Stocks Fall Following Fed Statement

Charles Schwab: On the Market

Posted: 1/27/2016 4:15 PM ET

Stocks Fall Following Fed Statement

U.S. stocks traded sharply lower on the heels of the Federal Reserve's decision to leave current monetary policy unchanged. Ahead of the Fed's decision, stocks showed some resiliency in the wake of disappointing earnings reports from Dow members Apple and Boeing as mixed inventory data from the Department of Energy gave a boost to crude oil prices. Treasuries were mixed, the U.S. dollar lost ground and gold was higher, while in domestic economic news, new home sales were reported well above economists' expectations.

The Dow Jones Industrial Average (DJIA) lost 223 points (1.4%) to 15,944, the S&P 500 Index declined 21 points (1.1%) to 1,883, and the Nasdaq Composite was 100 points (2.2%) lower at 4,468. In heavy volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.85 to $32.30 per barrel and wholesale gasoline was unchanged at $1.07 per gallon, while the Bloomberg gold spot price increased $5.66 to $1,125.57 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 98.97.

Dow member Apple Inc. (AAPL $93) reported fiscal 1Q earnings-per-share (EPS) of $3.28, above the $3.23 FactSet estimate, as revenues rose 1.7% year-over-year (y/y) to $75.9 billion, versus expectations of $76.6 billion, though its gross margin topped forecasts. Shipments of iPhone's, iPad's and Mac's all came in south of estimates. AAPL issued softer-than-expected 2Q guidance for revenues and gross margin. Shares finished solidly lower.

Dow component Boeing Co. (BA $117) posted 4Q EPS ex-items of $1.60, north of the $1.27 projection, with revenues declining 4.0% y/y to $23.6 billion, exceeding the expected $23.5 billion. However, the company issued full-year 2016 earnings and revenue guidance that came in well below the Street's forecasts. BA closed sharply lower.

Dow member United Technologies Corp. (UTX $86) announced adjusted 4Q profits of $1.53 per share, roughly in line with expectations, as revenues decreased 5.0% y/y to $14.3 billion, below the $15.0 billion projection. UTX reaffirmed its 2016 guidance and shares moved slightly higher.

AT&T Inc. (T $35) reported 4Q EPS ex-items of $0.63, roughly in line with estimates, as revenues rose 22.0% y/y to $42.1 billion, reflecting its recent acquisition of DIRECTV, compared to the expected $42.7 billion. T reaffirmed its 2016 guidance and shares finished modestly higher.

Biogen Inc. (BIIB $273) posted 4Q earnings ex-items of $4.50 per share, above the projected $4.06, with revenues rising 7.5% y/y to $2.8 billion, topping the expected $2.7 billion. BIIB's 2016 EPS outlook was in line with forecasts, while its revenue guidance had a midpoint slightly below expectations. Shares were nicely higher.

Housing data stronger than expected, Fed leaves policy unchanged

New home sales (chart) jumped 10.8% month-over-month (m/m) in December to an annual rate of 544,000 from November's upwardly revised 491,000 pace, and compared to the Bloomberg forecast of 500,000. The median home price declined 4.3% y/y at $288,900. The supply of new home inventory fell to 5.2 months at the current sales pace from 5.6 months in November as sales jumped m/m in the Northeast, Midwest and West, while sales in the South were nearly unchanged. New home sales are based on contract signings instead of closings.

The MBA Mortgage Application Index rose 8.8% last week, after gaining 9.0% in the previous week. The solid increase came as an 11.3% jump in the Refinance Index was met with a 4.6% increase for the Purchase Index, while the average 30-year mortgage rate fell 4 basis points (bps) to 4.02%.

At 2:00 p.m. ET, the Federal Open Market Committee (FOMC) announced it will leave current monetary policy unchanged, holding the target for its benchmark interest rate at 0.25-0.50%. Though the Committee did not update its economic projections or hold a press conference, it did judge "that labor market conditions improved further even as economic growth slowed late last year," and that it "is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook." As noted in the Schwab Market Perspective: Looking for Answers, it’s too soon to say whether the Fed will move at its March meeting; but we are fairly confident the FOMC will lower its projections for rate hikes this year from a total of four to closer to what the market’s been expecting, which is no more than two. Read more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

Treasuries were mixed, as the yield on the 2-year note lost 1 bp to 0.83%,the yield on the 10-year note was flat at 2.00% and the 30-year bond rate gained 1 bp to 2.80%. 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.

A preliminary read for December durable goods orders headlines tomorrow's U.S. economic calendar, projected to drop 0.7% m/m, after a flat reading in November. Excluding transportation, orders are expected to be 0.1% lower m/m, while nondefense capital goods orders excluding aircraft, considered a proxy for business spending, are expected to decrease 0.2%, after declining 0.3% in November.

Additional reports expected on tomorrow's docket include pending home sales, expected to have increased 0.9% m/m for December, and weekly initial jobless claims, forecasted to have decreased to 281,000 from the 293,000 level the week prior. Rounding out the day, the Kansas City Fed Manufacturing Activity Index is forecasted to have declined slightly to a level of -10 for January from the -9 registered in December, with a reading below zero denoting contraction.

Europe turns higher on late-day recovery, Asia finishes mostly to the upside

European equities finished mostly higher, ahead of today's Fed monetary policy decision, with oil prices turning higher late in the session on some mixed oil inventory data in the U.S., adding to yesterday's solid advance and limiting the impact of some disappointing earnings reports. The euro was little changed versus the U.S. dollar and bond yields in the region mostly gained ground. In economic news, German consumer confidence came in above expectations for February. 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.

Stocks in Asia finished mostly to the upside on the heels of the solid gain in the U.S., with crude oil prices rising noticeably to help buoy the markets. Japanese equities advanced with the yen giving back some of yesterday's gains. The advance came ahead of today's Fed decision in the U.S. and as the Bank of Japan's monetary policy decision looms on this week's horizon. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers a look at the global monetary policy front in his article, Central Banks to the Rescue?, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Stocks trading in Hong Kong were higher, though mainland Chinese securities declined as a report showing the nation's industrial profits fell in December exacerbated festering growth concerns that have contributed to the recent global market rout, as described by the Schwab Center for Financial Research's article, Market Volatility: What Investors Should Know, at www.schwab.com/marketinsight. Also, follow Schwab on Twitter: @schwabresearch. Indian equities finished flat after not trading yesterday due to a holiday, and South Korean stocks increased, while Australian listings fell in the wake of a report that showed the nation's 4Q consumer price inflation came in hotter than expected, led by weakness in financials and oil & gas issues.

The international economic calendar for tomorrow is expected to include retail sales from Japan, trade data from Australia, import prices and CPI from Germany, and consumer confidence from the eurozone.

Schwab Center for Financial Research - Market Analysis Group

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