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Schwab Market Update

Stocks Rallying Back to Record Highs

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U.S. stocks are moving higher, with the Dow and S&P 500 back at record levels, as trade concerns continue to be held in check and the U.S. dollar is decisively adding to a recent drop. Technology issues are leading to the upside, while financials are hanging onto gains even as Treasury yields have turned mixed following a recent run. Existing home sales snapped a string of declines, jobless claims surprisingly dipped, regional manufacturing activity rose more than expected, and Leading Indicators extended a streak of gains. Gold is up and crude oil prices are down. Europe posted a broad-based gain.      

At 12:52 p.m. ET, the Dow Jones Industrial Average and the Nasdaq Composite are up 1.0%, while the S&P 500 Index is advancing 0.8%. WTI crude oil is decreasing $0.31 to $70.46 per barrel, Brent crude oil is declining $0.61 at $78.79 per barrel, and wholesale gasoline is flat at $2.02 per gallon. The Bloomberg gold spot price is trading $1.55 higher to $1,205.59 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is dropping 0.5% to 94.05.

Darden Restaurants Inc. (DRI $116) reported fiscal Q1 earnings-per-share (EPS) of $1.34, versus the $1.24 FactSet estimate, as revenues grew 6.5% year-over-year (y/y) to $2.1 billion, above the projected $2.0 billion. Q1 same-store sales at the parent of Olive Garden rose 3.3% y/y, compared to the forecasted 2.1% gain. DRI raised its full-year guidance. Shares have given up an early gain and are lower.

Thor Industries Inc. (THO $93) posted fiscal Q4 EPS of $1.67, well below the projected $2.03, as revenues increased 3.1% y/y to $1.9 billion, roughly in line with estimates. The recreational vehicle maker said while it is pleased with its full-year results, the year ended with near-term challenges for both the top line and gross margin. The company's Q4 gross margin came in well below expectations as it took actions to balance dealer inventory levels. Shares are falling. 

Red Hat Inc. (RHT $133) announced fiscal Q2 profits of $0.46 per share, or $0.85 ex-items, compared to the estimated $0.82, as revenues grew 14.0% y/y to $823 million, below the forecasted $828 million. The open source solutions company issued Q3 guidance that was below expectations, while it raised its full-year EPS forecast slightly and lowered its revenue outlook for the year. Shares are seeing solid pressure. 

Existing home sales snap losing streak, Leading Indicators continue to climb

Existing-home sales in August were flat month-over-month (m/m) at July's unrevised 5.34 million annual rate, after declining the past four months, and compared to the Bloomberg forecast of a 5.37 million pace. Sales of single-family homes were unchanged m/m and were 1.0% below year-ago levels, while purchases of multi-family structures were also unchanged from July and were down 4.8% y/y. The median existing-home price was up 4.6% y/y to $264,800, marking the 78th straight month of gains. Unsold inventory came in at a 4.3-months pace at the current sales rate, up from 4.1 months a year ago. Inventory of homes for sale was unchanged m/m. Sales rose m/m in the Northeast and Midwest, but declined in the South and West. Existing home sales account for the majority of the housing sales market.   

Lawrence Yun, Chief Economist at the National Association of Realtors (NAR) noted that the decline in home sales appears to have hit a plateau, and with inventory stabilizing and modestly rising, buyers appear ready to step back into the market. The recent rise in interest rates could pose a threat to the stabilizing housing markets, as Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses in his latest Schwab Sector Views: Retail Renaissance. Brad points out that interest rates that move up too high or too fast could dampen demand for mortgages, which could affect profits in certain areas of the financial sector. 

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for August increased 0.4% m/m, versus projections of a 0.5% gain and July's upwardly-revised 0.7% increase. The index has not seen a decline since May 2016. ISM new orders, the yield curve, the credit index, stock prices, jobless claims and consumer expectations were positive, while building permits and average workweek were negative. 

Weekly initial jobless claims (chart) declined by 3,000 to 201,000, versus estimates calling for a rise to 210,000, with the prior week's figure unrevised at 204,000. The four-week moving average decreased by 2,250 to 205,750, while continuing claims fell by 55,000 to 1,645,000, south of estimates of 1,705,000.

The Philly Fed Manufacturing Index (chart) in September improved more than expected, moving further into expansion territory (a reading above zero). The index rose to 22.9 from 11.9 in August, compared to estimates of a rise to 18.0.

Treasuries are mixed, with the yield on the 2-year note ticking 1 basis point (bp) higher to 2.80%, while the yield on the 10-year note is little changed at 3.06% and the 30-year bond rate is dipping 1 bp to 3.20%.  

Treasury yields appear to be pausing after a recent run, while the U.S. dollar is falling noticeably, extending a soft patch as of late that has the Dollar Index at a level not seen since July. Global trade worries remain contained in the wake of this week's latest round of tariffs exchanged between the U.S. and China that saw the rates on each other's goods come in below expectations. Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest video, A Closer Look at U.S. Tariffs, providing analysis of what’s been happening with trade and tariffs and two things that she thinks are not getting the attention that they deserve. The U.S. dollar has fallen, even as economic data has been solid and the Fed is highly-expected to announce a rate hike next week.

Europe higher even as currencies rally versus the U.S. dollar

European equities traded higher, with financials and materials leading to the upside amid the recent rise in global bond yields and a lack of an escalation in the global trade uneasiness. Stocks moved higher despite rallies in the euro and British pound as the U.S. dollar extended a drop seen as of late. Brexit and Italian budget concerns remained in focus, while the British pound found additional support from a much stronger-than-expected August U.K. retail sales report. The euro gained ground despite a larger-than-expected drop in September Eurozone consumer confidence, which came ahead of tomorrow's business activity reports from Markit. Bond yields in the region trimmed the recent rise, though Italian rates nudged higher. In monetary policy news, the Swiss National Bank kept its monetary policy stance unchanged. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the global landscape in his articles, Where Will The Next Crisis Come From? and U.S. Bonds Have an Important Message for International stocks,

noting the global economic, financial and market system now seems better prepared to manage the shocks of the past but there are other increased vulnerabilities. Jeff adds that the U.S. bond market historically has been a good indicator of peaks in international stock markets and this is now important since the yield curve in the U.S. has flattened more than in Europe.

The U.K. FTSE 100 Index and Italy's FTSE MIB Index were up 0.5%, France's CAC-40 Index rose 1.1%, Germany's DAX Index advanced 0.9%, Spain's IBEX 35 Index traded 1.0% to the upside, and Switzerland's Swiss Market Index gained 0.7%.   

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