Schwab Market Update
Stocks Higher in Choppy Trading, Data and Fiscal Deal in Focus
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U.S. stocks are mixed in early afternoon trading as they struggle to find footing despite a host of upbeat earnings and economic data. Capitol Hill lawmakers remain at a stalemate on a highly-anticipated fiscal relief package which continues to keep a lid on investor enthusiasm. Dow member Coca-Cola highlights a busy earnings calendar, however the markets have had mixed reactions to results out of the transportation sector, as Southwest Airlines and CSX are moving higher, though Union Pacific is seeing some pressure. On the economic front, jobless claims came in well below expectations, Leading Indicators were positive for a fifth-straight month, and existing home sales remained robust. Treasury yields have overcome early losses as bond prices give up gains, and the U.S. dollar is regaining some footing following a recent stumble. Crude oil prices are recovering from yesterday's drop and gold is seeing solid pressure. Europe was mixed, but nearly flat across the board.
The Dow Jones Industrial Average rose 153 points (0.5%) to 28,364, the S&P 500 Index was up 18 points (0.5%) at 3,453, and the Nasdaq Composite gained 21 points (0.2%) to 11,506. In moderate volume, 844 million shares were traded on the NYSE and 3.3 billion shares changed hands on the Nasdaq. WTI crude oil was $0.61 higher at $40.64 per barrel and wholesale gasoline rose $0.02 to $1.16 per gallon. Elsewhere, the Bloomberg gold spot price fell $19.34 to $1,904.99 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—advanced 0.3% at 92.94.
Tesla Inc. (TSLA $426) reported Q3 earnings-per-share (EPS) of $0.27, or $0.76 ex-items, versus the $0.57 FactSet estimate, as revenues rose 39.0% year-over-year (y/y) to $8.8 billion, above the Street's forecast of $8.3 billion. The company's gross margin was up 462 basis points (bps), well above expectations, and the electric vehicle maker said although achieving its goal of delivering 500,000 vehicles this year has become more difficult, it remains its 2020 target. Shares were higher.
Dow member Coca-Cola Company (KO $51) posted Q3 EPS of $0.40, or $0.55 ex-items, versus the expected $0.46, as revenues declined 9.0% y/y to $8.7 billion, north of the projected $8.4 billion. The company said since its last earnings update in July, global unit case volume trends have continued to improve, and there remains uncertainty around the ultimate impact of the coronavirus pandemic, therefore, full-year guidance cannot be reasonably estimated at this time. KO traded to the upside.
American Airlines Group Inc. (AAL $13) announced a Q3 loss of $4.71 per share, or a loss of $5.54 per share ex-items, compared to the forecasted shortfall of $5.86 per share. Revenues fell 73.0% y/y to $3.2 billion, north of the expected $2.8 billion. The company said it saw improvements in passenger demand and load factors during Q3, but both continue to be significantly below 2019 levels. AAL also announced that it plans to issue up to $1.0 billion of equity in an at-the-market offering to further bolster liquidity. AAL overcame early losses and traded higher.
Southwest Airlines Co. (LUV $42) reported a Q3 loss of $1.96 per share, or a shortfall of $1.99 per share ex-items, compared to the projected loss of $2.35 per share. Revenues dropped 68.2% y/y to $1.8 billion, just above the expected $1.7 billion. The company said the pandemic persists along with the negative effects on air travel demand, and until we have widely-available vaccines and achieve herd immunity, it expects passenger traffic and booking trends to remain fragile. However, LUV said it is encouraged by modest improvements in leisure passenger traffic trends since the slowdown in demand experienced in July. Shares gained ground.
Whirlpool Corporation (WHR $194) reported Q3 EPS of $6.27, or $6.91 ex-items, versus the projected $4.20, as revenues rose 3.9% y/y to $5.3 billion, north of the estimated $4.8 billion. The company said it saw solid industry demand across the globe. WHR increased its full-year guidance and increased its quarterly dividend to $1.25 per share. Shares gave up early gains and finished lower.
Union Pacific Corporation (UNP $187) posted Q3 EPS of $2.01, below the expected $2.06, with revenues decreasing 11.0% y/y to $4.9 billion, roughly in line with expectations. The company said quarterly freight revenue declined y/y, as core pricing gains were more than offset by lower volumes, a less favorable business mix and decreased fuel surcharge revenue. UNP traded lower.
CSX Corporation (CSX $82) announced Q3 profits of $0.96 per share, above the estimated $0.93, as revenues declined 11.0% y/y to $2.7 billion, roughly in line with expectations. The company said intermodal volume growth was more than offset by declines in coal and merchandise volumes, as well as lower fuel surcharge revenue. Additionally, CSX announced a new share repurchase authorization of up to $5.0 billion. Shares were nicely higher.
Q3 earnings season could be another catalyst for the markets as expectations are lofty in the wake of the recovery in business activity from the severe disruption of the COVID-19 pandemic. Schwab's Chief Investment Strategist Liz Ann Sonders, Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Chief Fixed Income Strategist Kathy Jones, point out how actual earnings numbers may be less important than what corporate leaders say about their expectations in the latest, Schwab Market Perspective: Turning to Earnings Season.
With the markets clinging to hopes of a fiscal relief deal ahead of the election, Schwab's Liz Ann Sonders offers guidance on the looming expected highly-contentious political showdown in her article, Election Blues: Looking at Election History for Market Guidance. Moreover, Schwab's Managing Director and Senior Investment Strategist, David Kastner, CFA, discusses Health Care vs the 2020 Election, in his latest Schwab Sector Views.
For timely strategies on how to navigate the volatile market environment and in-depth analysis of the election, check out our Market Insights page, and you can follow us on Twitter at @SchwabResearch.
Jobless claims improve, Leading Index and existing home sales both top forecasts
Weekly initial jobless claims (chart) came in at a level of 787,000 for the week ended October 17th, below the Bloomberg estimate of 870,000 and south of the prior week's downwardly-revised 842,000 level. The four-week moving average fell by 21,500 to 811,250, while continuing claims for the week ended October 10th fell by 1,024,000 to 8,373,000, below estimates of 9,625,000. The four-week moving average of continuing claims dropped by 1,093,500 to 10,085,750.
The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for September rose 0.7% month-over-month (m/m), compared to projections of a 0.6% gain, following August's upward revision to a 1.4% advance. The LEI has been positive for five-straight months after the plunges in March and April, due to positive contributions from jobless claims, building permits, the yield curve and ISM new orders.
Existing home sales continued to rise in September, increasing 9.4% m/m to an annual rate of 6.54 million units—the fourth consecutive month of gains—topping expectations of 6.30 million and versus August's modestly-revised 5.98 million rate.
Each of the four major regions experienced m/m and y/y growth, with the Northeast seeing the greatest improvement from both periods. Sales of single-family homes and purchases of condominiums and co-ops were up m/m and y/y. The median existing home price was up 14.8% from a year ago to $311,800, marking the 103rd straight month of y/y gains as prices rose in every region. Unsold inventory came in at a 2.7-months pace at the current sales rate, down from 3.0-months in August and the 4.0-months pace a year earlier. Existing home sales reflect contract closings instead of signings and account for a large majority of the home sales market.
National Association of Realtors Chief Economist Lawrence Yun said, "Home sales traditionally taper off toward the end of the year, but in September they surged beyond what we normally see during this season." He added that, "I would attribute this jump to record-low interest rates and an abundance of buyers in the marketplace, including buyers of vacation homes given the greater flexibility to work from home."
The October Kansas City Fed Manufacturing Activity Index moved further into a level depicting expansion (a reading above zero). The index rose to 13 from September's 11 reading, where it was forecasted to remain.
Treasuries gave up early gains and moved lower, with the yield on the 2-year note ticking 1 bp higher to 0.15%, while the yields on the 10-year note and the 30-year bond rose 4 bps at 0.86% and 1.67%, respectively. Bond yields have rebounded this week to levels not seen since June on the longer-end of the curve but rates remain in a trading range. The markets continue to grapple with economic data suggesting the recovery continues, while the Fed continues to pledge extremely accommodative policy for the foreseeable future and uncertainty remains palpable regarding an agreement on a new round of fiscal relief measures.
Schwab's Kathy Jones discusses in her article, Do Bonds Still Provide Diversification?, how fears of whether bonds can continue to provide diversification in this environment may be overblown.
The U.S. economic week will culminate tomorrow with Markit's preliminary October Manufacturing and Services PMI reports, with the former expected to nudge higher to 53.5 from September's 53.2 and the latter forecasted to remain at the prior month's 54.6 level. Readings above 50 for both indexes denote expansion.
Europe mixed and Asia mostly lower amid political uncertainties and COVID-19 case focus
European equities closed mixed, as political uncertainties remained as a U.K. Brexit trade deal continued to be elusive, along with a highly-expected new fiscal relief agreement in the U.S. The implications of the recent rise in new COVID-19 cases in Europe and the U.S. also seemed to have kept conviction in check. Schwab's Jeffrey Kleintop notes in his article, Risk of Second Wave of COVID-19 Lockdowns, how the biggest political risk facing investors may be the potential for politicians to implement national lockdowns in response to a rise in new COVID-19 cases that could lead to renewed recession and a new bear market for stocks. The Energy sector saw early pressure following yesterday's drop in crude oil prices after some bearish oil inventory data and as OPEC and its allies, known as OEPC+ offered cautious commentary this week as the industry faces uncertain demand. The euro and British pound were lower versus the U.S. dollar, which regained some footing following a recent stumble. Bond yields in Europe and the U.K. were higher, even as Eurozone consumer confidence deteriorated more than expected in October.
The U.K. FTSE 100 Index increased 0.2%, Switzerland's Swiss Market Index rose 0.1%, France’s CAC-40 Index, Germany's DAX Index and Italy's FTSE MIB Index all decreased 0.1%, while Spain's IBEX 35 Index traded 0.2% lower.
Stocks in Asia finished mostly to the downside as the markets grapple with whether a new fiscal relief package for the world's largest economy of the U.S. will come to fruition in time to help further bridge the gap from the severe disruption from the COVID-19 pandemic. The political wrangling in the U.S. comes as the key presidential election looms, and Schwab's Jeffrey Kleintop discusses in his latest article, Global Impact of a "Blue Wave" Election Outcome, how the U.S. election could impact five key economic and market areas of taxes, labor, the environment, oil and trade. Also, a lowered 2020 growth forecast for the Asia-Pacific region by the International Monetary Fund appeared to dampen sentiment. Japan's Nikkei 225 Index declined 0.7%, with the yen gaining some ground, and China's Shanghai Composite Index traded 0.4% to the downside. South Korea's Kospi Index fell 0.7%, Australia's S&P/ASX 200 Index decreased 0.3%, and India's S&P BSE Sensex 30 Index moved 0.4% to the downside. The recent drop in the U.S. dollar may be helping limit downside pressure for emerging market stocks, and the Hong Kong Hang Seng Index nudged 0.1% to the upside.
Tomorrow's international economic calendar will include a host of preliminary October Manufacturing and Services PMI reports, along with some inflation statistics out of Japan and retail rales results from the U.K.
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