Schwab Market Update
Abundance of Data Leads to Diverging Results for Stocks
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U.S. stocks closed mixed on a busy day, as the markets appeared to catch their breath following a torrid rally that saw the Dow top 30,000 for the first time. Prior to today, COVID-19 vaccine optimism and some much needed clarity on the make-up of President-elect Joe Biden's administration provided the ballast for the recent rally that leads into tomorrow’s Thanksgiving break. Economic data was the main focus as the markets sifted through a wide range of data that was pulled forward ahead of the holiday, headlined by a disappointing jobless claims report, mixed personal income and spending data, and a stronger-than-expected read on durable goods orders. Moreover, the minutes from the November FOMC monetary policy meeting were highlighted by much discussion on tweaking the asset purchase program, however no changes in terms of pace and composition were ultimately made. Treasury yields were mostly flat, and the U.S. dollar slid. Gold turned lower and crude oil prices were higher. Gap posted mixed Q3 results, while HP topped revenue forecasts, VMware beat expectations and raised its guidance, and a report surfaced that Dow member Salesforce has been in talks to potentially acquire Slack Technologies. Asia and Europe closed mixed.
The Dow Jones Industrial Average fell 174 points (0.6%) to 29,872, the S&P 500 Index was down 6 points (0.2%) at 3,630, and the Nasdaq Composite increased 58 points (0.5%) to 12,094. In moderate volume, 966 million shares were traded on the NYSE and 4.4 billion shares changed hands on the Nasdaq. WTI crude oil traded $0.80 higher at $45.71 per barrel and wholesale gasoline added $0.02 to $1.27 per gallon. Elsewhere, the Bloomberg gold spot price was down $1.07 at $1,806.53 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.3% lower to 91.94.
Gap Inc. (GPS $22) reported Q3 earnings-per-share (EPS) of $0.25, below the $0.32 FactSet estimate, with revenues flat year-over-year (y/y) at $4.0 billion, topping the Street's projection of $3.8 billion, as a jump in online sales was offset by a drop from its in-store sales. The company's global same-store sales rose 5.0% y/y, driven by a 61% increase in online sales, compared to the expected 0.3% dip. The company said due to the continued high level of uncertainty in the marketplace, it is not providing a fiscal year earnings outlook. However, GPS noted that with a rapidly growing online sales contribution, at over 40% of its sales in the quarter, and the opportunity for market share gains, supported by the significant investment in marketing, it remains optimistic for Q4. Shares fell sharply.
HP Inc. (HPQ $22) posted fiscal Q4 EPS of $0.49, or $0.62 ex-items, compared to the forecasted $0.52, with revenues dipping 1.0% y/y to $15.3 billion, north of the expected $14.7 billion. The company said its consumer personal systems revenue rose solidly but its commercial personal systems sales fell and its printing net revenues were down y/y. HPQ issued Q1 EPS guidance that was above estimates and it increased its quarterly dividend by 10.0% to $0.1938 per share. Shares were nicely higher.
VMware Inc. (VMW $142) reported Q3 EPS of $1.02, or $1.66 ex-items, compared to the forecasted $1.44, as revenues grew 8.0% y/y to $2.9 billion, slightly above the expected $2.8 billion. The enterprise software company said subscription and Software as a Service (SaaS) revenue increased 44% y/y in Q3 and surpassed license revenue for the first time, adding that it will continue to invest in and focus on further expanding its subscription and SaaS portfolio. VMW raised its full-year EPS and revenue outlooks. Shares were lower despite the results and guidance.
Slack Technologies (WORK $41) shares jumped following a Wall Street Journal (WSJ) report that Dow member salesforce.com Inc. (CRM $247) has been in talks to acquire the software company. Sources cited in the report indicated that any potential transaction would value WORK above its current $17 billion valuation. The WSJ report said there is no guarantee that talks will lead to a deal. Neither company has commented on the report. Shares of CRM traded lower.
Amid the backdrop of substantial progress on the COVID-19 vaccine/treatment front that has fostered rotation in the stock markets, we have made some tactical changes to our outlook. We closed out our overweight large cap/underweight small cap tactical recommendation for U.S. stocks, and maintained our outperform rating on the Financials sector and upgraded the Health Care sector to outperform.
For analysis of these changes check out Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Changes: Vaccine News Changing Market's Leadership Characteristics?, as well as Managing Director and Senior Investment Strategist, David Kastner's, CFA, latest Schwab Sector Views: Election, Vaccine News Change the Picture.
For other timely strategies on how to navigate the volatile market conditions, check out our Market Insights page on www.schwab.com, and follow us on Twitter at @SchwabResearch.
Treasury yields flat amid a flood of data
Weekly initial jobless claims (chart) came in at a level of 778,000 for the week ended November 21st, above the Bloomberg estimate of 730,000 and the prior week's upwardly-revised 748,000 level. The four-week moving average rose by 5,000 to 748,500, while continuing claims for the week ended November 14th fell by 299,000 to 6,071,000, above estimates of 6,000,000. The four-week moving average of continuing claims dropped by 438,000 to 6,615,250.
The second look (of three) at Q3 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 33.1%, unrevised from the first release and matching forecasts. Q2's figure was unadjusted at a 31.4% plunge. Personal consumption was revised to a 40.6% increase, below expectations of an adjustment to a 40.9% jump, from the initially-reported 40.7% increase. Q2 consumption was unrevised at a 33.2% drop
On inflation, the GDP Price Index was unrevised at a 3.6% rise, matching estimates, while the core PCE Index, which excludes food and energy, was also unrevised at a 3.5% gain, in line with forecasts.
October preliminary durable goods orders (chart) rose 1.3% month-over-month (m/m), versus estimates of a 0.8% rise and compared to September's upwardly-revised 2.1% increase. Ex-transportation, orders increased 1.3% m/m, versus forecasts of a 0.5% gain and compared to September's favorably-adjusted 1.5% rise. Moreover, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, were up 0.7%, compared to projections of a 0.5% rise, while the prior month's figure was upwardly-revised to a 1.9% increase.
Personal income (chart) declined 0.7% m/m in October, versus forecasts of 0.1% dip, and following September's downwardly-revised 0.7% gain. Personal spending rose 0.5%, above the estimated 0.4% increase and versus the prior month's negatively-adjusted 1.2% advance. The October savings rate as a percentage of disposable income was 13.6%. The PCE Deflator was flat m/m, matching expectations and compared to September's unadjusted 0.2% rise. Compared to last year, the deflator was 1.2% higher, in line with estimates and below September's unadjusted 1.4% gain. Excluding food and energy, the PCE Core Index was also unchanged m/m, in line with expectations and versus September's unrevised 0.2% rise. The index was 1.4% higher y/y, matching estimates and south of September's upwardly-adjusted 1.6% gain.
The November final University of Michigan Consumer Sentiment Index (chart) was revised lower to 76.9, versus expectations to match the preliminary reading of 77.0. The downward revision came as a slight upward adjustment to the current conditions portion of the survey was more than offset by a downward revision to the expectations component. The overall index was lower versus October's 81.8 level as a rise in the assessment of current conditions was overshadowed by a drop in expectations. The 1-year inflation forecast rose to 2.8% from October's 2.6% rate, and the 5-10 year inflation forecast ticked higher to 2.5% from the prior month's 2.4% pace.
New home sales (chart) declined 0.3% m/m in October to an annual rate of 999,000 units, versus forecasts calling for a rate of 975,000 units, and compared to September's upwardly-revised 1,002,000 unit level. The median home price was up 2.5% y/y at $330,600. New home inventory remained at September's rate of 3.3 months of supply at the current sales pace. Sales in the Northeast and Midwest rose m/m, but sales in the South and West declined. Sales in all four regions were sharply higher y/y. New home sales are based on contract signings, offering a timelier read on housing activity compared to the larger contributor of existing home sales, which are based on closings.
The advance goods trade balance showed that the October deficit widened by a slightly smaller amount than expected, coming in at $80.3 billion, versus estimates calling for it to increase to $80.4 billion from September's unadjusted shortfall of $79.4 billion.
Preliminary wholesale inventories rose 0.9% m/m for October, compared to expectations of a 0.4% gain, and versus September's favorably-revised 0.7% rise.
The MBA Mortgage Application Index rose by 3.9% last week, following the prior week's 0.3% dip. The increase came as a 4.5% gain in the Refinance Index was met with a 3.5% rise in the Purchase Index. The average 30-year mortgage rate fell 7 basis points (bps) to 2.92%.
In afternoon action, the Federal Reserve released the minutes from its November monetary policy meeting, where it kept its accommodative policy intact and continued to advocate for fiscal relief. The report showed Committee members felt current monetary policy continues to be appropriate at this time, citing a U.S. economy that is "well below" pre-pandemic levels, despite a pick-up in recent months, as several participants expressed concern about the absence of additional fiscal support. However, the highlight of the document was the discussion on the Fed’s on-going asset purchase program, in which Members discussed a wide range of potential adjustments. Ultimately, no immediate changes were made as the report noted, "participants judged that immediate adjustments to the pace and composition of asset purchases were not necessary at this time."
Treasuries were mostly flat, with the yields on the 2-year note and 10-year note little changed at 0.16% and 0.88%, respectively, while the yield on the 30-year bond rose 2 bps to 1.62%.
Bond yields have gained some momentum as of late, with the global markets reacting to the progress on the COVID-19 vaccine front and economic data that has been mostly positive but showing signs of deceleration, though concerns remain regarding the implications of some reinstated restrictions on activity as virus cases surge in the U.S. and Europe.
Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest 2021 Fixed Income Outlook: Calmer Waters, how we see the potential for 10-year Treasury bond yields to trade in a range of 1% to as high as 1.6% in 2021, reflecting the prospects for real economic growth to recover at a faster pace.
Please note: all U.S. markets will be closed on Thursday and trade in an abbreviated session on Friday in observance of the Thanksgiving holiday.
Asia and Europe mixed following recent run
European equities closed mixed, as the global markets took a breather from a recent rally on lingering optimism regarding progress on the COVID-19 vaccine/treatment front as well as some clarity on the U.S. political picture. Financials and Energy sectors gave back a recent surge that came from optimism of a potential global economic recovery after virus vaccines are deployed. The euro and British pound ticked higher versus the U.S. dollar. Bond yields in the region were mostly lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, provides his 2021 Global Outlook: New Cycle, New Leadership, noting how we expect a near-term economic double-dip for the global economy to give way to a vaccine-led broad recovery in 2021.
The U.K. FTSE 100 Index was down 0.6%, while France's CAC-40 Index rose 0.2%, Spain's IBEX 35 Index gained 0.3%, Italy's FTSE MIB Index advanced 0.7%, and Germany's DAX Index as well as Switzerland's Swiss Market Index were little changed.
Stocks in Asia finished mixed as the markets digest the recent rise in the global markets on further progress in combating COVID-19 and as the U.S. political front became clearer, which has fostered demand for sectors that are economically sensitive and have underperformed, notably Financials and Energy. Also, the markets appeared to grapple with the likelihood of some rough global economic waters in the near-term until broad-based distribution of multiple vaccine candidates comes to fruition. Japan's Nikkei 225 Index gained 0.5%, with the yen modestly recovering some of yesterday's decline, while China's Shanghai Composite Index fell 1.2%. South Korea's Kospi Index declined 0.6% and Australia's S&P/ASX 200 Index advanced 0.6%. The Hong Kong Hang Seng Index traded 0.3% higher but India's S&P BSE Sensex 30 Index dropped 1.6%. As noted in the latest Schwab Market Perspective: Vaccine News Improves Outlook, encouraging vaccine news has raised hopes for a quicker pace of economic recovery. Although some COVID-19-related restrictions have been reinstated around the globe, they may have less of an overall economic impact than the spring lockdowns.
Tomorrow’s international economic calendar includes Australian capital expenditure, the Bank of Korea Repo rate, leading index figures from Japan, German and French consumer confidence data, and M3 information from the Eurozone.
Friday’s international calendar will offer Japanese CPI and trade data, followed by French inflation and GDP data as well as Eurozone confidence numbers.
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