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Thursday, January 07, 2016

  Schwab Market Update

Posted: 1/7/2016 4:15 PM ET
Stocks Continue to Tumble

U.S. equities followed the global trend sharply lower amid festering Chinese growth and currency concerns as stock declines in the world's second largest economy triggered newly implemented, but freshly suspended circuit breakers which brought trading to a halt less than 30 minutes after the open. Treasuries recovered from a mild midday decline to finish higher, while the domestic docket showed weekly jobless claims declined. The U.S. dollar and crude oil prices were lower and gold finished nicely higher.

The Dow Jones Industrial Average (DJIA) dropped 392 points (2.3%) to 16,514, the S&P 500 Index declined 47 points (2.4%) to 1,943, and the Nasdaq Composite plummeted 146 points (3.0%) to 4,689. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq. WTI crude oil slipped $0.70 to $33.27 per barrel and wholesale gasoline lost $0.01 to $1.15 per gallon, while the Bloomberg gold spot price increased $15.71 to $1,109.38 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.9% lower at 98.25.

Macy's Inc. (M $37) reported that same-store sales over the holiday period were down 4.7% year-over-year (y/y). The retailer noted that it was disadvantaged by the historically warm weather in northern climate zones, while adding that it continued to feel the impact of lower spending by international tourists as the value of the U.S. dollar remained strong. M said it is not expecting a major change in sales trends in January, as it lowered its 4Q and full-year guidance, while announcing job cuts and store closures. Shares, which have fallen nearly 50% in the past six months, traded nicely higher despite the report.

J.C. Penney Co. Inc. (JCP $7) announced a 3.9% y/y increase in same-store sales over the holiday period and reaffirmed its full-year operating earnings outlook. JCP was solidly higher.

Walgreens Boots Alliance Inc. (WBA $81) reported fiscal 1Q EPS ex-items of $1.03, above the $0.96 estimate, with revenues rising 48.5% y/y—due to the inclusion of the results from recently acquired Alliance Boots—to $29.0 billion, below the $29.3 billion forecast. WBA raised the low end of its full-year EPS outlook. Shares finished to the upside.

Constellation Brands Inc. (STZ $150) posted 3Q earnings-per-share (EPS) ex-items of $1.42, above the $1.31 FactSet estimate, as revenues rose 6.0% y/y to $1.6 billion, roughly in line with forecasts. The beer, wine and spirits company raised its full-year guidance. STZ moved higher.

KB Home (KBH $10) reported fiscal 4Q EPS of $0.43, below the expected $0.50, with revenues growing 24.0% y/y to $986 million, versus the projected $1.1 billion. The homebuilder noted that while inclement weather and trade shortages in certain markets tempered its 4Q deliveries and revenues, it has a positive rhythm in its business and substantial momentum as it enters 2016. KBH closed sharply lower.

Jobless claims drop

Weekly initial jobless claims (chart) fell by 10,000 to 277,000 last week, versus the Bloomberg estimate calling for a decline to 275,000 as the prior week's figure was unrevised at 287,000. The four-week moving average decreased by 1,250 to 275,750, while continuing claims rose by 25,000 to 2,230,000, north of the forecasted 2,200,000 level.

Treasuries were higher amid the global sell-off in the equity markets, with the yields on the 2-year and 10-year notes losing 3 basis points (bps) to 0.95% and 2.15%, respectively, while the 30-year bond rate declined 1 bp to 2.93%.

Bond yields have moved lower to start the year, which has seen the global market selloff on festering Chinese growth/currency concerns, elevated geopolitical tensions, and diverging global monetary policies. For a look at what may be ahead for the markets, see our 2016 Schwab Market Outlook from the Schwab Center for Financial Research, under the "White Papers" tab at, and follow us on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will culminate with the release of the December nonfarm payroll report, with a 200,000 headline job gain projected, while private sector employment is forecasted to grow by 198,000. The unemployment rate is expected to remain at 5.0% and average hourly earnings are estimated to gain 0.2% month-over-month. With the Fed hiking rates last month for the first time in nearly a decade amid the backdrop of subdued inflation and the domestic economy not firing on all cylinders, the likely path of future rate hikes remains slow and gradual—which likely would be a positive for risk assets such as stocks. As such, the wage component of the report will likely be highly scrutinized and Schwab's Chief Investment Strategist, Liz Ann Sonders notes in our 2016 Schwab Market Outlook, inflation remains low, but it could be at an inflection point if global growth improves and/or wage growth accelerates further. She adds that inflation and the U.S. dollar are both key for Federal Reserve policy, and a faster pace of rate increases suggests the Fed is acting to combat an inflation problem or an overheating economy (or both). Neither scenario is good for the stock market. Read more under the "White Papers" tab at, and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Additional reports on tomorrow's domestic docket will include wholesale inventories for November, expected to show a 0.1% decrease, matching the decline seen the month prior, and consumer credit will be released in the final hour of trading.

Stocks in Europe and Asia fall amid the continued global selloff
European equity markets posted a broad-based drop, with oil & gas issues falling amid the continued drop in oil prices, while basic materials and financials also saw pressure. The focus for the global markets remained on China, with the nation's currency accelerating its drop to exacerbate economic growth concerns. Global sentiment was hampered by Chinese stocks falling sharply in early trading and were halted—for the second time this week—less than 30 minutes into the session due to newly deployed circuit breakers. The euro traded higher versus the U.S. dollar and bond yields in the region moved mostly to the upside. In economic news, German retail sales rose by a smaller amount than anticipated, while the nation's factory orders advanced by a much larger rate than had been projected. Also, eurozone economic confidence for December surprisingly improved, reaching the highest level since April 2011. Schwab's Director of International Research, Michelle Gibley, CFA, discusses Why Our Outlook for European Stocks Is Positive at, and be sure to follow us on Twitter: @schwabresearch.

Stocks in Asia fell broadly as the Chinese markets fell so much to begin the day that newly implemented circuit breakers—which China suspended after the close—were triggered for a second time this week to halt trading, with the session lasting less than 30 minutes. Currency concerns were at the center of the selloff, with the central bank cutting its yuan reference rate by the most since August, per Bloomberg. For more analysis on the currency markets, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Decoding Devaluations: What Do Currency Moves Mean for Your Money?, at, and follow Jeff on Twitter: @jeffreykleintop. The Shanghai Composite Index fell 7.0% and the Hong Kong Hang Seng Index dropped 3.1%. For a look at the turmoil in the Chinese markets, see our article from the Schwab Center for Financial Research, Chinese Stock Market Selloff: What's New, What's Not at, and follow us on Twitter: @schwabresearch. Japanese equities fell, with the yen rallying, and Australian stocks traded to the downside, exacerbated by a sharp fall in the nation's building approvals for November. However, Australia's trade deficit narrowed by a larger amount than anticipated for November. Finally, securities in South Korea and India dropped.

The international economic calendar for tomorrow is expected to include the Leading Index from Japan, car sales from India and retail sales from Australia. Other releases from across the pond will cover industrial production and the trade balance from Germany and France, while the latter will also release a read on manufacturing production.

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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