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 Advance Ahead of Jobs Report

Charles Schwab: On the Market

Posted: 12/7/2017 4:15 PM EST

Stocks Advance Ahead of Jobs Report

 

U.S. stocks traded higher with technology shares leading the advance on the heels of some upbeat results and guidance from Broadcom. Crude oil prices rose solidly and Treasury yields were mostly higher, while gold was lower and the U.S. dollar ticked to the upside to add to its recent gains. Market participants continued to assess the tax reform landscape amid the reconciliation process. Tomorrow, the morning release of the November labor report will likely garner much attention.

The Dow Jones Industrial Average (DJIA) increased 71 points (0.3%) to 24,211, the S&P 500 Index was 8 points (0.3%) higher at 2,637, and the Nasdaq Composite advanced 36 points (0.5%) to 6,813. In moderate volume, 824 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.73 to $56.69 per barrel and wholesale gasoline gained $0.04 to $1.70 per gallon. Elsewhere, the Bloomberg gold spot price moved $15.54 lower to $1,247.83 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% higher at 93.74.

Broadcom Limited (AVGO $264) reported fiscal Q4 earnings-per-share (EPS) of $1.50, or $4.59 ex-items, versus the $4.52 FactSet estimate, as revenues rose 17.0% year-over-year (y/y) to $4.9 billion, above the projected $4.8 billion. The chipmaker issued Q1 revenue guidance that had a midpoint above expectations. The company also announced a 72% increase to its quarterly dividend to $1.75 per share. Shares finished flat after initially trading higher.

Dollar General Corp. (DG $93) posted Q3 EPS of $0.93, versus the estimated $0.94, as revenues increased 11.0% y/y to $5.9 billion, topping the projected $5.8 billion. Q3 same-store sales grew 4.3% y/y, exceeding the forecasted 2.7% gain. DG narrowed its full-year earnings outlook, while increasing its sales guidance. Shares gained ground.

Dow member General Electric Co. (GE $18) announced that its GE Power group plans to reduce its global headcount by about 12,000 positions as part of its effort to reduce overall structural costs. GE traded to the upside.

Lululemon Athletica Inc. (LULU $72) announced Q3 EPS of $0.43, or $0.56 ex-items, versus the projected $0.52, with revenues rising 14.0% y/y to $619 million, north of the expected $610 million. Q3 same-store sales grew 8.0% y/y, above the estimated 5.3% gain. The company's gross and operating margins topped forecasts. LULU issued Q4 guidance that topped forecasts, while it raised its full-year outlook. Separately, the company authorized the repurchase of up to $200 million in its common shares. Shares gained solid ground.

Shares of SAGE Therapeutics Inc. (SAGE $156) rallied 70% after the company announced positive results regarding a trial of its treatment for major depressive disorder.

Consumer credit tops expectations, jobless claims surprisingly decline

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $20.5 billion during October, well above the $17.0 billion forecast of economists polled by Bloomberg, while September's figure was adjusted lower to $19.2 billion from $20.8 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $12.2 billion, a 5.3% increase y/y, while revolving debt, which includes credit cards, rose by $8.3 billion, a 9.9% y/y rise.

Weekly initial jobless claims (chart) decreased by 2,000 to 236,000 last week, versus the Bloomberg forecast of 240,000, as the prior week was unrevised at 238,000. The four-week moving average dipped by 750 to 241,500, while continuing claims dropped by 52,000 to 1,908,000, south of estimates of 1,919,000.

The upbeat report comes ahead of tomorrow's November nonfarm payroll report, with jobs projected to rise by 195,000, following October's 261,000 jump (economic calendar). Private sector employment is expected to grow 198,000 on the heels of the prior month's 252,000 gain. The unemployment rate is forecasted to remain at 4.1%. However, given the importance of the consumer on U.S. economic output and the subdued inflation outlook, tomorrow's wage component of the report is likely to garner the most attention as the markets try to project the pace of Fed rate hikes in 2018 after December's highly-expected increase. Average hourly earnings are anticipated to rise 0.3% month-over-month (m/m) after being disappointingly flat in October and the y/y pace of earnings is projected to accelerate to 2.7% from 2.4%.

As we head into 2018, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers his latest, Schwab Sector Views: 18 Thoughts Heading into '18. In our view, a repeat of 2017 is unlikely, and we’re expecting more sector changes in 2018 than there were in 2017. Brad adds that the Fed will be under new management and have several new members throughout the year, and we don’t currently expect major changes in the normalization process but the new makeup could change things.

Treasuries were mostly lower, with the yield on the 2-year note dipping 1 basis point (bp) to 1.80%, while the yield on the 10-year note increased 2 bps to 2.36%, and the 30-year bond rate advanced 3 bps to 2.76%.

The U.S. dollar slightly extended its weekly gain and Treasury yields dipped. Tax reform continues to be a main focus for the markets as the House and Senate grapple with key differences in their bills with the reconciliation process expected to be highly competitive.

Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of some likely changes, based on what we know about the current bills, in his article, Tax Reform: What Investors Should Know, though he cautions that it's hard to be certain what might be in the final bill.
We believe it would be premature for individual investors to make changes now, given the high degree of uncertainty over any eventual new tax law, but Hayden offers his Tax Reform: Frequently Asked Questions for investors wondering how the most sweeping tax overhaul effort in decades will affect them.

Additional economic reports expected tomorrow include wholesale inventories, forecasted to have declined 0.4% m/m in October, and the preliminary University of Michigan Consumer Sentiment Index, expected to have ticked higher for December's initial result to 99.0 from November's final read of 98.5.

Europe and Asia finish mixed

European equity markets finished mixed, following some divergent economic data in the region, while conviction remained stymied by policy uncertainty as the U.S. tax reform reconciliation process looms and U.K. Brexit concerns festered. The British pound turned slightly higher versus the U.S. dollar as U.K. Prime Minister May scrambles amid heightened political pressures to try to make progress on Brexit negotiations. The U.K. and EU have reportedly agreed on the future role of the European Court of Justice in British legal cases but the Irish border issues still remains a substantial sticking point as a deadline nears for the EU to deem if negotiations have progressed enough to move on to the next stage. 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, German industrial production unexpectedly fell in October and the Q3 eurozone GDP growth rate was revised higher to a 2.6% y/y pace, from a previous estimate of a 2.5% gain, where it was expected to remain. The euro was little changed versus the U.S. dollar and bond yields in the region traded mixed.

Stocks in Asia finished mixed, with technology issues rebounding after a recent bout of pressure, while the focus on U.S. tax reform remained and the markets appear to be continuing to assess the year's strong advance. The global rally is discussed by Schwab's Jeffrey Kleintop, CFA, and Randy Frederick, in the video, It's All Relative: Why Stocks May Not Be Overvalued. Japanese equities almost overcame yesterday's entire drop, with the yen giving back yesterday's rise. Stocks trading in Hong Kong rebounded slightly from yesterday's slide, though mainland Chinese shares declined with banks seeing some pressure after a the IMF said lenders need more capital and the government proposed liquidity-management regulations. Australian securities traded higher, led by strength in banking stocks and Indian equities gained ground on the heels of yesterday's unchanged monetary policy decision by the Reserve Bank of India. South Korean stocks declined with the tech rebound being countered by weakness in manufacturing and energy issues.

The international economic docket for tomorrow will yield reports on Q3 GDP and bank lending from Japan, home loans from Australia, the trade balance and labor costs from Germany, and construction output, industrial and manufacturing production, and the trade balance from the U.K.

Stocks Rally Ahead of Senate Tax Vote

Charles Schwab: On the Market

Posted: 11/30/2017 4:15 PM EST

Stocks Rally Ahead of Senate Tax Vote

 

U.S. stocks traded nicely higher as market participants weighed the likelihood of the Senate passing its tax reform bill, with a vote expected to be held soon. Energy stocks rose as crude oil prices ticked higher and Treasury yields extended recent gains, while gold and the U.S. dollar traded lower. Domestic economic reports showed that personal income and spending in October rose and weekly jobless claims dipped. Kroger announced upbeat quarterly profits and Costco reported better-than-expected same-store sales growth. 

The Dow Jones Industrial Average (DJIA) rallied 332 points (1.4%) to 24,272, the S&P 500 Index advanced 22 points (0.8%) to 2,648, and the Nasdaq Composite gained 50 points (0.7%) to 6,874. In heavy volume, 1.5 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.10 higher to $57.40 per barrel and wholesale gasoline was unchanged at $1.73 per gallon. Elsewhere, the Bloomberg gold spot price decreased $8.30 to $1,275.34 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 93.07.

PVH Corp. (PVH $135) reported Q3 earnings-per-share (EPS) of $3.05, or $3.02 ex-items, versus the $2.91 FactSet estimate, as revenues increased 5.0% year-over-year (y/y) to $2.4 billion, above the projected $2.3 billion. PVH issued Q4 EPS guidance that was below expectations, though it raised its full-year profit outlook. The parent of Calvin Klein and Tommy Hilfiger projected Q4 and full-year revenues to be slightly above estimates. Shares declined.

Kroger Co. (KR $26) posted Q3 profits of $0.44 per share, compared to the forecasted $0.40, with revenues rising 4.5% y/y to $27.7 billion, above the expected $27.5 billion. The grocer's Q3 same-store sales grew 1.1% y/y, versus the estimated 0.9% gain. KR reaffirmed its full-year EPS outlook. Shares rallied.

Costco Wholesale Corp. (COST $184) moved nicely higher after the company said its November same-store sales grew 10.8% y/y, above the projected 7.9% increase. L Brands Inc. (LB $56) said its November same-store sales declined 1.0% y/y, versus the forecasted 0.2% gain, but noted that it sees December sales being flat to up low-single digits. LB rallied.

Personal income and spending rise, jobless claims dip

Personal income (chart) rose 0.4% month-over-month (m/m) in October, above the Bloomberg forecast of a 0.3% gain, and compared to September's unrevised 0.4% increase. Personal spending increased 0.3% last month, matching expectations, and versus September's downwardly revised 0.9% gain. The October savings rate as a percentage of disposable income was 3.2%. The PCE Deflator was 0.1% higher, in line with expectations and versus the prior month's unrevised 0.4% gain.

Compared to last year, the deflator was 1.6% higher, north of estimates of a 1.5% rise and compared to September's upwardly revised 1.7% gain. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, matching expectations, and versus the prior month's upwardly revised 0.2% gain. The index was 1.4% higher y/y, in line with estimates, and compared to September's upwardly revised 1.4% increase.

Weekly initial jobless claims (chart) declined by 2,000 to 238,000 last week, versus forecasts calling for it to match the prior week’s upwardly revised 240,000 figure. The four-week moving average rose by 2,250 to 242,250, while continuing claims grew by 42,000 to 1,957,000, north of estimates of 1,890,000.

The Chicago Purchasing Managers Index (chart) declined in November to 63.9 from October's unrevised 66.2 level, and better than expectations calling for a decline to 63.0. The index remained solidly in expansion territory (above 50) and pulled back from the highest level since March 2011, adding to a long list of signs that the manufacturing sector remains solid.

Schwab's Chief Investment Strategist Liz Ann Sonders notes that U.S. business capital spending has already picked up but an even sharper recovery could be in the cards for 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. Tomorrow, November manufacturing activity will be on display with the releases of the ISM Manufacturing Index and the final Markit Manufacturing PMI Index. The ISM index is projected to dip to 58.3 from 58.7 in October, while Markit's index is expected to be revised higher to 54.0 from the preliminary 53.8 reading, but slightly below October's 54.6 level. Readings above 50 for both reports denote expansion.

Treasuries traded lower, with the yield on the 2-year note rising 2 basis points (bps) to 1.78%, the yield on the 10-year note gaining 3 bps to 2.42%, and the 30-year bond rate ticking 1 bp higher to 2.83%.

Treasury yields added to yesterday's noticeable curve steepening after a recent bout of flattening that fostered some market weariness, while the U.S. dollar pared its modest weekly rebound.
The markets continued to grapple with the continued signs of broad-based global economic growth and mostly favorable earnings results, along with tax reform uncertainty. The Senate appears headed to vote later today or tomorrow on its bill with signs emerging the past couple days that it has been tweaked enough to find enough support to pass. This has fostered some optimism regarding tax reform becoming a reality this year, but has also resulted in some rotation in the stock market sectors, which helped lead yesterday's selloff in the tech sector.

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, if the bill passes the Senate, the House and Senate would need to convene a conference to negotiate and reconcile differences between the two bills to produce a single consensus bill. That bill would then need to be approved by both chambers before it could be sent to President Donald Trump for his signature.

Negotiations between the two chambers 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.

Tomorrow, the U.S. economic calendar will give us a look at national manufacturing activity in November with the releases of the ISM Manufacturing Index, projected to dip to 58.3 from 58.7 in October, and the final Markit Manufacturing PMI Index, expected to be revised higher to 54.0, but down from October's 55.3 level. Readings above 50 for both depict expansion. Construction spending for October will also be reported, forecasted to have increased 0.5% after rising 0.3% in September.

Europe gives up gains as euro and pound rally, Asia mostly lower

European equity markets relinquished early gains and finished mostly lower, with the euro extending a rise amid a downside reversal for the U.S. dollar late in the session and the British pound jumping on signs of progress in deadlocked Brexit negotiations. Energy issues gave up an advance as crude oil prices were choppy ahead of today's OPEC production decision. OPEC is expected to deliver an extension of cuts to the end of 2018 but there were some uncertainties that lingered ahead of the decision. U.S. tax reform optimism continued but this fostered yesterday's noticeable rotation out of the technology sector, and the group remained under pressure on this side of the pond. In economic news, eurozone consumer price inflation estimates came in a bit cooler than expected for November, while the region's October unemployment rate dipped unexpectedly. German retail sales surprisingly fell last month. 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. Bond yields finished mostly lower to exacerbate pressure on financials.

Stocks in Asia finished mostly lower, with the global selloff in the tech sector weighing on markets, while optimism of U.S. tax reform lingered and a flood of data in the region was digested. Shares trading in mainland China and Hong Kong fell, with the weakness in tech more than offsetting the government's reports on manufacturing and the key services sectors showing growth accelerated for both, with the former surprisingly increasing. South Korean equities dropped as the tech pullback was met with an expected increase in the Bank of Korea's benchmark interest rate and an unexpected drop in the nation's industrial production. Australian securities moved lower with financials seeing some pressure after the government announced that it will launch an inquiry into the sector. Indian stocks also traded to the downside on the tech volatility and ahead of the nation's Q3 GDP report. After the closing bell, India's Q3 GDP accelerated to a 6.3% y/y pace of growth, but slightly below the projected 6.4% expansion.

However, Japanese equities rose with the yen extending yesterday's weakness and strength in financials helping counter the slide in the tech sector. Japan reported that industrial production rose at a smaller rate than expected but growth in vehicle production accelerated solidly in October. Despite the downside pressure on most markets, they remain nicely higher on the year, fostered 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.

The international economic docket for tomorrow will yield a host of reports from Japan as the island nation reports its jobless rate, CPI, capital spending, company sales and vehicle sales. China, India and South Korea will deliver manufacturing PMI reads and the latter will also announce final Q3 GDP. Reports from across the pond will include Markit Manufacturing PMI reads from the U.K., Germany, France, Italy and the eurozone.

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.

Stocks Rally as Bulls Come Charging Back

Charles Schwab: On the Market

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

Stocks Rally as Bulls Come Charging Back

 

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

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

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

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

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

Homebuilder sentiment and industrial production top forecasts

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

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

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

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

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

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

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

Treasury yields and the U.S. dollar rebounded somewhat from recent pressure that came from a flare-up in global risk aversion on the heels of the world stock market rally as of late. Festering U.S. tax reform uncertainty—today the House passed its bill to overhaul the tax code, which has some significant differences from the Senate's version—has fostered the change in conviction. This has countered a relatively positive economic landscape, while recent soft Chinese economic data and market skittishness as the yield curve has flattened have exacerbated sentiment. As such, check out our article, Does Low Market Volatility Portend a Market Tumble?, as well as Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest commentary, Tax Reform: Key Differences Between the Senate and House Plans.

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

Europe recovers on data, Asia rebounds from recent slide

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

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

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

Stocks Log Losses as Senate Reveals Tax Plan

Charles Schwab: On the Market

Posted: 11/9/2017 4:15 PM EST

Stocks Log Losses as Senate Reveals Tax Plan

 

U.S. stocks traded lower and Treasury yields gave up early gains and finished mixed as volatility rose ahead of today's release of the Senate's tax reform plan, which differed from the House's version in several areas. Crude oil prices and gold gained ground, while the U.S. dollar traded lower. In equity news, earnings reports continued to roll out, headlined by Macy's better-than-expected results. The economic docket showed weekly jobless claims rose more than forecasted and a monthly gain in wholesale inventories matched estimates. 

The Dow Jones Industrial Average (DJIA) declined 101 points (0.4%) to 23,462, the S&P 500 Index fell 10 points (0.4%) to 2,585, and the Nasdaq Composite dropped 39 points (0.6%) to 6,750. In moderate volume, 886 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.36 to $57.17 per barrel and wholesale gasoline was unchanged at $1.82 per gallon. Elsewhere, the Bloomberg gold spot price was $4.88 higher at $1,286.24 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 94.51.

Macy's Inc. (M $20) reported Q3 earnings-per-share (EPS) of $0.12, or $0.23 ex-items, versus the $0.19 FactSet estimate, as revenues declined 6.1% year-over-year (y/y) to $5.3 billion, roughly in line with projections. Q3 same-store sales fell 3.6% y/y, larger than the expected 2.9% decline. The company's gross margin improved slightly y/y and topped forecasts, while it noted that inventories declined. M reaffirmed its full-year guidance, pointing out that it expects continued improvement in trends in the holiday quarter, including a lift from loyalty and digital, and it intends to head into 2018 with momentum. Shares traded higher.

Kohl's Corp. (KSS $41) posted Q3 EPS of $0.70, below estimates of $0.72, with revenues inching 0.1% higher y/y to $4.3 billion, roughly in line with forecasts. Quarterly same-store sales ticked 0.1% higher y/y, versus the expected 0.7% decrease. The company's gross and operating margins came in below the Street's forecasts. KSS raised the low end of its full-year profit outlook. Shares pared heavy early losses and finished modestly lower as analysts expressed some optimism regarding the unexpected positive same-store sales growth in Q3 heading into the holiday season.

D.R. Horton Inc. (DHI $46) announced fiscal Q4 earnings of $0.82 per share, one penny north of expectations, as revenues grew 11.0% y/y to $4.1 billion, above the projected $4.0 billion. The homebuilder's closings, net orders and backlog all topped projections. DHI issued full-year revenue guidance that was just above estimates. Separately, the company increased its quarterly dividend by 25.0% to $0.125 per share. Shares were higher.

Monster Beverage Corp. (MNST $59) reported Q3 EPS of $0.38, or $0.40 ex-items, compared to the anticipated $0.40, as revenues gained 15.4% y/y to $910 million, versus the forecasted $905 million. Shares were little changed.

Jobless claims rise

Weekly initial jobless claims (chart) grew by 10,000 to 239,000 last week, above the Bloomberg forecast of an increase to 232,000, with the prior week’s figure being unrevised at 229,000. The four-week moving average declined by 1,250 to 231,250, while continuing claims rose 17,000 to 1,901,000, north of estimates of 1,885,000.

Wholesale inventories (chart) were unrevised at the preliminary estimate of 0.3% month-over-month (m/m) gain for September, matching forecasts and compared to August's 0.8% gain. Sales grew 1.3% m/m, compared to forecasts of a 0.9% increase and August's upwardly revised 1.9% jump. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dipped to a 1.27 months pace from August's 1.28 rate.

Treasuries finished mixed, with the yield on the 2-year note declining 2 basis points (bps) to 1.63%, while the yields on the 10-year note and the 30-year bond ticked 1 bp higher to 2.33% and 2.80%, respectively.

Treasury yields relinquished gains and the U.S. dollar extended its loss amid uncertainty regarding the long road to tax reform as the markets received the Senate's tax overhaul plan today. The plan differs on some key points from the House's bill released last week, for example, the Wall Street Journal reported that the Senate's bill will delay the corporate tax cut until 2019. This has opened the door for what could be a highly contentious reconciliation process and was cited as a source of an afternoon jump in volatility in the markets. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses this in his latest commentary, House Tax Reform Bill: What Investors Need to Know, noting that we don’t suggest investors take any action at this time.

The release of the House’s bill is the first step in what will surely be a lengthy process, and changes to the bill are inevitable. The biggest stumbling block remains the Senate, where getting to 50 votes isn’t a sure thing. Clarity will come only as the process unfolds in the weeks ahead.
The markets are also contended with Fed leadership that is heading for some major changes, including at the Chairman position after President Trump picked Fed Governor Jay Powell to lead the Central Bank. Schwab's Chief Fixed Income Strategist Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick provide analysis in the video, Should a Change in Fed Leadership Matter to Investors?.

This all comes amid the positive global economic backdrop, which Schwab's Chief Investment Strategist Liz Ann Sonders points out could be bolstered by ramped up capital spending and productivity in her articles, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle and One Thing Leads to Another: Productivity's Rebound.

Tomorrow, the U.S. economic calendar will limit releases to the preliminary University of Michigan Consumer Sentiment Survey for November, forecasted to have ticked higher to 100.9 from October's final read of 100.7.

Europe mostly lower, Asia mixed

European equities moved lower, with U.S. tax reform uncertainties appearing to stymie conviction amid the recent global market rally, while U.K. Brexit talks garnered attention as they resumed after hitting a deadlock last month. For analysis, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?. The euro gained ground and the British pound ticked higher versus the U.S. dollar, while bond yields in the region moved to the upside. Moreover, mixed earnings results were in focus, while in economic news, German exports declined by a smaller amount than expected for September.

Stocks in Asia finished mixed as the markets contended with the tax-reform uncertainty in the U.S., some economic data in the region and as U.S. President Trump continued his tour with a stop in China. Japanese equities reversed to the downside late in the trading session as the yen rallied versus the U.S. dollar and as a report showed the nation's machine orders—a gauge of capital spending—fell more than expected in September. Shares trading in mainland China and Hong Kong advanced, while data showed the country's consumer and producer price inflation came in hotter than expected for October. Australian securities increased and Indian equities also ticked higher, while South Korean stocks dipped. With the global market rally appearing to pause somewhat amid the fiscal policy uncertainties in the U.S., Schwab's Jeffrey Kleintop, CFA, and Randy Frederick offer the video, Is An Optimistic Outlook for Global Equities Warranted?.

The international economic docket for tomorrow will yield the Tertiary Industry Index from Japan, industrial production from India and industrial and manufacturing production from the U.K. and France.

Stocks Mostly Flat as New Fed Chief Announced

Charles Schwab: On the Market

Posted: 11/2/2017 4:15 PM EDT

Stocks Mostly Flat as New Fed Chief Announced

 

U.S. stocks finished the regular trading session mostly unchanged amid some favorable reports on weekly jobless claims and preliminary Q3 productivity and as President Trump announced Jerome Powell is expected to succeed Janet Yellen as the next Federal Reserve Chair. The markets also grappled with the details of this morning's release of the House's tax reform proposal. Treasury yields and the U.S. dollar were lower, while gold and crude oil prices traded slightly higher. In earnings news, Facebook and Tesla were under pressure after announcing their quarterly results following yesterday's closing bell.

The Dow Jones Industrial Average (DJIA) rose 81 points (0.3%) to 23,516, the S&P 500 Index was nearly unchanged at 2,580, and the Nasdaq Composite decreased 2 points to 6,715. In moderately heavy volume, 910 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.24 to $54.54 per barrel and wholesale gasoline added $0.03 to $1.77 per gallon. Elsewhere, the Bloomberg gold spot price gained $1.52 to $1,276.18 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 94.69.

Facebook Inc. (FB $178) reported Q3 earnings-per-share (EPS) of $1.59, versus the $1.28 FactSet estimate, as revenues rose 47.0% year-over-year (y/y) to $10.3 billion, topping the projected $9.9 billion. Daily and monthly active users were roughly in line with expectations, but its higher-than-expected outlook for capital expenditures and security investments was well above forecasts, and the company said this will impact profitability. Shares traded lower.

Tesla Inc. (TSLA $298) posted a Q3 loss of $3.70, or $2.92 per share ex-items, versus the expected $2.31 per share shortfall, with revenues rising 29.9% y/y to $3.0 billion, compared to the forecasted $2.9 billion. The company lowered its production target for its Model 3 due to constraints at its battery manufacturing facility. Shares finished sharply lower.

Yum Brands Inc. (YUM $79) announced Q3 EPS of $1.18, or $0.68 ex-items, versus the forecasted $0.67, as revenues declined 5.0% y/y to $1.4 billion, roughly in line with expectations. Q3 same-store sales grew 3.0% y/y, compared to the estimated 1.9% increase. The parent of Taco Bell, KFC and Pizza Hut maintained its full-year guidance. Shares rallied.

Kraft Heinz Co. (KHC $77) reported Q3 EPS of $0.77, or $0.83 ex-items, compared to the expected $0.82, as revenues grew 0.7% y/y to $6.3 billion, mostly in line with expectations. The company's organic sales growth slightly missed forecasts as sales declined more than expected in North America, overshadowing solid growth in the rest of the world. Shares were lower.

Jobless claims decline unexpectedly, Q3 productivity jumps

Weekly initial jobless claims (chart) decreased by 5,000 to 229,000 last week, below the Bloomberg forecast of an increase to 235,000, with the prior week’s figure being revised higher by 1,000 to 234,000. The four-week moving average fell by 7,250 to 232,500, while continuing claims dropped 15,000 to 1,884,000, south of estimates of 1,894,000.

Preliminary Q3 nonfarm productivity (chart) rose 3.0% on an annualized basis, versus expectations of a 2.6% gain, following the unrevised 1.5% increase seen in Q2. Unit labor costs gained 0.5%, above the forecast calling for a 0.4% gain. Unit labor costs were revised higher to a rise of 0.3% in Q2.

Today's employment data precedes tomorrow's fully-loaded economic docket, headlined by the October nonfarm payroll report, which is expected to show job growth of 310,000, rebounding from September's hurricane-impacted 33,000 decline. Private sector employment is projected to rise by 301,000 after falling 40,000 the month prior. The unemployment rate is forecasted to remain at 4.2% and average hourly earnings are estimated to rise 0.2% month-over-month after, building on September's 0.5% gain, and be up 2.7% y/y. Also, the September trade deficit is expected to widen to $43.2 billion, and September factory orders are projected to match August's 1.2% m/m rise, while the ISM non-Manufacturing Index and Markit's Services PMI Index are estimated to show growth remained solid.

Economic growth remains steady and a relatively new bright spot may be emerging as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle. Liz Ann also points out that tax reform—if we get it—would be an additional kicker, and the House's bill released today is garnering heavy scrutiny. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Vice President of Trading and Derivatives, Randy Frederick, discuss in the video, Where Does Tax Reform Stand?.

Friday's reports are not likely to sway already elevated expectations of a December Fed rate hike, which was reinforced by the Central Bank's monetary policy decision yesterday, but could impact the outlook for the frequency of rate hikes next year. We expected two-to-three rate hikes in 2018, meaning the market's expectations may have to rise to meet the Fed's as Liz Ann notes in her analysis of yesterday's decision titled, Fed Stands Pat in November; Gets Ready to Go in December.

Also, the markets are grappling with today's expected pick of Fed Governor Jay Powell as the next Chairman of the Central Bank by President Donald Trump, along with the release of the House tax reform bill and the Bank of England's decision to raise rates as expected.

For analysis of the Fed and President Donald Trump's pick for the next Chairman check out our article, Fed Chairman: Why Trump's Choice Matters. President Trump's expected pick of Fed Governor Jay Powell as the next Fed Chairman today is also fostering uncertainty and Schwab's Chief Fixed Income Strategist Kathy Jones and Randy Frederick discuss in the video, Should a Change in Fed Leadership Matter to Investors?.

Treasuries finished higher, with the yield on the 2-year note flat at 1.61%, while the yields on the 10-year note and the 30-year bond declined 3 basis points to 2.35% and 2.83%, respectively. Treasury yields and the U.S. dollar dipped amid the aforementioned fiscal and monetary policy uncertainties, as well as the Bank of England's decision to raise rates today.

Europe mixed, pound falls despite BoE rate hike, Asia mostly lower amid earnings

European equity markets finished mixed, with the markets grappling with the details of the U.S. tax reform bill that was released today, while digesting the expected rate hike by the Bank of England (BoE), which included a more dovish forecast for further increases. The British pound fell on the BoE's decision and outlook to help the U.K. markets move higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the changed global monetary policy landscape in his article, How the Shift by Central Banks May Affect the Stock Market. The markets also awaited the Fed leadership announcement in the U.S., while losses for financials were limited by a rally in shares of Credit Suisse Group AG (CS $16) on the heels of the company's sharp increase in profits. Markit reported that eurozone manufacturing output continued to depict solid growth. The euro traded higher versus the U.S. dollar and bond yields were lower.

Stocks in Asia finished mostly lower on some mixed earnings data in the region, while the markets digested yesterday's unchanged Fed monetary policy decision. Also, caution appeared to set in ahead of the Bank of England's monetary policy decision, as well as the release of the House's tax reform bill and President Trump's pick for the next head of the Fed in the U.S. Japanese equities gained ground. Australian securities dipped with financials seeing some pressure, while shares trading in mainland China and Hong Kong also declined. Stocks trading in South Korea and India finished lower. For analysis of the global market rally, see Schwab's Liz Ann Sonders' and Randy Frederick's video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?.

The international economic docket for tomorrow will yield reads on the services sector from China, India, Australia and the U.K., with Australia also expected to report retail sales.

Gains Taper Near Close

Charles Schwab: On the Market

Posted: 10/26/2017 4:15 PM EDT

Gains Taper Near Close

 

After being higher for most of the day, the U.S. stock markets finished mixed, with gains in the tech sector on Twitter's quarterly results being tempered by health care issues following a disappointing outlook from Celgene. Treasury yields were higher amid mixed economic data, including a disappointing pending home sales report, while the U.S. dollar rallied with the euro seeing pressure in the wake of the European Central Bank's decision to cut and extend its stimulus measures. Crude oil prices were higher and gold was lower.

The Dow Jones Industrial Average (DJIA) rose 72 points (0.3%) to 23,401, the S&P 500 Index increased 3 points (0.1%) to 2,560, while the Nasdaq Composite was 7 points (0.1%) lower at 6,557. In moderate volume, 875 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil added $0.46 to $52.64 per barrel and wholesale gasoline gained $0.01 to $1.70 per gallon. Elsewhere, the Bloomberg gold spot price lost $11.30 to $1,266.23 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 1.1% higher at 94.70.

Twitter Inc. (TWTR $20) reported a Q3 net loss of $0.03 per share, or earnings-per-share (EPS) of $0.10 ex-items, versus the $0.06 FactSet estimate, as revenues declined 4.0% year-over-year (y/y) to $590 million, above the projected $587 million. The company said daily active users grew 14.0% y/y and monthly active users rose 4.0%. TWTR issued Q4 operating earnings guidance that topped forecasts. Shares rallied.

Comcast Corp. (CMCSA $36) posted Q3 earnings of $0.55 per share, or $0.52 ex-items, versus the projected $0.49, with revenues declining 1.6% y/y to $21.0 billion, compared to the forecasted $21.1 billion. CMCSA's video subscribers fell but by a slightly smaller amount than expected. The company said it increased operating earnings despite the impact of the severe storms and the uneven comparison due to the Rio Olympics. Shares finished lower.

Ford Motor Co. (F $12) announced Q3 EPS of $0.39, or $0.43 ex-items, compared to the expected $0.33, as automotive revenues rose 0.9% y/y to $33.6 billion, above the forecasted $33.0 billion. F raised the low end of its full-year EPS outlook. Shares were higher.

United Parcel Service Inc. (UPS $119) reported Q3 EPS of $1.45, in line with forecasts, as revenues grew 7.0% y/y to $16.0 billion, above the expected $15.6 billion. The company cited the impact of natural disasters, but said it saw balanced shipment growth and yield expansion, while its international profit rose solidly. UPS raised the low end of its full-year earnings outlook. Shares were higher.

Shares of Celgene Corp. (CELG $100) tumbled after the company lowered its 2017 revenue outlook and its long-term guidance for 2020, due to certain market dynamics and recent pipeline events. The updated guidance accompanied its Q3 earnings report, which showed revenues were softer than expected as sales of its psoriasis drug Otezla severely missed estimates. This also comes as the company announced last week that its highly-anticipated drug for Crohn's disease failed a late-stage trial.

In late-day action, the Wall Street Journal reported that CVS Health Corp. (CVS $73) was in talks to acquire Aetna Inc. (AET $179). Neither company commented on the headline. Shares of AET rallied on the news, while CVS was slightly lower.

Jobless claims rise

Weekly initial jobless claims (chart) rose by 10,000 to 233,000 last week, but below forecasts of an increase to 235,000, with the prior week’s figure being revised higher by 1,000 to 223,000. The four-week moving average dropped by 9,000 to 239,500, while continuing claims decreased 3,000 to 1,893,000, north of estimates of 1,890,000.

The advance goods trade deficit widened slightly more than expected to $64.1 billion in September, from the upwardly revised $63.3 billion in August, and compared to expectations of $64.0 billion.
Preliminary wholesale inventories increased 0.3% month-over-month (m/m) in September, versus forecasts for a 0.4% increase, and following August's downwardly revised 0.8% rise.

Pending home sales were flat m/m in September, versus projections of a 0.5% rise, and following the negatively-revised 2.8% drop registered in August. Compared to last year, sales were 5.4% lower, versus estimates of a 4.2% drop. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpectedly rose in September.

The Kansas City Fed Manufacturing Activity Index for October unexpectedly showed growth (a reading above zero) accelerated, with the index rising to 23, versus forecasts for it to remain at September's 17 level.

Treasuries were lower, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, were all 2 basis points higher at 1.62%, 2.45% and 2.96%, respectively.

The U.S. dollar rallied as the euro dropped in the wake of the monetary policy decision from the European Central Bank (ECB). Bond yields and the U.S. dollar have received some support from continued global economic and earnings optimism, most recently yesterday's solid gain in durable goods orders, as well as relative optimism regarding tax reform.

Tomorrow, the economic calendar will culminate with the first look (of three) at Q3 GDP, projected to show growth slowed a bit to a quarter-over-quarter (q/q) annualized rate of 2.6%, from the 3.1% pace seen in Q2, with personal consumption decelerating to a rise of 2.1% from 3.3%. Although the hurricanes are likely to have some impact, growth is projected to remain steady and post the best two-quarter performance since early 2015, per Bloomberg. The final University of Michigan Consumer Sentiment Index is also slated for release, with economists anticipating a reading of 101.1, matching the preliminary report, but above the 95.1 posted in September.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Trying to Reason With Hurricane Season: The Aftermath of "Harma," that we expect to see a boost in economic activity associated with the recovery/rebuilding efforts. Liz Ann also points out in her latest article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle, that U.S. business capital spending (capex) has already picked up; but an even sharper recovery could be in the cards for 2018, while tax reform—if we get it—would be an additional kicker courtesy of the proposed 100% depreciation allowance. She adds that the pick-up in capex is a relatively new bright spot for the U.S. economy; and in 2018 it will likely be a shining characteristic of the latter innings of an economic expansion.

Europe higher as ECB trims and extends stimulus measures

European equity markets traded higher, with the euro seeing solid pressure versus the U.S. dollar as the European Central Bank announced following its monetary policy meeting that it will cut its bond buying program in half in January. However, the ECB said it will extend the time frame for its purchases to September, with the possibility of another extension if needed, while committing to a substantial reinvestment of maturing debt in 2018 and for an extended period. The announcement came as the ECB left rates unchanged and the markets paid close attention to President Mario Draghi's customary press conference that followed the decision, in which he appeared to foster a dovish takeaway regarding his views on the inflation and eurozone economic growth. Schwab's Jeffrey Kleintop, CFA, offers analysis of the global monetary policy front in his article, How the Shift by Central Banks May Affect the Stock Market. Bond yields in the region were lower following the ECB's announcement. The British pound also saw some pressure. Spanish stocks led the way, rallying on eased concerns toward the Catalonia turmoil.

Stocks in Asia finished mixed following the declines in the U.S. yesterday, while the markets digested a flood of diverging earnings reports and awaited the monetary policy decision out of the eurozone from the ECB. Japanese equities gained modest ground, rebounding after snapping a 16-day winning streak yesterday, with some upbeat earnings reports helping overshadow strength in the yen. Schwab's Liz Ann Sonders discusses with Randy Frederick in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?. Stocks in mainland China advanced, but those traded in Hong Kong decreased, while a disappointing earnings report from the semiconductor sector weighed on South Korean securities, despite the nation reporting stronger-than-expected Q3 GDP growth. Finally, markets in Australia and India advanced.

Tomorrow’s international economic calendar will offer CPI and PPI from Japan, PPI from Australia, retail sales from Spain and housing prices from the U.K.