Stocks Come Up for Air in Final Hour

Charles Schwab: On the Market

Posted: 2/1/2016 4:15 PM ET

Stocks Come Up for Air in Final Hour

After spending most of the day in negative territory, courtesy of disappointing manufacturing reports from China and here at home, as well as a decline in crude oil prices, U.S equities worked their way off the lows to finish mixed and near the flatline. Equity news was dominated by M&A activity, as well as better-than-expected results from Aetna. Meanwhile, Treasuries were lower, as was the U.S. dollar, and gold was higher.

The Dow Jones Industrial Average (DJIA) fell 17 points (0.1%) to 16,449, the S&P 500 Index lost nearly a point (0.1%) to 1,939, while the Nasdaq Composite added 6 points (0.1%) to 4,620. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.00 to $31.62 per barrel and wholesale gasoline lost $0.05 to $1.08 per gallon, while the Bloomberg gold spot price increased $10.22 to $1,128.43 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 98.99.

Aetna Inc. (AET $103) reported 4Q earnings-per-share (EPS) of $1.37, above the $1.21 FactSet estimate, as revenues rose 2.0% year-over-year (y/y) to $15.1 billion, versus the expected $15.0 billion. AET issued full-year profit guidance that was below expectations. The company said it continues to work diligently with the Department of Justice and state regulators toward final approval of its proposed acquisition of Humana Inc. (HUM $168), and it believes it remains on track to close the transaction in the second half of 2016. AET traded higher.

Abbott Laboratories (ABT $38) announced an agreement to acquire point-of-care diagnostics company Alere Inc. (ALR $54) for about $56.00 per share in cash, for a total equity value of $5.8 billion. ABT finished lower, while ALR rallied over 45%.

Dominion Resources Inc. (D $70) announced an agreement to acquire Questar Corp. (STR $25) for $25.00 per share in cash, or about $4.4 billion. The announcement comes as D reported 4Q EPS that came in below forecasts and issued earnings guidance with midpoints that were slightly below expectations. D was lower, while STR jumped over 22% higher.

Cardinal Health Inc. (CAH $80) posted fiscal 2Q EPS ex-items of $1.30, above the forecasted $1.26, with revenues growing 23.0% y/y to $31.4 billion, above the projected $29.2 billion. CAH reaffirmed its full-year profit outlook. Shares were lower.

Manufacturing reports miss, personal income and spending data mixed

The Institute for Supply Management (ISM) Manufacturing Index (chart) in January continued to depict contraction (below 50), rising to 48.2 from December's 48.0 level, and compared to the Bloomberg forecast calling for a modest rise to 48.4. This was the fourth-straight month of contraction, though new orders and production both moved back into expansion territory, with the contraction for employment accelerating.

The final Markit U.S. Manufacturing PMI Index was revised lower to 52.4 from the 52.7 preliminary level for January, and versus expectations of a slight downward revision to 52.6. The index was up from the 51.2 level posted in December, with a reading above 50 denoting expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Schwab's Chief Investment Strategist, Liz Ann Sonders notes 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. As well, Liz Ann cautions investors of the cacophony of apocalyptic forecasts, and to instead focus on the leading indicators; but observe the lagging indicators for perspective, in her newest article, Life in the Fast Lane: Look Through the Windshield, Not the Rear View Mirror. Read both articles at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Personal income (chart) was 0.3% higher month-over-month (m/m) in December, topping the forecasted 0.2% gain, while November's 0.3% increase was unrevised. Personal spending was flat m/m, versus the expected 0.1% rise, and November's 0.5% increase. The December savings rate as a percentage of disposable income rose to 5.5% from the downwardly revised 5.3% posted in November. The PCE Deflator dipped 0.1% m/m, compared to the forecasted flat reading. Compared to last year, the deflator was 0.6% higher, matching forecasts. Excluding food and energy, the PCE Core Index was flat, compared to expectations of a 0.1% increase, and the index was 1.4% higher y/y, in line with estimates.

Construction spending (chart) ticked 0.1% higher m/m in December, versus projections of a 0.6% advance, and following November's negatively revised 0.6% decrease. Residential spending rose 0.7%, while non-residential spending declined 0.4%.

Treasuries were lower, as the yields on the 2-year and 10-year notes, along with the 30-year bond, rose 3 basis points (bps) to 0.80%, 1.95%, and 2.77%, respectively.

Tomorrow's domestic economic docket will be nearly empty, save for the release of January auto sales data throughout the day.

Europe lower, Asia mixed on China data and oil weakness

European equities traded lower, with oil & gas issues seeing some pressure as crude oil prices traded lower, while global growth concerns continued in the wake of another string of disappointing U.S. and Chinese manufacturing data. The euro moved higher versus the U.S. dollar and bond yields in the region mostly gained ground. Global growth concerns and the ensuing rout in energy prices have contributed to the selloff in the world markets to begin the year, as discussed by the Schwab Center for Financial Research in Market Volatility: What Investors Should Know, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. Markit's final eurozone Manufacturing PMI Index was unrevised at 52.3 for January, and was down from 53.2 in December, but a reading above 50 denotes expansion. Also, Switzerland's PMI Manufacturing Index fell to 50.0 for January, missing forecasts, though Markit's U.K. PMI Manufacturing Index rose to 52.9 for last month, topping expectations.

Stocks in Asia finished mixed, with lingering support coming from Friday's announcement from the Bank of Japan to expand its stimulus efforts by adopting a negative interest rate policy giving that nation's markets a boost, while Chinese growth concerns were preserved following some lackluster manufacturing data. 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. Stocks in South Korea advanced, despite a larger-than-expected drop in January exports, and Australian securities rose ahead of tomorrow's monetary policy decision from the Reserve Bank of Australia.

Meanwhile, mainland Chinese equities and those stocks listed in Hong Kong fell, following the nation's official Manufacturing PMI Index ticking lower to 49.4 in January, from 49.7 in December, and compared to the 49.6 reading that was expected. Markit's China PMI Manufacturing Index ticked higher to 48.4 for last month, from 48.2 in December, and versus the forecasted 48.1 level. Readings below 50 for both indexes denote contraction. However, a separate report showed China's official non-Manufacturing PMI Index for January slowed slightly but continued to denote expansion. Growth concerns in China have helped fuel a rout for the country's equity markets as discussed in Schwab's Jeffrey Kleintop's, CFA, article, Chinese Stock Market Selloff: What's New, What's Not. Read both articles at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

In addition to the aforementioned Reserve Bank of Australia's monetary policy meeting, the Reserve Bank of India will also meet, with no change to its stance expected. Other items on the international economic calendar include employment data from Germany, Spain and the eurozone, while the Euro Area will also release PPI figures.

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.