Same Ol' Song and Dance

Charles Schwab: On the Market

Posted: 2/2/2016 4:15 PM ET

Same Ol' Song and Dance

U.S. equities revisited what appears to be the early theme for 2016, as the markets again endured solid losses on the back of the persistent tumble in crude oil prices. Meanwhile, the equity front provided a plethora of mixed earnings results, and the domestic economic calendar was empty and unable to provide any inspiration. Treasuries were noticeably higher amid the obvious negative sentiment, while gold and the U.S. dollar were modestly lower.

The Dow Jones Industrial Average (DJIA) fell 296 points (1.8%) to 16,154, the S&P 500 Index lost 36 points (1.9%) to 1,903, while the Nasdaq Composite plunged 103 points (2.2%) to 4,517. 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 fell $1.74 to $29.88 per barrel and wholesale gasoline dropped $0.08 to $1.00 per gallon, while the Bloomberg gold spot price inched $1.36 higher to $1,129.77 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 98.84.

Alphabet Inc. (GOOGL $781), the parent company of Google, reported 4Q earnings-per-share (EPS) ex-items of $8.67, above the $8.10 FactSet estimate, as revenues excluding traffic acquisition costs (TAC) rose 19.3% year-over-year (y/y) to $17.3 billion, north of the expected $16.9 billion. The company said its "very strong" growth in 4Q was driven by mobile search as well as YouTube and programmatic advertising. Shares were solidly higher.

Dow member Pfizer Inc. (PFE $30) posted 4Q EPS ex-items of $0.53, one penny above forecasts, with revenues growing 7.0% y/y to $14.0 billion, versus the expected $13.6 billion. The company issued 2016 guidance that came in below projections. PFE traded lower.

Dow component Exxon Mobil Corp. (XOM $75) announced 4Q profits of $0.67 per share, topping the estimated $0.63, as revenues fell 31.5% y/y to $59.8 billion, compared to the forecasted $50.8 billion. The company said while its financial results reflect the challenging environment, the scale and diversity of its cash flows, along with its financial strength, provide it with the confidence to invest through the cycle to create long-term shareholder value. Shares were noticeably lower.

United Parcel Service Inc. (UPS $95) reported 4Q EPS ex-items of $1.57, above the expected $1.42, with revenues rising 1.0% y/y to $16.1 billion, versus the projected $16.2 billion. UPS' 2016 profit outlook was mostly above estimates. The company said all three business segments expanded operating margins and generated double-digit operating profit growth. Shares finished to the upside.

Mattel Inc. (MAT $30) rallied after the toymaker posted 4Q profits ex-items of $0.67 per share, besting the expected $0.61, with revenues roughly flat y/y at $2.0 billion, compared to the forecasted $1.9 billion.

Michael Kors Holdings Ltd. (KORS $50) was over 20% higher after reporting fiscal 3Q EPS of $1.59, topping the projected $1.46, as revenues rose 6.3% y/y to $1.4 billion, roughly in line with estimates. Same-store sales declined 0.9% y/y, versus the expected 4.4% drop.

The major automakers reported U.S. January sales today, with Fiat Chrysler Automobiles NV's (FCAU $7) Chrysler brand posting adjusted sales growth of 15.8% y/y, compared to the estimated 9.9% gain. The figures are being adjusted by FactSet to account for two fewer selling days this year compared to the same period a year ago. Ford Motor Co. (F $12) posted an adjusted 5.5% y/y rise in sales, above the forecasted 4.8% gain, while General Motors Co's (GM $30) sales rose 8.8%, compared to the projected 6.4% growth. F, GM and FCAU were all lower.

Bond yields fall with economic calendar taking a break

Treasuries finished higher amid a dormant domestic economic docket, as the yield on the 2-year note declined 6 basis points (bps) to 0.74%, while the yields on the 10-year note and the 30-year bond fell 9 bps to 1.86% and 2.67%, respectively.

Tomorrow, the domestic economic calendar will heat up with a couple reads on U.S. services sector activity, with the releases of the ISM non-Manufacturing Index and Markit's final Services PMI Index, with both expected to show growth in the sector continued in January. As well, the ADP Employment Change report will be released, forecasted to show 190,000 private-sector jobs were created during January following the 257,000 registered in December. The report come ahead of Friday's key January nonfarm payroll report, projected to show 190,000 jobs were added, the unemployment rate remained at 5.0%, and average hourly earnings rose 0.3% month-over-month (m/m).

Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Life in the Fast Lane: Look Through the Windshield, Not the Rear View Mirror, the recession drumbeat has picked up tempo and groupthink has gelled around the worst-case scenario. Our view is less apocalyptic, but cautious nonetheless. We are maintaining our “neutral” rating on U.S. stocks, which means investors should not take any risk above their normal equity allocation. But we would caution against positioning at the extreme for the Armageddon scenario many prognosticators are painting. Liz Ann adds in her article, Changes: Turn and Face the Strange (Market), we are in a manufacturing recession, but at this point, the much larger services segment of the economy is showing sustained growth. Every predictive recession model she has studied still suggests a low risk of recession. In fact, if we are in one or heading toward one, it would be the first time in history the leading indicators did not roll over and provide ample warning. Read both articles at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Additionally, MBA Mortgages Applications are scheduled to be released tomorrow as well.

European and Asian stocks fall amid weakness in oil

European equities finished broadly lower, led by oil & gas and financial stocks, on the heels of some disappointing earnings reports and as the selloff in crude oil resumed. In economic news, the eurozone unemployment rate unexpectedly dipped to 10.4% in December, from 10.5%, where economists had expected it to remain. The euro traded higher versus the U.S. dollar and bond yields in the region were mixed. For more on the volatile global markets, see the Schwab Center for Financial Research's article, Market Volatility: What Investors Should Know, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Further to the east, stocks in Asia finished mostly to the downside, with energy issues weighing on the markets as pressure has resurfaced for crude oil prices. Japanese equities declined, with the yen gaining ground to help stocks give back some of the two-day rally that followed Friday's decision by the Bank of Japan to adopt a negative interest-rate policy. Meanwhile, central bank focus remained, with the Reserve Bank of Australia (RBA) and Reserve Bank of India (RBI) both keeping their benchmark interest rates unchanged. 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/oninternational, and follow Jeff on Twitter: @jeffreykleintop. Stocks traded in Australia and India fell on the heels of the decisions by the nations' respective central banks, while listings in both South Korea and Hong Kong also declined. However, mainland Chinese stocks bucked the trend to finish higher, as the People's Bank of China continued to pump cash into the financial system ahead of next week's Lunar New Year holidays. Volume was light ahead of the holidays in China.

Items slated for release on tomorrow's international economic calendar include: trade data from Australia, consumer confidence from Japan, CPI from Italy and the U.K., retail sales out of the eurozone, as well as the Markit Services PMI indexes from across Europe.

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