Charles Schwab: On the Market

Posted: 1/22/2016 4:15 PM ET

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U.S. equities closed nicely higher for a second-straight session, as a global stock rally ensued amid a steep rise in crude oil prices and as global sentiment may have been further buoyed by expectations of additional stimulus measures in the eurozone and Japan. A surge in existing home sales and upbeat manufacturing data overshadowed some mixed domestic earnings reports. Treasuries and gold were lower, while the U.S. dollar traded higher.

The Dow Jones Industrial Average (DJIA) advanced 211 points (1.3%) to 16,093, the S&P 500 Index increased 38 points (2.0%) to 1,907, and the Nasdaq Composite jumped 119 points (2.7%) to 4,591. In moderately-heavy volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil surged $2.66 to $32.19 per barrel and wholesale gasoline gained $0.06 to $1.11 per gallon, while the Bloomberg gold spot price decreased $3.69 to $1,097.51 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 99.56. Markets were higher for the week, as the DJIA advanced 0.7%, the S&P 500 Index increased 1.4%, and the Nasdaq Composite Index gained 2.3%.

Dow component General Electric Co. (GE $28) reported 4Q earnings-per-share (EPS) of $0.52, above the FactSet estimate of $0.49, with revenues rising 1.0% year-over-year (y/y) to $33.9 billion, below the projected $35.9 billion. GE reaffirmed its 2016 profit outlook. Shares traded lower.

Starbucks Corp. (SBUX $59) posted fiscal 1Q profits ex-items of $0.46 per share, one penny above expectations, with revenues increasing 12.0% y/y to $5.4 billion, roughly in line with forecasts. Global same-store sales grew 8.0% y/y, versus the expected 6.9% increase, led by stronger-than-forecasted sales in its Americas segment, which more than offset softer-than-anticipated growth in its China/Asia Pacific unit, as well as its Europe, Middle East and Africa region. SBUX issued 2Q EPS guidance that slightly missed expectations, while reiterating its full-year outlook. Shares of SBUX were nearly unchanged.

Dow member American Express Co. (AXP $55) reported 4Q EPS ex-items of $1.23, compared to the estimated $1.20, with revenues declining 8.0% y/y to $8.4 billion, roughly in line with forecasts. Shares closed sharply lower as the Street expressed disappointment to its 2016 and 2017 EPS guidance.

Dow component Boeing Co. (BA $125) announced that it will lower the production rate on the 747-8 program to match supply with near-term demand in the cargo market, and will recognize a $569 million after-tax charge in 4Q. BA added that global air passenger traffic growth and airplane demand remain strong, but the air cargo market recovery that began in late 2013 has stalled in recent months. BA finished higher.

Housing and manufacturing data surprise to the upside

Existing-home sales in December jumped 14.7% month-over-month (m/m)—the largest monthly increase ever recorded—to a 5.46 million annual rate, compared to the Bloomberg forecast of an increase to a 5.20 million pace. November's figure was unadjusted at a 4.76 million annual rate. Sales were 7.7% higher y/y. The median existing-home price was 7.6% above a year ago at $224,100, and housing supply is the lowest since January 2005. Single-family home sales rose sharply, and condominium sales were higher, while all four major regions posted jumps in sales. National Association of Realtors (NAR) chief economist Lawrence Yun said the December robust bounce back caps off the best year since 2006, and while the carryover of November's delayed transactions into December contributed greatly to the sharp increase, the overall pace taken together indicates sales these last two months maintained the healthy level of activity seen in most of 2015.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Sticking with Financials and Technology, an improved housing environment—bolstered by increased household formation and continued low interest rates—should buoy mortgage demand, helping us maintain an outperform rating for the financial sector. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

The preliminary Markit U.S. Manufacturing PMI Index for January unexpectedly rose to 52.7 from December's 51.2 level, and compared to the forecast of a dip to 51.0. A reading above 50 denotes expansion.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) was down 0.2% m/m in December, matching projections, while November's 0.4% rise was revised to a 0.5% increase. The yield curve continued to lend support, but components pertaining to ISM new orders, building permits, and jobless claims, weighed on the index.

Treasuries were lower, with the yield on the 2-year note increasing 3 basis points (bps) to 0.87%, the yield on the 10-year note gaining 2 bps to 2.05% and the 30-year bond rate rising 1 bp to 2.82%. 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.

Europe extends yesterday's ECB-fueled rally, Asia follows

European equities rallied broadly for a second-straight session, with oil & gas stocks leading the way as crude oil prices extended yesterday's advance. The Stoxx Europe 600 Index posted its best two-day gain since October 2011, per Bloomberg, and finished the week higher for the first time this year. Sentiment remained buoyed by yesterday's comments from European Central Bank (ECB) President Mario Draghi that suggested an expansion of further stimulus measures could come as early as its next meeting in March. The ECB's sooner-than-expected consideration of further stimulus measures comes as inflation was seen as continuing to be weaker than expected, downside economic risks were said to have increased, and as the global markets have been in turmoil to begin 2016, as discussed by the Schwab Center for Financial Research in Market Volatility: What Investors Should Know. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. In economic news, Markit's preliminary Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—declined to 53.5 for January, from 54.3 in December, and compared to the dip to 54.1 that was expected. However, a reading above 50 denotes continued expansion in business activity. The euro traded lower versus the U.S. dollar and bond yields in the region moved mostly higher.

Stocks in Asia finished broadly higher on the heels of solid gains in the U.S. and Europe yesterday as crude oil prices recovered and the European Central Bank hinted at the possibility of expanded stimulus measures at its next meeting in March. Japanese stocks led the way, with the Nikkei 225 Index jumping 5.9% as the yen weakened and reports suggested the Bank of Japan is considering further monetary policy stimulus. The Nikkei 225 Index rebounded from sharp losses this week that took the index into bear market territory. Stocks in mainland China and Hong Kong advanced amid strength in the energy sector and as the government signaled it will provide support to try to combat overcapacity in the steel and coal industries, per Bloomberg. Equities in Australia, South Korea and India traded to the upside.

Stocks snap weekly losing streak on wild tale-of-two halves ride

Equities appeared headed for another weekly selloff that has been a theme to begin 2016, with global sentiment continuing to be hammered by festering global growth/currency concerns, along with the persistent tumble in crude oil prices. The market's attention was diverted away from 4Q earnings season beginning to ramp, with relatively upbeat reports out of the financial sector being largely discounted by the Street. However, the second half of the week saw stocks bounce back from likely oversold conditions, as crude oil prices rallied off of 12-year lows to offer a reprieve for the energy sector and global stimulus expectations flared-up, headlined by the European Central Bank signaling further stimulus measures could come as early as March.

As noted in the Schwab Market Perspective: Looking for Answers, stocks began the year with the worst performance ever for the first two weeks, and investor confidence is shaken. Emotional investing is rarely successful and we urge investors to show patience and keep long-term goals in mind. Read more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

Heavy economic week looms on the horizon

Despite attention being divided by the recent global market meltdown, as well as 4Q earnings season ramping up, next week's U.S. economic calendar is poised to garner the market's attention. The Federal Reserve's mid-week monetary policy decision will likely take top billing, though the first look (of three) at 4Q GDP, Markit's Services PMI Index, and Consumer Confidence are other key releases that should provide a look at how well the economy is holding up. As noted in the Schwab Market Perspective, the corporate picture appears decent, with fourth quarter earnings season showing mostly positive results so far. Although risks have risen and concerns have spiked, it still doesn’t appear to us that a U.S. recession is in the foreseeable future. Oil has been a major driver of market action, but should be ultimately beneficial to the majority of the economy. A global recession also seems unlikely at this point as the excess that built up leading up to previous downturns doesn’t seem to have occurred this time around. Read more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

Other U.S. reports worth noting on next week's docket include: new home sales, durable goods orders, and the final January University of Michigan Consumer Sentiment Index.

International reports worth looking out for include: Australia—consumer price inflation. China—industrial profits. Japan—Bank of Japan monetary policy decision, consumer price inflation, trade balance, household spending, retail sales, and industrial production. Europe—eurozone Markit business activity reports, consumer confidence, and consumer price inflation. German investor and consumer confidence data, as well as retail sales. U.K.—4Q GDP and consumer confidence.

Schwab Center for Financial Research - Market Analysis Group

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