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Markets Finish Session Higher, Fail to Post Weekly Advance

The U.S. equity markets finished the last trading session of the week modestly higher, but failed to post gains for a seventh-straight week, as the omnipresent uncertainty swirling around a U.S.-China "phase one" trade deal that has hampered conviction all week tempered some upbeat news on the manufacturing front and some mixed retail sector earnings reports. Markit's manufacturing and services sector reports came in stronger than expected, and the University of Michigan's Consumer Sentiment Index was unexpectedly revised higher. Meanwhile, Gap, Nordstrom, Williams-Sonoma and Foot Locker put the finishing touches on Q3 earnings season for the week. Treasury yields were nearly unchanged and the U.S. dollar was higher, while crude oil and gold prices fell.

The Dow Jones Industrial Average (DJIA) rose 109 points (0.4%) to 27,876, the S&P 500 Index increased 7 points (0.2%) to 3,110 and the Nasdaq Composite advanced 14 points (0.2%) to 8,520. In light volume, 717 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.81 to $57.77 per barrel and wholesale gasoline shed $0.03 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price was $1.74 lower at $1,462.67 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.3% to 98.26. Markets were lower for the week, snapping a six-week winning streak, as the DJIA declined 0.5%, while the S&P 500 Index and the Nasdaq Composite decreased 0.3%.

Gap Inc. (GPS $17) reported Q3 earnings-per-share (EPS) of $0.37, or $0.53 ex-items, versus the $0.51 FactSet estimate, as revenues declined 2.0% year-over-year (y/y) to $4.0 billion, roughly in line with forecasts. Q3 same-store sales declined 4.0% y/y, compared to the expected $3.9% decrease. Same-store sales at its Old Navy, Gap and Banana Republic units all were negative y/y. GPS reaffirmed its full-year earnings outlook, but lowered its forecast for same-store sales. Shares were higher.

Nordstrom Inc. (JWN $37) posted Q3 EPS of $0.81, above the projected $0.63, with revenues decreasing 2.2% y/y to $3.6 billion, below the forecasted $3.7 billion. JWN raised the low end of its full-year EPS guidance, while reaffirming its revenue outlook. Shares rallied.

Williams-Sonoma Inc. (WSM $67) announced Q3 earnings of $0.94 per share, or $1.02 ex-items, versus the estimated $1.01, as revenues rose 6.3% y/y to $1.4 billion, roughly in line with forecasts. Q3 same-store sales increased 5.5% y/y, compared to the expected 5.1% gain, as its Pottery Barn same-store sales rose more than expected, but its Williams-Sonoma sales fell more than projected. WSM raised the low end of its EPS, revenue and same-store sales outlooks. Shares traded lower.

Foot Locker Inc. (FL $39) reported Q3 profits of $1.16 per share, or $1.13 ex-items, versus the expected $1.08, with revenues rising 3.9% y/y to $1.9 billion, roughly in line with forecasts. Q3 same-store sales grew 5.7% y/y, north of the forecasted 5.1% increase. The company issued Q4 same-store sales guidance that was below the Street's forecasts. Shares fell.

Business activity and consumer sentiment reports top estimates

The preliminary Markit U.S. Manufacturing PMI Index for November rose to 52.2 from October's unrevised 51.3 figure, and versus the Bloomberg expectation of an increase to 51.4. The preliminary Markit U.S. Services PMI Index showed growth accelerated more than expected for the key U.S. sector this month, rising to 51.6 from October's 50.6 figure, above forecasts of 51.0. Readings above 50 for both indexes denote expansion.

The final November University of Michigan Consumer Sentiment Index (chart) was adjusted higher to 96.8, from the preliminary figure of 95.7, where it was expected it to remain. The index was also above October's 95.5 level and continued to rebound from the near three-year low posted in August as both the current conditions and expectations components of the index were revised higher. The current conditions component was below the prior month's level but the expectations portion was above October's figure. The 1-year inflation forecast remained at October's 2.5% rate, and the 5-10 year inflation outlook rose to 2.5% from 2.3%.

The November Kansas City Fed Manufacturing Activity Index remained at a level depicting contraction (a reading below zero), matching October's unrevised -3 reading, versus forecasts calling for it to improve to -2.

Treasuries were nearly flat, as the yields on the 2-year and 10-year notes were unchanged at 1.61% and 1.77%, respectively, while the 30-year bond rate ticked 1 basis point (bp) lower to 2.22%. For a look at fixed income investing, check out Schwab's Chief Fixed Income Strategist Kathy Jones' commentary, The Bond Investors' Dilemma, and her latest video, Investing in Bonds with a Flat to Inverted Yield Curve.

As the stock markets recently broke out to post a string of record highs, Schwab’s Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Shiny Happy People: Investors Cheering Stocks' New Highs, for the past near-two years we have been pointing out the confluence of uncertainties that have meant the market could "go either way"—including most obviously trade/tariffs, but also the related economic trajectory, Fed policy and geopolitical/political uncertainty. She adds that it has led to a wide trading range—the peaks and valleys of which have been driven as much by extremes in sentiment as they have by the changing dynamics of the underlying fundamentals. Liz Ann concludes that in light of that, and the extremes of sentiment we are witnessing again, investors should not view the market’s latest high with rose-colored glasses.

Europe higher following business activity reports and continued focus on trade

European equities finished out the week higher, as the euro and British pound lost ground versus the U.S. dollar and bond yields came under pressure. The markets digested a host of manufacturing and services sector reports for this month. Markit's Eurozone Manufacturing PMI improved more than expected but remained in contraction territory, while Markit's Services PMI unexpectedly declined but remained in expansion territory. Markit's U.K. Services and Manufacturing PMIs both surprisingly slowed to levels depicting contraction. The U.S.-China trade front remained a focus, with mixed headlines keeping uncertainty high, and European Central Bank President Christine Lagarde delivered her first speech, in which she pointed out the importance of fiscal policy in fixing the region's challenges. The hampered auto sector traded higher to lend some support and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his 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.

The U.K. FTSE 100 Index rallied 1.2%, Germany's DAX Index and France's CAC-40 Index rose 0.2%, Spain's IBEX 35 Index increased 0.4%, and Switzerland's Swiss Market Index advanced 0.3%, while Italy's FTSE MIB Index was little changed.

Asia mixed on data and as trade uncertainty lingers

Stocks in Asia finished mixed, with the markets focusing on a host of manufacturing and services sector data set for throughout the day, while uncertainty regarding a U.S.-China "phase one" deal remained, with Chinese President Xi saying the nation wants to work out an initial trade agreement but it is not afraid to retaliate when necessary. 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 increased 0.3%, with the yen remaining choppy, while data showed the nation's manufacturing contraction slowed and its services sector output returned to expansion territory for November, and its consumer price inflation rose mostly in line with expectations for October. China's Shanghai Composite Index declined 0.6% and the Hong Kong Hang Seng Index rose 0.5%. Australia's S&P/ASX 200 Index gained 0.6% and South Korea's Kospi Index moved 0.3% higher, though India's S&P BSE Sensex 30 Index decreased 0.5%.

Stocks snap string of weekly gains

U.S. stocks retreated modestly from all-time highs for the major indices, with the S&P 500 Index snapping a string of six-straight weekly gains as mixed headlines caused uncertainty of a U.S.-China "phase one" trade deal to resurface and stymie market conviction. Q3 earnings season also limped to the finish line, with mixed results as Target Corporation (TGT $127) and Lowe's Companies Inc. (LOW $118) highlighted the calendar, but Dow member Home Depot Inc. (HD $218), Macy's Inc. (M $15) and Kohl's Corporation (KSS $47) disappointed the Street. Per data compiled by Bloomberg, out of the 476 S&P 500 companies that have reported thus far, nearly 58% have topped revenue forecasts and about 79% have exceeded earnings estimates. The health care sector remains a standout in Q3, on track to post double-digit revenue growth and over an 8% rise in profits. The economic calendar continued to paint a mixed picture, with Friday's upbeat consumer sentiment and business activity reports being complemented by a jump in the Philly Fed Manufacturing Index, a third monthly rise in four in existing home sales and a high in building permits not seen since 2007. However, jobless claims nudged higher and the Leading Index posted the third-straight monthly decline. The U.S. dollar and gold rose on the week, while the Treasury yield curve flattened and crude oil prices were little changed. The health care sector continued to outperform, but tech, consumer discretionary, industrials, real estate and materials stocks all came under pressure to pace the week's pullback in the equity markets.

Next week, the economic calendar will remain robust but be condensed due to the Thanksgiving holiday, which will see the U.S. markets close on Thursday and have a half-day on Friday. Leading up to the holiday break, we will get key reads on new home sales, Consumer Confidence, the second reading (of three) of Q3 GDP, preliminary durable goods orders, jobless claims, the Chicago PMI, personal income and spending, and the Fed's Beige Book. The week will also begin with a Monday evening speech from Federal Reserve Chairman Jerome Powell.

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 economic calendar will also deliver some data that may move the markets with releases that deserve a mention including: China—Manufacturing and non-Manufacturing PMIs. Japan—retail sales and industrial production. Eurozone—economic and consumer confidence figures, and consumer price inflation statistics, along with German business confidence, retail sales and unemployment change. U.K.—retail sales and consumer confidence.

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