls ahead of next month's vote in Catalonia are showing pro-Spain parties have as much support as pro-independence forces, per Bloomberg. 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. The British pound was little changed versus the greenback and bond yields in the region finished mostly lower.

Stocks in Asia finished mostly to the downside, with technology issues weighing heavily on South Korean equities, while the Bank of Korea is expected to raise rates after its monetary policy meeting later this week. Mainland Chinese stocks and those traded in Hong Kong declined, with sentiment being hampered by the recent rally in the nation's bond yields, which appears to be fostering some profit-taking after this year's strong gains, while a report showed growth in the country's industrial profits slowed in October. 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. Japanese securities traded slightly to the downside, with the yen gaining ground late in the session amid the continued pressure on the U.S. dollar amid yield curve concerns and political uncertainty, but markets in Australia and India bucked the trend, finishing modestly higher.

The international economic calendar will be light tomorrow, with reports slated for release to include import prices and consumer confidence from Germany, and consumer confidence from France.

Stocks Add to Yesterday’s Bounce

Charles Schwab: On the Market

Posted: 11/21/2017 4:15 PM EST

Stocks Add to Yesterday’s Bounce

 

The U.S. equity markets added to yesterday's gains, despite a slew of mixed earnings reports, and continued global political uncertainty. Upbeat existing home sales gave the bulls some sustenance on the heels of yesterday's jump in Leading Indicators. However, volume was again somewhat restrained ahead of this week's Thanksgiving holiday break for the markets. Treasury yields were mixed and the U.S. dollar dipped, while crude oil and gold were higher.

The Dow Jones Industrial Average (DJIA) rose 161 points (0.7%) to 23,591, the S&P 500 Index gained 17 points (0.7%) at 2,599, and the Nasdaq Composite jumped 72 points (1.1%) to 6,862. In moderate volume, 828 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.41 to $56.83 per barrel and wholesale gasoline was $0.03 higher at $1.77 per gallon. Elsewhere, the Bloomberg gold spot price gained $2.96 to $1,279.88 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—decreased 0.1% to 94.00.

The U.S. Department of Justice (DOJ) announced that it is suing to block AT&T Inc's (T $34) proposed $85 billion takeover of Time Warner Inc. (TWX $90), noting that the merger would greatly harm American consumers. T responded by saying the DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent and it is confident the U.S. District Court will reject the Government's claims and permit this merger under longstanding legal precedent. T was lower and TWX was higher.

Lowe's Companies Inc. (LOW $81) reported Q3 earnings-per-share (EPS) of $1.05, above the $1.02 FactSet estimate, as revenues increased 6.5% year-over-year (y/y) to $16.8 billion, exceeding the projected $16.6 billion. Q3 same-store sales grew 5.7% y/y, north of the expected 4.5% gain. LOW reaffirmed its full-year guidance. Shares dipped.

Dollar Tree Inc. (DLTR $99) posted Q3 profits of $1.01 per share, well above the estimated $0.90, with revenues rising 6.3% y/y to $5.3 billion, roughly in line with forecasts. Q3 same-store sales grew 3.2% y/y, exceeding the expected 2.5% increase. DLTR issued Q4 earnings guidance that topped expectations, while it raised its full-year outlook. Shares were higher.

Palo Alto Networks Inc. (PANW $150) announced a fiscal Q1 loss of $0.70 per share, or EPS of $0.74 ex-items, versus the expected profit of $0.68, as revenues rose 27.0% y/y to $506 million, exceeding the estimated $489 million. The next-generation security company issued Q2 guidance that topped forecasts and raised its full-year outlook. Shares were solidly higher.

Intuit Inc. (INTU $152) reported a fiscal Q1 loss of $0.07 per share, or EPS of $0.11 ex-items, compared to the expected earnings of $0.05, with revenues rising 14.0% y/y to $886 million, north of the estimated $855 million. The maker of QuickBooks and TurboTax issued Q2 guidance that was mostly above estimates, while it reaffirmed its full-year outlook. Shares were lower.

Campbell Soup Co. (CPB $46) posted fiscal Q1 EPS of $0.91, or $0.92 ex-items, versus the expected $0.97, as revenues declined 2.0% y/y to $2.2 billion, roughly in line with forecasts. The company said this was a difficult quarter, particularly for its U.S. soup business, amid a continued volatile operating environment with a rapidly evolving retailer landscape and competitive activity pressuring the top line. CPB lowered its full-year EPS outlook, while reaffirming its revenue guidance. Shares fell.

Continued rebound in existing home sales stronger than expected

Existing-home sales in October rose 2.0% month-over-month (m/m) to a 5.48 million annual rate, compared to the Bloomberg forecast of a 5.40 million pace, and versus September's downwardly revised 5.37 million rate. Sales of single-family homes rose 2.1% m/m but were 1.0% below year ago levels, while purchases of multi-family structures were up 1.7% m/m and flat y/y. The median existing-home price was 5.5% above year ago levels at $247,000, marking the 68th-straight month of y/y gains. Unsold inventory came in at a 3.9-months pace at the current sales rate—a record low—down from the 4.4 months rate a year ago. Inventory of homes for sale decreased and is down 10.4% y/y, falling for 29 consecutive months. Sales were higher m/m in all regions. Existing home sales are based on contract closings instead of signings and account for the majority of the housing sales market.

The National Association of Realtors (NAR) noted job growth in most of the country continues to carry on at a robust level and is starting to slowly push up wages, which is in turn giving households added assurance that now is a good time to buy a home. However, supply constraints for both new and previously-owned homes are posing headwinds for the housing sector and may be offsetting solid demand, with prices rising sharply to dampen affordability, which could be exacerbated by rising interest rates.

Housing has helped strong Q3 earnings results from the financial sector as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her newest article, Green Grass and High Tides: Earnings Stellar But Not Without Risk. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, maintains his outperform rating on financials, noting in his latest, Schwab Sector Views: 'Tis the Season…Almost, that mortgage demand appears healthy and high rental rates in some parts of the country could provide further incentive for home buying.

Treasuries were mixed, as the yield on the 2-year note rose 2 basis points (bps) to 1.77%, while the yield on the 10-year note dipped 1 bp to 2.36% and the 30-year bond rate fell 2 bp to 2.76%.
Treasury yields continue to diverge and the U.S. dollar has dipped as the markets grapple with U.S. tax reform uncertainty ahead of next week's expected Senate vote on its plan that differs significantly from the House's plan that passed last week, along with the failed coalition talks in Germany. 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.

Ahead of Thursday's Thanksgiving holiday break for all U.S. markets, tomorrow's economic calendar will be jam-packed with data, with weekly mortgage applications being followed by weekly jobless claims, preliminary durable goods orders and the final University of Michigan Consumer Sentiment Index. The data is expected to show the employment front remains solid, manufacturing demand continues to pick up and elevated consumer sentiment persists. However, the afternoon release of the minutes from the Fed's most recent monetary policy meeting that ended November 1st with an unchanged stance will likely garner the heaviest attention as a December rate hike is highly expected. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, that 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.

Europe and Asia higher, taking lead from U.S. action yesterday

European equity markets traded higher, with energy issues getting a boost with crude oil prices moving modestly higher after a bout of weakness and ahead of next week's OPEC meeting. The markets continued to shrug off flared-up political uncertainty as the potential for a German election redux rose 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. In economic news, Switzerland's exports declined for a second-straight month, while U.K. public sector net borrowing came in above expectations. The euro and the British pound were little changed versus the U.S. dollar, while bond yields in the region finished mostly lower.

Stocks in Asia finished higher following the gains in the U.S. yesterday, with a solid jump in the nation's Leading Indicators helping foster some resiliency in the face of tax reform concerns and a flare-up in German political uncertainty. Japanese equities advanced, aided by some weakness in the yen, rebounding from a recent pullback from recent highs not seen in over two decades. 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 in his latest article, 5 Reasons Investors Should Give Thanks, adding that stocks appear to closely track earnings growth, even where risks are most intense, while broad economic and earnings growth is expected to continue in 2018.

Stocks in mainland China and Hong Kong moved nicely higher, with financials jumping as earnings optimism toward the sector ramped up, while markets in South Korea and India also finished to the upside. Markets in Australia gained modest ground, with the markets digesting the minutes from the Reserve Bank of Australia's (RBA) monetary policy meeting earlier this month, which resulted in an unchanged policy decision, as well as a speech from RBA Governor Lowe. Both suggested the economy is improving but the central bank was not in a hurry to begin normalizing policy through rate increases.

Tomorrow’s international economic calendar will be quiet, save the lone report of consumer confidence from the Eurozone.