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Schwab Market Update

Stocks Trade in Red Shade as Success for Tax Proposal Weighed

U.S. stocks finished the trading session lower and the week mixed as investors appeared to exercise caution amid the developing path of proposed tax policy, some disappointing Chinese economic data and a flattening yield curve. Treasury yields were mixed and the U.S. dollar was lower, while crude oil prices rebounded from a recent decline and gold was also higher. Shares of GAP, Abercrombie & Fitch, and Foot Locker traded solidly higher following the release of the companies Q3 earnings results.      

The Dow Jones Industrial Average (DJIA) declined 100 points (0.4%) to 23,358, the S&P 500 Index declined 7 points (0.3%) at 2,579, and the Nasdaq Composite slipped 11 points (0.2%) to 6,783. In moderate volume, 875 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rallied $1.36 to $56.71 per barrel and wholesale gasoline was $0.03 higher at $1.74 per gallon. Elsewhere, the Bloomberg gold spot price gained $15.46 to $1,294.04 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.3% to 93.63. Markets were mixed for the week, as the DJIA decreased 0.3% and S&P 500 Index ticked 0.1% lower, while the Nasdaq Composite advanced 0.5%.

Gap Inc. (GPS $29) reported Q3 earnings-per-share (EPS) of $0.58, versus the $0.54 FactSet estimate, as revenues rose 1.1% year-over-year (y/y) to $3.8 billion, roughly in line with forecasts. Q3 same-store sales grew 3.0% y/y, above the expected 1.3% gain. GPS raised its full-year guidance. Shares finished nicely higher.   

Applied Materials Inc. (AMAT $56) posted fiscal Q4 EPS of $0.91, or $0.93 ex-items, compared to the forecasted $0.91, with revenues rising 20.0% y/y to $4.0 billion, above the estimated $3.9 billion. The chip equipment maker issued Q1 guidance that exceeded projections. AMAT traded lower.  

Abercrombie & Fitch Co. (ANF $16) announced Q3 earnings of $0.15 per share, or $0.30 ex-items, topping the forecasted $0.22, as revenues increased 5.0% y/y to $859 million, north of the estimated $820 million. Q3 same-store sales rose 4.0% y/y, above the expected 0.4% gain. Shares rallied as ANF also issued a Q4 outlook that bested the Street's expectations.

Williams-Sonoma Inc. (WSM $46) reported Q3 EPS of $0.84, matching forecasts, as revenues rose 4.3% y/y to $1.3 billion, rough in line with expectations. Q3 same-store sales grew 3.3% y/y, just above the estimated 3.0% increase. WSM issued Q4 profit guidance that missed expectations. Separately, the company announced the acquisition of home furnishings and décor industry 3-D imaging and augmented reality platform Outward Inc. WSM traded solidly lower. 

Foot Locker Inc. (FL $41) posted Q3 profits of $0.81 per share, or $0.87 ex-items, versus the expected $0.80, as revenues decreased 0.8% y/y to $1.9 billion, topping the forecasted $1.8 billion. Q3 same-store sales declined 3.7% y/y, compared to the projected 4.6% drop. FL said despite a continued highly promotional environment, it believes it can exceed its Q4 guidance issued in August. Shares surged nearly 30%.   

Housing construction activity stronger than expected

Housing starts (chart) for October jumped 13.7% month-over-month (m/m) to an annual pace of 1,290,000 units, well above the Bloomberg forecast of a 1,190,000 unit rate. September starts were upwardly revised to an annual pace of 1,135,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, grew 5.9% m/m in October to an annual rate of 1,297,000, after September's favorably revised 1,225,000 rate, and north of the expected annual pace of 1,250,000 units.

The Kansas City Fed Manufacturing Activity Index for November showed growth decelerated more than expected, with the index dipping to 16 from 23 in October, compared to the forecasted 21, though a reading above zero denotes expansion in activity.  

Treasuries finished mixed, with the yield on the 2-year note ticking 1 basis point (bp) higher to 1.72%, while the yield on the 10-year note declined 3 bps to 2.35%, and the 30-year bond dropped 5 bps to 2.78%.

The markets continued to grapple with the ongoing flattening of the yield curve and the recent soft data out of China that came amid a relatively positive global economic backdrop. Also, U.S. tax reform uncertainty remained as yesterday's bill passing in the House opened the door for scrutiny and concerns about the reconciliation process with the Senate's plan that differs significantly on some key areas and is expected to be voted on the week after the Thanksgiving holiday. 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.

Europe mostly lower and Asia mixed to close out the week

European equity markets traded mostly lower after breaking a string of losses yesterday that came amid what seemed to be a flare-up in global market risk aversion. With U.S. tax reform uncertainty lingering despite yesterday's House bill passing, coalition talks in Germany ramped up and the Brexit stalemate remained. For analysis of the uncertainty political front in the region, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives Randy Frederick's video, Political Risk: How Should Investors Respond?. The British pound and the euro ticked slightly higher versus the U.S. dollar as the markets continued to digest comments from European Central Bank President Mario Draghi, who offered an upbeat outlook for the economy, but said the central bank needs to be patient in normalizing policy as inflation remains subdued. Schwab's Jeffrey Kleintop provides analysis of the changing global monetary policy landscape in his article, How the Shift by Central Banks May Affect the Stock Market. Bond yields in the region were mostly lower, while energy issues recovered modestly as crude oil prices rebounded after a recent drop.

Stocks in Asia finished mixed to close out a week that saw some increased downside pressure as the global markets appeared to shift to a de-risking mood on the heels of a global rally. Schwab's Jeffrey Kleintop, CFA, offers a look at the global market rally seen this year that has been fostered by the broadest economic growth in a decade in his latest article, 5 Reasons Investors Should Give Thanks. Some support came from yesterday's rebounds in the U.S. and Europe, but the markets continued to be cautious as U.S. tax reform uncertainty lingered, crude oil prices sold off, and recent Chinese economic data has disappointed.  Japanese equities pared solid early gains as the yen gained ground late in the day. Mainland Chinese shares declined with sentiment being exacerbated by local media reports warning of high valuations in some stocks that have rallied as of late, per Bloomberg. Equities trading in Hong Kong and India advanced, while Australian securities were also higher and South Korean shares finished flat.

Stocks bounce back to finish week mixed

U.S. stocks finished the trading week mixed as a strong rally on Thursday, led by tech issues, was able to offset losses that developed early in the week as the uncertainty surrounding the likelihood of a successful domestic tax policy overhaul intensified. The House passed its bill to reduce taxes and focus is now tuned to the Senate and its legislative process with a floor vote expected shortly after the Thanksgiving holiday break. Economic data was mostly positive as an advance read on retail sales unexpectedly increased m/m, showing widespread sales gains, but also revealing a dip in online shopping. A separate report showed small business optimism rose and consumer inflation was mostly in line with expectations. Market participants were also treated to hotter-than-expected producer price inflation figures, slowing in some regional manufacturing output and an unexpected rise in weekly jobless claims.

In earnings news, Wal-Mart Stores (WMT $97) surged to a record high after it revealed its Q3 results, while Home Depot (HD $167), Tyson Foods (TSN $78), and Dick's Sporting Goods (DKS $29) also topped analysts' quarterly projections. Target (TGT $57) disappointed with its quarterly marks and General Electric (GE $18) cut its quarterly dividend in half. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, third quarter earnings season is largely complete and can be characterized as a positive one—with strong “beat rates” for both top- and bottom-line results; while economic data continues to indicate solid growth. 

Although next week will be shortened by Thursday's Thanksgiving holiday, during which the U.S. markets will be closed, the economic calendar will still deliver a feast of key reports that could provide sustenance for market action. Housing will remain in focus, with the release of existing home sales, along with manufacturing demand in the form of the preliminary durable goods report. The Leading Index will give us a look at how many cylinders the economy is firing on, while the minutes from the Fed's Oct/Nov monetary policy meeting will provide us discussion details as the highly-expected December rate hike decision looms. We will get a look at the psyche of the consumer, courtesy of the final University of Michigan Consumer Sentiment Index for this month. The week will come to a close with Markit's November business activity reports, illustrating the pace of growth in output from the manufacturing and services sectors. 

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest, Schwab Sector Views: 'Tis the Season…Almost, much of the U.S. economy arguably comes down to how the consumer is faring as businesses make hiring and investing decisions based on their expectations of consumer demand. Brad adds that it would be difficult to view the status of the consumer as anything less than mostly positive with unemployment historically low, wages trending higher and still low interest rates conspiring to boost consumer confidence.   

International reports due out next week that deserve a mention include: Australia—Leading Index. Japan—trade balance and the All Industry Activity Index. Eurozone—Markit Manufacturing and Service PMIs and consumer confidence, along with German Q3 GDP and PPI. U.K.—public sector net borrowing, Q3 GDP and business investment.

Schwab Center for Financial Research - Market Analysis Group

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