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Schwab Market Update

Stocks Tick Higher to Close out Shortened Week

U.S. stocks modestly added to weekly gains in a shortened session following yesterday's Thanksgiving break, with volume remaining subdued and the retail sector in focus as Black Friday unofficially kicked off the key holiday shopping season. Treasury yields moved higher but the U.S. dollar fell, while Markit's reads on the manufacturing and services sector activity missed forecasts. Gold was lower and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) rose 32 points (0.1%) to 23,558, the S&P 500 Index increased 5 points (0.2%) at 2,602, and the Nasdaq Composite advanced 22 points (0.3%) to 6,889. In light volume, 363 million shares were traded on the NYSE and 848 million shares changed hands on the Nasdaq. WTI crude oil increased $0.86 to $58.88 per barrel and wholesale gasoline was $0.02 higher at $1.79 per gallon. Elsewhere, the Bloomberg gold spot price declined $3.53 to $1,287.94 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.4% to 92.80. Markets were higher for the week, as the DJIA increased and S&P 500 Index grew 0.9%, while the Nasdaq Composite advanced 1.6%.

The retail sector was mostly higher as the markets monitored activity on Black Friday, which unofficially kicks off the holiday shopping season, and the National Retail Federation (NRF) expects sales to be up nearly 4.0% year-over-year (y/y) for the period. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest, Schwab Sector Views: 'Tis the Season…Almost, the status of the American consumer is vital to the overall economy, and the holiday season can go a long way to determining the fate of retailers. Low unemployment, increasing wages, and high confidence among consumers paint a positive picture for both the holiday season and the overall economy. Brad concludes that the retail sector may not be as dire as you have been led to believe.

Business activity declines but continues to show expansion

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output decelerated, declining to 53.8 in November, from October's 54.6 level, and versus the Bloomberg expectation of 55.0. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector this month also downshifted, decreasing to 54.7, versus forecasts calling for it to remain at October's 55.3 level. However, readings above 50 for both indexes denote expansion.

Treasuries lost ground, with the yields on the 2-year and 10-year notes, along with the 30-year bond, rising 2 basis points to 1.74%, 2.34%, and 2.76%, respectively. 

U.S. stocks moved higher this week back to record high territory after snapping a string of gains in the previous week, with the markets shrugging off lingering tax reform uncertainty, which was joined by a flare-up in German political concerns. Upbeat global earnings and economic sentiment appeared to support stocks, bolstered by a winding down upbeat Q3 earnings season, while stronger-than-expected reads on U.S. Leading Indicators and existing home sales were accompanied by favorable eurozone business activity and confidence reports. Crude oil prices recovered from a recent bout of pressure. Treasury yields were little changed and the U.S. dollar fell amid some relative volatility on the heels of Fed Chairwoman Janet Yellen offering a subdued and uncertain outlook for inflation with December rate hike expectations remaining elevated.

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, the bull market continues to be undisturbed by myriad actual or potential negative events and momentum favors the bulls for the foreseeable future.  However, elevated valuations and growing investor complacency pose risks that could lead to a long-awaited pullback and/or a pickup in volatility from today’s extremely low base.

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.

Next week will return to normal and will bring plenty of reports and events for the markets to contend with. OPEC will conduct a meeting, the Senate is expected to vote on its tax reform plan that differs significantly from last week's House plan that passed, and data will be released on how the holiday shopping season is kicking off. Moreover, the economic calendar will deliver new home sales, Consumer Confidence, the second look (of three) at Q3 GDP, the Fed's Beige Book, personal income and spending, Markit's Manufacturing PMI Index, the ISM Manufacturing Index, and November auto sales

International markets mostly higher following Thursday's China selloff

The European equity markets traded mostly higher as the U.S. markets returned to action in an abbreviated session following yesterday holiday break. Financials led the way as bond yields in the region gained ground, while economic data was positive and optimism rose regarding a possible solution to the German political impasse. German business confidence unexpectedly improved to a record high for November, while Germany's biggest opposition party said it is open to talks on backing a government led by Chancellor Angela Merkel after this week's failed coalition negotiations, per Bloomberg. The political focus joins festering U.S. tax reform uncertainty and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick offer the video, Political Risk: How Should Investors Respond?. The upbeat German business sentiment report follows yesterday's stronger-than-expected read on eurozone manufacturing and services sector activity released by Markit. The euro and British pound traded higher versus the U.S. dollar.

Stocks in Asia also finished mostly higher, with Japanese markets returning to action following yesterday's holiday break and as Chinese markets rebounded slightly from Thursday's sharp drop that was fostered by increased government regulatory crackdowns and festering concerns toward the recent downside volatility in the bond markets. 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.

International economic reports due out next week include: Australia—building approvals. China—industrial profits, as well as Manufacturing and non-Manufacturing PMIs. India—Q3 GDP. Japan—retail sales, industrial production, household spending, and consumer price inflation statistics. Eurozone—Consumer Price Index, economic confidence, and Markit's Manufacturing PMI Index, along with German retail sales and unemployment change. U.K.—Markit's PMI Manufacturing Index.  

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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