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Wednesday, January 20, 2016

Charles Schwab: On the Market
Posted: 1/20/2016 4:15 PM ET
Stocks Stage an Impressive Comeback

While still not pretty, after beginning the day deeply rooted in negative territory, and then the blue-chip index accelerating to a more than 500-point decline, the U.S equity markets were able to stage a comeback, with the major indexes finishing well off the lows of the day. The unyielding fall in crude oil prices continued to pressure the energy sector, as well as up the global growth uncertainty. Meanwhile, Treasuries moved higher amid the palpable anxiety, while mixed housing data and a cooler-than-expected inflation report didn't help matters. Mostly positive earnings news on the equity front had little effect, while the U.S. dollar and gold were higher.

The Dow Jones Industrial Average (DJIA) fell 249 points (1.6%) to 15,767, the S&P 500 Index declined 22 points (1.2%) to 1,859, and the Nasdaq Composite shed 5 points (0.1%) to 4,472. In very heavy volume, 1.5 billion shares were traded on the NYSE and 3.2 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.22 to $28.35 per barrel, wholesale gasoline lost $0.01 to $1.02 per gallon, while the Bloomberg gold spot price rose $14.11 to $1,101.53 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 99.12.

Netflix Inc. (NFLX $108) reported 4Q earnings-per-share (EPS) of $0.10, above the $0.02 FactSet estimate, as revenues rose 22.8% year-over-year (y/y) to $1.8 billion, roughly in line with forecasts. The company's domestic net streaming customer additions came in below expectations, though its international customer additions easily exceeded projections. NFLX issued 1Q domestic net subscriber guidance that missed expectations, while its forecast for international additions was well above estimates. Shares were lower.

Dow member Goldman Sachs Group Inc. (GS $154) posted 4Q profits of $4.68 per share. The results excluded $1.54 billion after-tax in provisions for the settlement with the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force, which reduced EPS by $3.41, and may be impacting comparability to the Street's $3.54 estimate. Revenues declined 5.4% y/y to $7.3 billion, topping the forecasted $7.1 billion. The company said it is pleased that its diversified business mix allowed it to deliver solid results in a year characterized by uneven global economic activity. Shares of GS finished lower.

Dow component International Business Machines Corp. (IBM $122) announced 4Q EPS ex-items of $4.84, versus the expected $4.81, with revenues decreasing 8.5% y/y to $22.1 billion, mostly in line with forecasts. IBM issued 2016 earnings guidance that was well below expectations. IBM was solidly lower.

Housing construction mixed, consumer price inflation cooler than expected

Housing starts (chart) for December declined 2.5% month-over-month (m/m) to an annual pace of 1,149,000 units, compared to the Bloomberg forecast of a 1,200,000 unit rate. November's starts were upwardly revised to an annual pace of 1,179,000. Single and multi-family unit starts were both down m/m, but finished solidly higher y/y, led by the latter. Building permits fell 3.9% m/m in December to an annual rate of 1,232,000, after November's downward revision to a 1,282,000 rate, but above the expected annual pace of 1,200,000 units. Single-family unit permits grew m/m and were nicely higher compared to last year, while multi-family permits fell m/m, trimming their sharp y/y growth.

Housing activity has slowed as of late, likely due to the flare-up in global economic growth concerns and the volatility that has ensued in the wake of the Fed hiking rates for the first time in nearly a decade. However, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, showed the annualized rate of single-family units is at the highest level in eight years, per Bloomberg. Also, as noted by the National Association of Home Builders yesterday, sentiment among home builders remains at a level that "should bode well for future home sales in the year ahead." Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Changes: Turn and Face the Strange (Market), every predictive recession model I have studied still suggests a low risk of recession. In fact, if we are in one or heading toward one, it would be the first time in history the leading indicators did not roll over and provide ample warning. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The Consumer Price Index (CPI) (chart) dipped 0.1% m/m in December, versus forecasts of a flat reading, while November's flat level was unrevised. The core rate, which strips out food and energy, ticked 0.1% higher m/m, compared to expectations of a 0.2% increase, and November's unrevised 0.2% rise. Y/Y, prices were up 0.7% for the headline rate, versus forecasts of a 0.8% gain, while the core rate was 2.1% higher, in line with projections. November's y/y figures showed an unrevised 0.5% rise and an unadjusted 2.0% increase for the headline and core rates respectively.

The MBA Mortgage Application Index rose 9.0% last week, after surging 21.3% in the previous week. The solid increase came as an 18.7% jump in the Refinance Index more than offset a 1.6% decline for the Purchase Index, while the average 30-year mortgage rate fell 6 basis points (bps) to 4.06%.

Treasuries finished higher, as the yield on the 2-year note declined 5 bps to 0.83%, the yield2 on the 10-year note and the 30-year bond fell 7 bps to 1.99% and 2.76%, respectively. Schwab's Chief Fixed Income Strategist, Kathy Jones, offers our Fixed Income Outlook 2016: New Year, Same Road Map, at www.schwab.com/marketinsight, and follow Kathy on Twitter: @kathyjones.

Tomorrow's economic calendar will give investors a look at weekly initial jobless claims, forecasted to decline to a level of 278,000 from the prior week's 284,000, as well as the Philly Fed Business Activity Index, with economists expecting January's report to match December's -5.9 reading.

Europe and Asia broadly lower as global downside volatility remains

European equities traded sharply lower across the board, with global growth concerns continuing to dampen sentiment, exacerbated by a reduced 2016 global growth forecast from the International Monetary Fund (IMF). The Schwab Center for Financial Research offers a look at Market Volatility: What Investors Should Know, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. Oil & gas issues paced the widespread losses with crude oil prices remaining in selloff mode and as shares of Royal Dutch Shell PLC. (RDSA $36) fell after reporting a tumble in quarterly profits. Also, Zurich Insurance Group AG (ZURVY $22) saw heavy pressure after the company forecasted a quarterly loss for its general insurance business unit. In economic news, U.K. jobless claims unexpectedly fell and the nation's unemployment rate surprisingly dipped to 5.1% for November. The euro was little changed versus the U.S. dollar, while bond yields in the region were mixed.

Further east, stocks in Asia also finished broadly lower on the global uncertainty, the continued tumble in crude oil prices, and the IMF's lowered 2016 global growth forecast. Japanese equities fell, pressured by a rally in the yen late in the session, with the nation's Nikkei 225 Index entering bear market territory as the index is down over 20% since its August high. Mainland Chinese stocks declined, despite continued relative stability in the yuan, while the recent drop in Hong Kong's dollar to near the lowest level since 2007, per Bloomberg, weighed on the Hang Seng Index, which tumbled 3.8%. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers a look at China in his article, Chinese Stock Market Selloff: What's New, What's Not, while Schwab's Chief Fixed Income Strategist, Kathy Jones, discusses Why the Chinese Currency Decline is Rattling Markets, at www.schwab.com/marketinsight. Follow Jeff and Kathy on Twitter: @jeffreykleintop and @kathyjones.

Tomorrow's international economic calendar will be fairly light, with reports slated for release to include Japan's All-Industry Index, and confidence data from France, while the European Central Bank will meet to discuss monetary policy, with no change to its stance expected.

Schwab Center for Financial Research - Market Analysis Group

©2016 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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