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Stocks rally — Dow gains 170

Myles Udland
Markets Reporter

Stocks were in rally mode on Thursday, with the Dow gaining triple digits, though markets had a bit of a weak close and finished off their best levels of the day.

The Dow gained 174 points, or 0.8%, the S&P 500 gained 17 points, or 0.7%, and the Nasdaq gained 53 points, or 0.9%.

After a 4% slide on Wednesday, crude oil prices couldn’t get any positive momentum on Thursday and slid about 0.4%. Gold prices were unchanged. Treasury yields were higher with the 10-year rising to as high as 2.25% but settling closer to 2.23%. The 2-year settled at 1.19%. The dollar was little-changed after sinking early in the session.

Update 4:45 p.m. ET

It was an overall positive day in markets on Thursday, but the close took a little steam out of a rally that was otherwise positive and broad-based.

According to Dave Lutz, head of exchange-traded funds at JonesTrading, a few stories markets were focusing on during the day included:

—The growth trade is back on, as Treasury yields rose and the chances of a Fed rate hike in June rose to 63%. 

—Hedges in Europe appeared to be coming off during the day ahead of Sunday’s elections in France. The CAC in Paris was up 1.7% on Thursday. Late Thursday, however, headlines crossed that at least one French police officer was killed in a shooting on the Champs Elysee in Paris. This took some steam out of the market into the close. 

—Reports that healthcare reform was alive had some betting that perhaps the Trump agenda is back in play, bringing animal spirits — maybe! — back into the market. 

—Friday is the third Friday of the month and will be a widespread options expiration event in markets, leading to a lot of position-squaring across the board.

—Another overlooked story on Thursday was the success in the retail sector — the XRT ETF which tracks retail outperformed the market — leading to speculation that some of Thursday’s action was also tied to a pain trade given that broad positioning is against the space generally.   

Update 2:53 p.m. ET

“Very soon.”

According to U.S. Treasury Secretary Steven Mnuchin, the Trump administration will unveil a tax reform plan, “soon, very soon,” according to Reuters. Mnuchin’s comments came at a conference in Washington, D.C.

“It will be sweeping, it will be significant and it will create a lot of economic growth,” Mnuchin added.

These comments come during a day when markets were rallying across the board, with his commentary pushing up the dollar towards unchanged after having been down earlier in the session. Stocks remained near session highs and bonds near session lows after these comments.

Mnuchin’s comments come during a day when a potential healthcare package from the White House was being revived. “Whether health care gets done or health care doesn’t get done, we’re going to get tax reform done,” Mnuchin said.

Update 1:59 p.m. ET

Tesla has announced a recall.

On Thursday, the company announced it would 53,000 of its Model S and Model X cars due to a braking issue.

“The electric parking brakes installed on Model S and Model X vehicles built between February and October 2016 may contain a small gear that could have been manufactured improperly by our third-party supplier,” according to the company.

Following the news, shares of the company quickly moved lower and were off about 1% in afternoon trade.

Source: Yahoo Finance

Update 12:30 p.m. ET

Remember healthcare?

A new report from Politico indicates that ahead of next Friday’s deadline to agree on a continuing resolution to keep the government funded or risk a government shutdown, House Republicans are trying to find a new way to repeal Obamacare.

From Politico’s Adam Cancryn:

House Republicans are outlining a new deal that could revive their bid to repeal Obamacare — and set up an all-out sprint to make concrete progress on health care amid the specter of a government shutdown. […]

The deal — brokered by centrist Tuesday Group co-chair Tom MacArthur (R-N.J.) and hard-right Freedom Caucus head Mark Meadows (R-N.C.) — proposes giving states more flexibility to opt out of major Obamacare provisions, while at the same time preserving popular protections like the law’s ban on discrimination against people with pre-existing conditions.

It remains unclear whether the proposal can succeed in shifting any votes — President Donald Trump and leaders were forced to abandon a planned vote last month in the face of intra-party rebellion.

Still no word on taxes.

Update 12:08 p.m. ET

Big food stocks are “doomed,” say analysts at Credit Suisse.

In a note to clients on Thursday, Robert Moskow and his team at the firm write (emphasis ours):

Despite sales trends slipping into negative territory, Big Food companies remain locked into aggressive strategies to reduce costs rather than invest in growth. Big Food management teams are increasingly resigning themselves to assume a zero growth environment or worse for the next 1-2 years due to rising consumer distrust for processed foods, stubbornly weak pricing, and the slowdown in emerging markets. Pressure from activist investors and the emergence of private-equity controlled Kraft Heinz has raised the industry benchmark for profit margins. As a result, the stock prices of food companies now depend more heavily on margin expansion than at any time we can recall. 

The problem with this desire for ever-increasing profit margins is that the sales and volume growth in the industry are simply not there.

Credit Suisse notes that if sales rise 1% per year for the next 15 years, margins would have to rise 29% per year to justify current stock prices. Little about the industry indicates sales rising faster than that.

Some of the stocks in Credit Suisse singles out include Mondelez (MDLZ), Kellogg’s (K), Campbell’s Soup (CPB), General Mills (GIS), J.M. Smucker (SJM), Hershey (HSY), and Conagra (CAG).

Source: Credit Suisse

Now, Credit Suisse did not cut their rating on the whole sector in this note, saying that hitting targets over the next year or so appears achievable for the group. Longer-term, however, deep cost-cutting is unlikely to bring margin improvements to where they’d need to be to justify the group’s current 20.3 P/E multiple, higher than the group’s 5-, 10-, or 20-year average.

“The direction of these stocks over the next 12 months will depend more on their ability to achieve near-term expectations in 2017 and 2018 than anything else, and we simply don’t see much risk to those targets when they have such a full plate of cost savings at their disposal,” the firm writes.

“That said, we are increasingly concerned about the risk of downward earnings revisions over the next 3-5 years as cost savings opportunities dry up and Big Food companies need to make deeper investments in marketing and price discounts to rejuvenate their struggling brands.”

Update 11:23 a.m. ET

The big story this weekend will be the first round of French presidential elections, set to take place on Sunday.

For those who haven’t been following the story, Marine Le Pen — a far-right nationalist candidate — is likely to advance to the second round of elections on May 7 against one more centrist candidate, most likely Emmanuel Macron.

Le Pen would be expected to lose in this round.

In a note to clients ahead of this report, analysts at Bank of America Merrill Lynch said that markets are still underpricing the chances of an outright Le Pen win and, by extension, a potential exit from the euro from the currency bloc’s second-biggest economy.

“Even though getting agreement on a formal referendum on Euro membership in France will be difficult for Le Pen, we believe markets will see the French elections as effectively the referendum and would start pricing Frexit risks,” the firm writes.

“France and the rest of the Eurozone could reach the point of no-return well before a referendum in France.”

Marine Le Pen

In particular, BAML is concerned markets are underpricing the risks of a run-off between Le Pen and Jean-Luc Melenchon, who Bloomberg notes has Communist backing in the vote.

A choice between Le Pen and Melenchon will be a choice between two extremes that could lead to the same outcome, Frexit and a breakup of the Eurozone,” BAML writes.

“In this context, Macron or Fillon will be the market-friendly outcomes, at least in the short termboth could face challenges achieving a consensus for the reforms that the French economy needs. We note that markets could also react negatively to a second round between Fillon and Melenchon, as the polls suggest Melenchon could win.”

Update 9:51 a.m. ET

The latest report on initial jobless claims out this morning showed new filings for unemployment insurance remain low while continuing claims are near a 17-year low.

Last week, which covers the reference week for the April jobs report, initial claims totaled 244,000, up 10,000 from the prior week. Continuing claims totaled 1.98 million, the smallest since April 2000.

In earnings news on Thursday morning, shares of Verizon (VZ) were down 2% in early trading after quarterly results that showed subscribers fell by 307,000 during the first quarter. Analysts were expecting subscriber additions of 222,000, according to FactSet.

Elsewhere in earnings, D.R. Horton (DHI) reported better-than-expected results with the homebuilder reporting a 13.8% rise in orders and company chairman Donald Horton noting that, “The spring selling season is going well.”

Earlier this week, Yahoo Finance’s Melody Hahm outlined the current state of the U.S. housing recovery, which continues to be constrained by a lack of supply. This imbalance, however, remains a positive for homebuilding companies like D.R. Horton. D.R. Horton shares were down about 2% in early trading on Thursday.

Also on Thursday morning, activist hedge fund Elliott Management released the letter sent by former Arcnoic (ARNC) CEO Klaus Kleinfeld to the firm which led to Kleinfeld’s resignation.

Kleinfeld said the letter reflected “poor judgment.”

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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