Market Rally Comes to Abrupt End

Charles Schwab: On the Market

Posted: 1/25/2016 4:15 PM ET

Market Rally Comes to Abrupt End

The U.S. equity markets were unable to add to the two-session rally that concluded last week, finishing the first trading day of this week with solid losses, as crude oil's rebound stalled and some regional manufacturing activity disappointed. Earnings again dominated the equity front, though a major tie-up between two multi-industry firms garnered attention. Treasuries finished higher, as did gold, while the U.S. dollar fell.

The Dow Jones Industrial Average (DJIA) declined 208 points (1.3%) to 15,885, the S&P 500 Index decreased 30 points (1.6%) to 1,877, and the Nasdaq Composite was 73 points (1.6%) lower at 4,518. In heavy volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.85 to $30.34 per barrel and wholesale gasoline lost $0.06 to $1.05 per gallon, while the Bloomberg gold spot price rose $9.99 to $1,107.94 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 99.27.

Dow member McDonald's Corp. (MCD $119) reported 4Q earnings-per-share (EPS) of $1.31, above the $1.23 FactSet estimate, as revenues declined 4.0% year-over-year (y/y) to $6.3 billion, versus the projected $6.2 billion. Global same-store sales grew 5.0% y/y, exceeding the expected 3.2% increase. U.S. sales got a boost from the October launch of all day breakfast, while it saw broad-based strength in Asia and Europe. The company said it is demonstrating that its turnaround plan is key to restarting growth. MCD added that as it enters 2016, it expects continued positive top-line momentum across all segments. Shares were higher.

Global fire and security provider Tyco International PLC. (TYC $34) and U.S.-based global multi-industrial company Johnson Controls Inc. (JCI $34) announced an agreement to merge. Under the terms of the deal, JCI shareholders will own about 56% of the equity of the combined company and receive aggregate cash consideration of approximately $3.9 billion, while TYC shareholders will own about 44% of the equity of the combined company. The businesses of the two companies will be combined under the name Johnson Controls PLC. and is expected to be listed on the New York Stock Exchange and trade under the JCI ticker. The combined company is expected to maintain Tyco's Irish legal domicile and global headquarters in Cork, Ireland. TYC was higher, while JCI finished lower.

Halliburton Co. (HAL $29) posted 4Q profits of $0.31 per share, above the estimated $0.24, with revenues falling 42.0% y/y to $5.1 billion, roughly in line with forecasts. The provider of products and services to the energy industry said 2016 is expected to be another challenging year for the industry, but ultimately, when this market recovers, it believes North America will respond the quickest and offer the greatest upside, and that it will be positioned to outperform. Shares finished to the downside.

D.R. Horton Inc. (DHI $26) announced fiscal 1Q EPS of $0.42, one penny above forecasts, as revenues increased 5.0% y/y to $2.4 billion, roughly in line with expectations, though a 9.0% rise in home orders to 8,064 missed the Street's forecasts. Shares were lower.

Drop in regional manufacturing output unexpectedly accelerates

The Dallas Fed Manufacturing Index fell to -34.6 for January—the lowest since April 2009—from December's negatively revised -21.6 level, with economists surveyed by Bloomberg forecasting an improvement to -14.5. A reading below zero denotes contraction.

Treasuries were higher, as the yield on the 2-year note fell 1 basis point (bp) to 0.87%, the yield on the 10-year note was 4 bps lower at 2.02%, and the 30-year bond rate declined 3 basis points to 2.80%.

Items on tap for tomorrow's economic calendar include January Consumer Confidence, forecasted to remain at December's level of 96.5, the Richmond Fed Manufacturing Index, with economists expecting a reading of 2 for January, down from the 6 posted in December, with a reading above zero denoting expansion, as well as the S&P Case-Shiller Home Price Index and the preliminary Markit Services PMI Index.

Europe gives back some of late-last week's rally, Asia extends Friday's bounce

European stocks finished lower, giving back some of the rally seen in the last two sessions of last week that were fueled by European Central Bank President Mario Draghi's comments that suggested an expansion of stimulus efforts could come as early as its next meeting in March. Oil & gas issues saw some pressure as oil prices pulled back from their recent solid rebound. Financials also lost ground amid festering concerns about the health of the Italian banking sector. Moreover, sentiment may have been hamstrung by a report showing German business confidence declined for a second-straight month in January, likely bogged down by the turmoil for the global markets to begin 2016, as discussed by the Schwab Center for Financial Research in Market Volatility: What Investors Should Know. Also, see Schwab's Chief Investment Strategist, Liz Ann Sonders article, Changes: Turn and Face the Strange (Market) for a look at where the markets may be heading from here. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch. In other economic news, Italian retail sales unexpectedly dipped in November, while growth in the nation's industrial orders decelerated for the month. The euro gained ground versus the U.S. dollar and bond yields in the region were mostly lower.

Stocks in Asia finished higher, adding to Friday's rally, amid the growing expectations of further monetary policy stimulus out of Japan and Europe, while the Chinese markets showed some signs of stability. Japanese equities advanced following Friday's solid jump, with a larger-than-expected drop in the nation's exports preceding Friday's monetary policy decision from the Bank of Japan. Securities traded in mainland China and Hong Kong also rose, with coal and steel issues getting a boost from the government's pledge to further cut overcapacity and excess labor in those industries, per Bloomberg. Meanwhile, strength in oil & gas stocks on the recent rally in oil prices, along with solid gains for financials, helped boost Australia's markets, while shares traded in India and South Korea also moved higher. For our latest analysis of the international markets, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, 2016 International Investing: Why Laggards Don't Necessarily Produce Winners, at www.schwab.com/oninternational, and be sure to follow us on Twitter: @schwabresearch.

Tomorrow's international economic calendar holds GDP from South Korea, consumer price inflation from Japan, and China's trade balance.

Schwab Center for Financial Research - Market Analysis Group

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