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Stocks Higher Despite Headwinds

U.S. equities finished higher, achieving a sixth-straight week of gains, the first time since late 2017, despite a mixed retail sales report, another drop in industrial production, and an unexpected deceleration in regional manufacturing growth. Trade uncertainty, which had resurfaced and has contributed to the lackluster action in the markets this week, was tempered somewhat after White House advisor Larry Kudlow offered upbeat comments regarding progress toward a "phase one" U.S.-China trade deal. In equity news, Applied Materials delivered another dose of upbeat results from the semiconductor sector and billionaire investor Warren Buffett's Berkshire Hathaway disclosed a stake in RH. Treasury yields were higher and crude oil prices also gained ground, while the U.S. dollar and gold were lower.

The Dow Jones Industrial Average (DJIA) rose 223 points (0.8%) to 28,005, the S&P 500 Index increased 24 points (0.8%) to 3,120 and the Nasdaq Composite advanced 62 points (0.8%) to 8,540. In moderate volume, 845 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.95 to $57.72 per barrel and wholesale gasoline added $0.02 to $1.64 per gallon. Elsewhere, the Bloomberg gold spot price was $4.59 lower at $1,466.81 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.2% to 98.00. Markets were higher for the sixth-straight week, as the DJIA gained 1.2%, the S&P 500 Index advanced 0.9% and the Nasdaq Composite increased 0.8%.

Applied Materials Inc. (AMAT $62) reported fiscal Q4 earnings-per-share (EPS) of $0.75, or $0.80 ex-items, versus the $0.76 FactSet estimate, as revenues were roughly flat year-over-year (y/y) at $3.8 billion, north of the forecasted $3.7 billion. The chip equipment maker said its results reflect a healthy uptick in demand for semiconductor equipment. AMAT issued Q1 guidance that was above the Street's forecasts. Shares are rallying.

Nvidia Corporation (NVDA $204) posted Q3 EPS of $1.45, or $1.78 ex-items, compared to the expected $1.58, with revenues declining 5.0% y/y to $3.0 billion, above the estimated $2.9 billion. The chip company noted that its gaming business and demand from hyperscale customers powered its Q3 results. NVDA issued Q4 revenue guidance that was below forecasts but its gross margin outlook was well above forecasts. Shares finished lower.

Shares of RH (RH $188) rose after billionaire investor Warren Buffett's Berkshire Hathaway Inc. (BRKB $220) disclosed a new 6.5% stake in the company, formerly known as Restoration Hardware.

Retail sales mixed, industrial production falls, regional manufacturing growth unexpectedly slows

Advance retail sales (chart) for October rose 0.3% month-over-month (m/m), versus the Bloomberg forecast of a 0.2% increase, and September's 0.3% decline was unrevised. Last month's sales ex-autos gained 0.2% m/m, compared to expectations of a 0.4% gain and September's unrevised 0.1% dip. Sales ex-autos and gas ticked 0.1% higher m/m, compared to estimates of a 0.3% gain, and September's flat reading was adjusted to a 0.1% dip. The control group, a figure used to calculate GDP, was up 0.3%, matching projections, and compared to September's downwardly-adjusted 0.1% decline. Sales of furniture, electronics and appliances, building materials, clothing, and sporting goods all declined, but motor vehicles sales rose and sales at nonstore retailers—which include online shopping—were up solidly and came in 14.3% higher compared to the same period a year ago.

The Federal Reserve's industrial production(chart) fell 0.8% month-over-month (m/m) in October, doubling estimates of a 0.4% decrease, and September's favorably-adjusted 0.3% decline. This was the third monthly decline out of four as utilities production fell solidly, while manufacturing and mining output also dropped, with the former continuing to be negatively affected by a large strike in the automotive industry. Capacity utilization decreased to 76.7% from the prior month's unrevised 77.5% rate, and versus the expected 77.0%. Capacity utilization is 3.1 percentage points below its long-run average.

The Import Price Index (chart) declined 0.5% m/m for October, versus projections of a 0.2% decrease, and following September's downwardly-revised 0.1% gain. Compared to last year, prices fell 3.0%, compared to forecasts of a 2.2% drop and September's negatively-revised 2.1% decrease.

The Empire Manufacturing Index, a measure of activity in the New York region, declined to a level of 2.9 during November from the unrevised 4.0 posted in October, and below the 6.0 forecasted, with a reading above zero denoting expansion in activity.

Business inventories (chart) were flat m/m in September, below forecasts of a 0.1% gain, and versus August's downwardly-adjusted 0.1% dip.

Amid the mixed economic data, Schwab’s Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Split Personality: U.S. Economy's Bifurcation Persists, that the bifurcation between weak manufacturing/capex and stronger services/consumption is seen in the stark differential between CEO and consumer confidence, while noting that profitability and employment data continues to be key to watch for any signs of the bifurcation breaking down.

Treasuries were lower, as the yield on the 2-year note was up 3 basis points (bps) at 1.61%, the yield on the 10-year note increased 2 bps to 1.84%, and the 30-year bond rate ticked 1 bp higher to 2.31%, respectively. For a look at fixed income investing, check out Schwab's Chief Fixed Income Strategist Kathy Jones' commentary, The Bond Investors' Dilemma.

Europe higher as trade remained in focus

European equities finished out the week higher, as the markets continued to eye U.S.-China trade developments after White House advisor Larry Kudlow offered some upbeat comments regarding the progress as the two sides were expected to hold phone discussions today. Resurfaced uncertainty regarding a "phase one" deal has been a source of dampened market sentiment this week. In economic news, the Eurozone trade surplus narrowed more than expected in September and the region's consumer price inflation for October was revised lower. The euro and British pound were higher versus the U.S. dollar, while bond yields in the region were mixed. Economic data has been mixed and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his latest article, Will The Crash in Autos Drive The End Of This Cycle?, discussing the question of how the last global economic cycle ended with a housing bust; will the bust in auto sales end this cycle? Jeff notes that this auto-led downturn may be less damaging to the global economy than the housing bust was 10 years ago, but automobile manufacturing still accounts for a sizable amount of production, debt, and jobs.

Asia mostly higher on trade and data

Stocks in Asia finished mostly to the upside, with the global markets continuing to monitor headlines regarding progress of a U.S.-China "phase one" trade deal, of which resurfacing uncertainty has stymied sentiment this week. White House economic adviser Larry Kudlow noted yesterday that a deal was getting close, though a Chinese Ministry of Commerce spokesperson was cited as saying the rolling back of tariffs is key to an agreement. The two sides were expected to hold phone conversations today and amid the resurfaced uncertainty Schwab's Jeffrey Kleintop, discusses in his latest commentary, Tied to Trade: What's Next for Emerging Market Stocks?, how a wide range of outcomes from -10% to +40% may lie ahead of emerging market stocks depending on the timing and details of a trade deal. Japan's Nikkei 225 Index rose 0.7%, with the yen giving back some of a recent rise and data showing the nation's industrial production was revised to a higher rate of expansion for September. China's Shanghai Composite Index declined 0.6% and the Hong Kong Hang Seng Index finished flat after a string of losses that have come from the escalated unrest in the province. Australia's S&P/ASX 200 Index advanced 0.9% and India's S&P BSE Sensex 30 Index nudged 0.2% higher ahead of some trade data as the markets were closing, which showed the decline in exports decelerated in October. South Korea's Kospi Index rose 1.1%, with semiconductor-related stocks finding support following another dose of upbeat earnings results from the sector.

Stocks extend weekly winning streak

U.S. stocks posted a sixth-straight week of gains for the first time since late 2017, with resurfaced trade uncertainty being tamped down late in the week by upbeat comments regarding progress on a "phase-one" U.S.-China trade deal from White House advisor Larry Kudlow. Q3 earnings season continued down the home stretch and remained a buoy for the markets, with upbeat chip sector results continuing to pour in and Dow member Walmart Inc. (WMT $119) topping earnings estimates and raising its full-year guidance heading into the key holiday shopping season, to more than offset a disappointing outlook from Dow component Cisco Systems Inc. (CSCO $45). Thus far, of the 461 S&P 500 companies that have reported Q3 results, about 59% have topped revenue forecasts and roughly 79% have exceeded earnings estimates, per data compiled by Bloomberg. The healthcare sector, our lone outperform rating as discussed in our latest Schwab Sector Views: Macro View is Obscure, but the Earnings Landscape is Clearer, continues to shine during the season, posting double-digit sales growth and 9.0% earnings expansion. Expectations that the Fed will remain highly-accommodative likely helped the markets maintain record highs, as inflation figures, although rising more than expected, remained subdued, economic data continued to send mixed signals, and Federal Reserve Chairman Jerome Powell during his testimony on Capitol Hill suggested the Central Bank will pause after three rate cuts this year. Treasury yields and the U.S. dollar trimmed last week's rallies, while gold and crude oil prices finished little changed. Real estate, communications services, information technology and healthcare stocks led the week's gains, while the financials, consumer discretionary and energy sectors moved lower.

Next week, with earnings season creeping closer to the finish line, the economic calendar will likely dominate market attention, along with a persistent eye on the trade front. Housing will be in focus, courtesy of the releases of the NAHB Housing Market Index, housing starts and building permits, and existing home sales. Moreover, we will get looks at the minutes from the Fed's October 30th monetary policy meeting, the Leading Index, jobless claims, the Philly Fed Manufacturing Index, Markit's preliminary November Manufacturing and Services PMIs, and the final University of Michigan Consumer Sentiment Index for November.

As noted in our latest Schwab Market Perspective: Slowing Down While Speeding Up, while volatility has remained subdued and U.S. stocks are at all-time highs, a near-term concern is that investor sentiment may be getting a bit too frothy. The potential signing of a "phase one" U.S.-China trade deal and rollback of some tariffs has contributed substantially to the rally; yet the proposals made have yet to be corroborated by anything in writing. Further, absent a trade deal that covers the major structural issues surrounding intellectual property (IP) theft, technology transfers, and supply chains, we find it difficult to envision a resurgence in corporate animal spirits and business investment—stabilization is more likely. Conversely, a positive shift in global growth may be in its infancy stages, as a more widespread adoption of fiscal stimulus may bode well for economies that have leaned too much on easier monetary policy. With many developments still at stake, we maintain our neutral stance on U.S. equities (with a bias toward large caps at the expense of small caps) and both developed and emerging market equities; and encourage investors to use volatility to rebalance and stay near their strategic asset allocations.

Next week's international calendar will be relatively lighter than usual but will deliver some reads that may garner some attention with reports including: Japan—trade balance and consumer price inflation. Eurozone—consumer confidence and Markit's preliminary November Manufacturing and Services PMIs, along with a revision to Germany's Q3 GDP. U.K.—Markit's preliminary Manufacturing and Services PMIs.

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