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Schwab Market Update

Stocks Rise as Hopes for Tax Reform Stay Alive

U.S. equities extended weekly gains on the heels of last night's budget resolution passed by the Senate which sparked some tax reform optimism, though many obstacles still remain to securing an overhaul. Treasury yields and the U.S. dollar rallied, crude oil prices were also higher and gold declined. Limited economic news showed existing home sales in September increased more than forecasted. Meanwhile, on the earnings front, market participants seemingly shrugged off Dow member General Electric's severe earnings miss.

The Dow Jones Industrial Average (DJIA) advanced 166 points (0.7%) to 23,329, the S&P 500 Index gained 13 points (0.5%) to 2,575, and the Nasdaq Composite increased 24 points (0.4%) to 6,629. In moderate volume, 899 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil traded $0.34 higher to $51.84 per barrel and wholesale gasoline increased $0.04 to $1.68 per gallon. Elsewhere, the Bloomberg gold spot price declined $8.94 to $1,281.18 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.5% higher at 93.69. Markets were nicely higher for the week, as the DJIA jumped 2.0%, the S&P 500 Index gained 0.9% and the Nasdaq Composite advanced 0.4%.

Dow member General Electric Co. (GE $24) reported Q3 earnings-per-share (EPS) of $0.22, or $0.29 ex-items, well below the $0.49 FactSet estimate, as revenues grew 14.4% year-over-year (y/y) to $33.5 billion, above the projected $32.5 billion. The company called the quarter challenging as solid earnings performance in a majority of its businesses was offset by a decline in power performance in a difficult market. GE lowered its full-year EPS outlook. Shares finished lower, but pared heavy losses. 

Dow component Procter & Gamble Co. (PG $88) posted fiscal Q1 EPS of $1.06, or $1.09 ex-items, versus the $1.08 expectation, with revenues rising 1.0% y/y to $16.7 billion, roughly in line with forecasts. The company's gross margin missed expectations. The company said it saw organic sales growth in a decelerating global market and against a relatively strong base period. PG reaffirmed its full-year guidance.  Shares saw pressure. 

Honeywell International Inc. (HON $145) announced Q3 earnings of $1.75 per share, matching estimates, as revenues increased 3.0% y/y to $10.1 billion, compared to the expected $10.0 billion. HON reaffirmed its full-year profit outlook, but its Q4 earnings guidance missed forecasts. Shares ticked higher.

Home sales surprisingly rise, tax reform and Fed speculation boost yields and dollar

Existing-home sales in September rose 0.7% month-over-month (m/m) to a 5.39 million annual rate, compared to the Bloomberg forecast of a 5.30 million pace, and versus August's unrevised 5.35 million rate. Sales of single-family homes grew m/m but were below year ago levels, while purchases of multi-family structures fell and remain lower y/y. The median existing-home price was up 4.2% y/y at $245,100. Unsold inventory came in at a 4.2-months pace at the current sales rate, down from the 4.5 months rate a year ago. Inventory of homes for sale rose, but are down 6.4% y/y, falling for 28 consecutive months. Sales were flat m/m in the Northeast and slipped in the South, while rising in the Midwest and West. 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 temporary, but notable declines in Texas and Florida due to the hurricanes, as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, in his latest article, Fires, Hurricanes, and Earthquakes: What Disasters Mean For Markets. The NAR added that home sales in recent months remain at their lowest level of the year and are unable to break through, despite considerable buyer interest in most parts of the country as supply issues and fast-rising prices continue to stifle sales growth. If supply and price pressures ease, the housing market could get a boost, amplified by that fact that the report said nearly two-thirds of renters currently believe now is a good time to buy a home. This is one pillar buoying Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, outperform rating on the financial sector noted in his latest, Schwab Sector Views: Sustainable Energy?.

Treasuries fell, with the yields on the 2-year note and the 30-year bond  rising 5 basis points (bps) to 1.58% and 2.89%, respectively, while the yield on the 10-year note gained 6 bps to 2.38%.

Treasury yields and the U.S. dollar gained ground amid speculation on who the next Fed Chief will be and as the Senate passed its budget resolution late last night to nudge tax reform down the lengthy path to fruition.

Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis of the potential leadership changes and balance sheet reduction at the Fed in her article, Understanding the Federal Reserve's Shrinking Balance Sheet, and the video with Vice President of Trading and Derivatives, Randy Frederick, Should a Change in Fed Leadership Matter to Investors?. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses the likely elongated journey of tax reform in the article, Tax Reform Framework Released, But The Road Ahead Is Long.

Check out these articles and video on the Market Commentary page at www.schwab.com and follow Kathy, Randy and Schwab on Twitter: @kathyjones, @randyafrederick and @schwabresearch.

Europe and Asia higher as financials gain and politics remain in focus

European equity markets tilted to the upside, with financials leading the advance, bolstered by a gain in bond yields in the region. The euro traded lower versus the U.S. dollar, which got a boost from relative optimism regarding tax reform after the Senate passed its budget resolution. The British pound was higher versus the greenback as the European Union's summit in Brussels continued as Brexit negotiations remained in a deadlock but headlines suggested talks could be getting closer to moving to the next phase. However, Spanish political uneasiness lingered on the heels of yesterday's announcement that Spain was moving to suspend Catalonia's autonomy after it missed a deadline to renounce its independence push. 

For analysis of Brexit and Spanish political concerns, see Schwab's 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?, on the Market Commentary page at www.schwab.com.

Stocks in Asia finished higher amid an afternoon push to the upside as optimism regarding tax reform in the U.S. was lifted by the Senate's passing of its budget resolution. Japanese equities overcame early losses to finish little changed, ahead of this weekend's election, and on the heels of a 13-day winning streak that has taken the Nikkei 225 Index to highs not seen in over two decades. The yen gave back some of yesterday's gains as the U.S. dollar rose on the tax reform optimism and amid speculation of who will head up the Fed. Mainland Chinese stocks rose and shares trading in Hong Kong rallied, rebounding from yesterday's declines that followed some mixed economic data that showed industrial production missed, retail sales beat and Q3 GDP growth slowed. Australian and South Korean securities gained ground. Markets in India were closed for a holiday. With the global markets rallying, Schwab's Chief Investment Strategist Liz Ann Sonders talks with Schwab's Randy Frederick in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?, discussing that there seems to be no end in sight to the bull market in equities, but that doesn’t mean there’s nothing to worry about. See this video on the Market Commentary page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Stocks higher on week as Dow breaches milestone

Stocks finished the week higher, hitting fresh record highs and the Dow breaching the 23,000 milestone. Global economic and earnings optimism underpinned sentiment, with regional manufacturing reports jumping, while industrial production rebounded and existing home sales surprisingly recovered. Dow members IBM Corp. (IBM $162), Verizon Communications Inc. (VZ $50) Johnson & Johnson (JNJ $142) and UnitedHealth Group Inc. (UNH $207) highlighted a heating-up earnings season, along with Morgan Stanley (MS $51). Of the 88 S&P 500 companies that have reported thus far, 75% have topped revenue forecasts and 82% have bested earnings estimates, per data compiled by Bloomberg. Financials led the way, along with healthcare issues, while technology stocks gained ground, shrugging off an intraweek drop in Dow member Apple Inc. (AAPL $156) on iPhone8 demand worries and Apple Watch connection concerns in China. The energy sector dipped as crude oil prices slid late in the week and early earnings reports from the sector disappointed against the backdrop of lofty growth expectations. Consumer staples fell solidly, continuing to be hampered by industry concerns, exacerbated by negative reactions to results from Dow component Procter & Gamble and Unilever NV (UN $56). Tax reform optimism ensued to support stocks after passing another early hurdle on the long road to passage, while Fed leadership uncertainty lingered, boosting the U.S. dollar. Treasury yields also rallied to bolster gains for financials.    

Next week, the tone for the markets will likely be set by today's speech after the closing bell by Federal Reserve Chairwoman Janet Yellen, the continued ramp-up of earnings season, and the economic calendar culminating with the first look (of three) at Q3 GDP. Other reports that will dawn the economic docket next week include, Markit's October business activity reports, preliminary durable goods orders, new home sales and the final University of Michigan Consumer Sentiment Index for October. 

As noted in the latest Schwab Market Perspective: Preparing for the Latter Innings, U.S. stocks continue to grind higher, with little appearing able to knock them off course. The possibility of a pullback always exists but a melt up is also reemerging as a real possibility. Earnings tend to drive equity market direction, and the next few weeks should help set the tone for market action for the rest of the year. Expectations came down a bit as we entered reporting season and recent robust economic data gives support to the potential for companies to meet and/or beat estimates. Global economic growth continues to improve, which should help support both domestic and global stock markets. Read more on the Market Commentary page at www.schwab.com.

International reports on next week's calendar worth noting include: Australia—CPI. China—property prices and industrial profits. Japan—CPI. Eurozone—consumer confidence, Markit's business activity reports, and the European Central Bank monetary policy meeting, along with German business confidence and retail sales. U.K.—Q3 GDP.

Schwab Center for Financial Research - Market Analysis Group

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions. 

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