Stocks Using Oil and Data as Rally Fuel

Charles SchwabOn the Market

Posted: 1/26/2016 4:15 PM ET

Stocks Using Oil and Data as Rally Fuel

Despite another Chinese market selloff, U.S. stocks are rallying on a jump in crude oil prices and some upbeat economic and earnings reports, headlined by a stronger-than-expected read on domestic Consumer Confidence and a plethora of results from the Dow. Treasuries and the U.S. dollar are dipping, while the Fed is beginning its two-day monetary policy meeting. Gold is gaining ground. European equities overcame early losses on the rebound in oil.

At 12:50 p.m. ET, the Dow Jones Industrial Average is up 1.8%, the S&P 500 Index is gaining 1.4%, and the Nasdaq Composite is increasing 1.2%. WTI crude oil is rising $1.66 to $32.00 per barrel and Brent crude oil is advancing $1.79 to $32.29 per barrel, while wholesale gasoline is up $0.03 at $1.08 per gallon. Elsewhere, the Bloomberg gold spot price is trading $10.95 higher to $1,118.85 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is down 0.2% to 99.16.

Dow member Procter & Gamble Co. (PG $79) reported fiscal earnings-per-share (EPS) ex-items of $1.04, above the $0.98 FactSet estimate, as revenues declined 9.0% year-over-year (y/y) to $16.9 billion, roughly in line with expectations. The company's organic growth—excluding divestitures and acquisitions—topped forecasts. PG issued 2016 EPS guidance that missed forecasts, due to a larger-than-expected negative impact of foreign exchange, though it maintained its constant currency core EPS expectation and raised its free cash flow outlook. PG traded higher. 

Dow component 3M Co. (MMM $144) posted 4Q EPS ex-items of $1.80, compared to the expected $1.63, with revenues decreasing 5.4% y/y to $7.3 billion, versus the projected $7.2 billion. MMM reaffirmed its full-year profit outlook and shares moved higher.

Dow member DuPont (DD $53) announced 4Q profits ex-items of $0.27 per share, roughly in line with forecasts, as revenues declined 9.0% y/y to $5.3 billion, compared to the expected $5.4 billion. DD issued 2016 EPS guidance that came in below estimates. DD was modestly higher.

Dow component Johnson & Johnson (JNJ $101) reported 4Q EPS ex-items of $1.44, two cents above expectations, with revenues decreasing 2.4% y/y to $17.8 billion, versus the projected $17.9 billion. JNJ issued 2016 earnings guidance that beat estimates, though its revenue outlook came in shy of forecasts. Shares gained ground.

Sprint Corp. (S $3) posted a fiscal 3Q loss of $0.21 per share, compared to the forecasted $0.23 per share shortfall, as revenues declined 10.0% y/y to $8.1 billion, versus the anticipated $8.2 billion. The company raised its full-year operating earnings guidance. S rallied nearly 20%.

Coach Inc. (COH $33) posted fiscal 2Q EPS ex-items of $0.68, two pennies north of expectations, as revenues increased 4.0% y/y to $1.3 billion, roughly in line with forecasts. The company raised its full-year operating income outlook, while maintaining its 2016 sales guidance. Shares of COH were sharply higher.

Consumer Confidence improves more than expected

The Consumer Confidence Index (chart) rose to 98.1 in January from the downwardly revised 96.3 level in December, and compared to the Bloomberg estimate of 96.5. Sentiment toward the present situation was unchanged, while expectations of business conditions improved month-over-month (m/m). Also, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—dipped to -0.6 from the -0.3 posted last month.

The preliminary Markit U.S. Services PMI Index declined to 53.7 in January from 54.3 in December, versus forecasts of a dip to 54.0, though a reading above 50 denotes expansion.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.8% y/y in November, versus the Bloomberg expectation of a 5.7% rise. Month-over-month (m/m), home prices were higher by 0.9% on a seasonally adjusted basis for November, above forecasts of a 0.8% increase.

The Richmond Fed Manufacturing Activity Index declined but remained in expansion territory (a reading above zero), declining to 2 in January from 6 in December, matching estimates.

Treasuries finished mixed, as the yield on the 2-year fell 2 basis points (bps) to 0.83%, while the yield on the 10-year note was flat at 2.01% and the 30-year bond rate ticked 1 basis point higher to 2.80%, 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.

Finally, the Federal Open Market Committee (FOMC) kicked off its two-day monetary policy meeting, with a decision due out tomorrow afternoon. As noted in the Schwab Market Perspective: Looking for Answers, the combination of the tumult in the equity market and the continued rout in oil/commodities, combined with the lack of inflationary pressures, will almost certainly mean the Fed will make no move at its upcoming meeting. 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.

In addition to tomorrow's conclusion to the FOMC meeting and subsequent statement, other items on the economic calendar include new home sales, with economists expecting a 2.0% m/m increase during December to an annual rate of 500,000 units, as well as MBA Mortgage Applications.

Europe overcomes early losses, Asia back under pressure

European equities recovered from early losses that stemmed from another selloff in China and yesterday's drop in crude oil prices. 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. Stocks showed some resiliency as crude oil prices turned positive and some earnings reports in the region were favorable. The euro dipped versus the U.S. dollar and bond yields in the region were mostly lower. In economic news, Switzerland's exports declined m/m in December, resulting in a larger-than-expected narrowing of the country's trade surplus.

Stocks in Asia finished lower with yesterday's resumption of the rout in oil prices weighing on sentiment, along with festering global growth concerns, which overshadowed the recent resurfacing of expectations of further monetary policy stimulus efforts from some global central banks. 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?, noting that in recent years, actions by central banks have lifted stocks temporarily, but seemed to do little to boost economic activity. The key for sustaining a turnaround in the stock market is a recovery in growth and avoiding a global recession in 2016. Rather than rescuing investors, comments from central bankers are more likely to create volatility, both up and down, in the markets until the global economic path is clearer. Read more at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop.

However, volume was lighter than usual, with markets in Australia and India closed for holidays. Stocks in Japan fell, snapping a sharp two-day rebound, with the yen showing some strength late in the session. Mainland Chinese equities and issues traded in Hong Kong tumbled, as liquidity and growth concerns continued to apply pressure, despite the People's Bank of China conducting the biggest daily injection of cash into the financial system in three years, as the nation's Lunar New Year holiday looms on the horizon. Elsewhere, South Korea's markets declined, with traders digesting the nation's preliminary 4Q GDP report, which showed growth slowed solidly to a 0.6% quarter-over-quarter pace, from the 1.3% expansion posted in 3Q.

Tomorrow's economic calendar for overseas will include: Consumer sentiment data from South Korea, Germany, Italy and France, as well as CPI from Australia.

Schwab Center for Financial Research - Market Analysis Group

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