Charles Schwab: On the Market
Posted: 2/25/2016 4:15 PM ET
Stocks Finish Higher as Oil Assists in Powering Gains
U.S. equities finished nicely higher after initially struggling to hold on to early session gains, which transpired on the heels of a sharp rebound in durable goods orders, as a sharp rise in crude oil prices seemingly aided the advance. Treasuries and gold were higher, while the U.S. dollar was flat. In equity news, Best Buy posted mixed results and announced measures to return capital to shareholders and Salesforce.com rallied after announcing upbeat guidance.
The Dow Jones Industrial Average (DJIA) rose 212 points (1.3%) to 16,697, the S&P 500 Index added 22 points (1.1%) to 1,952, and the Nasdaq Composite gained 40 points (0.9%) to 4,582. In moderately-heavy volume, 951 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.92 to $33.07 per barrel and wholesale gasoline gained $0.03 to $1.31 per gallon, while the Bloomberg gold spot price increased $4.84 to $1,233.59 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 97.37.
Best Buy Co. Inc. (BBY $32) reported 4Q earnings-per-share (EPS) ex-items of $1.53, north of FactSet's $1.39 estimate, with revenues decreasing 4.1% year-over-year (y/y) to $13.6 billion, roughly in line with forecasts. 4Q same-store sales declined 1.7% y/y, versus estimates of a 1.1% decrease. BBY issued 1Q EPS and revenue guidance that came in below expectations. Separately, the company increased its quarterly dividend by 22.0% to $0.28 per share, in addition to a special dividend of $0.45 per share, and announced a new $1.0 billion share repurchase program. Shares finished higher in choppy trading.
Kohl's Corp. (KSS $47) posted 4Q EPS of $1.58, three cents above projections, as revenues rose 0.8% y/y to $6.4 billion, roughly in line with forecasts. Same-store sales ticked 0.4% higher y/y, compared to the estimated 1.6% increase. KSS' full-year earnings outlook had a midpoint below expectations, while its revenue guidance missed estimates. Separately, the company raised its quarterly dividend by 11.0% to $0.50 per share. KSS traded to the upside.
Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers analysis of how equities can be a nice source of income that investors may want to consider in his latest Schwab Sector Views: Looking for Income. Read more at www.schwab.com/marketinsight and follow us on Twitter: @schwabresearch.
L Brands Inc. (LB $86) reported 4Q profits of $2.15 per share, above the projected $2.05, on previously announced revenues of $4.4 billion, which grew 8.0% y/y. LB issued 1Q and full-year EPS guidance that missed expectations, while raising its outlook for February same-store sales, reflecting growth at both Victoria's Secret and Bath & Body Works. Shares gained ground.
HP Inc. (HPQ $10) achieved fiscal 1Q EPS of $0.36, matching expectations, as revenues fell 12.0% y/y to $12.2 billion, compared to the estimated $12.1 billion. HPQ issued 2Q earnings guidance with a midpoint below forecasts, while reaffirming its full-year profit outlook, and shares fell.
Salesforce.com Inc. (CRM $69) reported 4Q profits ex-items of $0.19 per share, matching forecasts, with revenues rising 25.0% y/y to $1.8 billion, roughly in line with expectations. CRM issued 1Q and full-year guidance that topped estimates and shares rallied.
Durable goods orders rebound sharply, jobless claims rise more than expected
Durable goods orders (chart) surged 4.9% month-over-month (m/m) in January, compared to Bloomberg's estimate of a 2.9% gain and December's upwardly revised 4.6% drop. Ex-transportation, orders rose 1.8% m/m, versus the 0.3% forecasted rise, and December's favorably revised 0.7% decline. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, jumped 3.9%, compared to projections of a 1.0% increase, and following the upwardly revised 3.7% decline in the month prior.
Growth in demand for goods meant to last at least three years was led by surges in aircraft and parts. However, stripping out these volatile components, growth was broad-based, including orders for motor vehicles, machinery, computers, and communication equipment, along with electrical equipment and appliances. Today's report is welcomed given the recessionary signals as of late from the manufacturing sector, notably the largest gain in the component pertaining to business spending since June 2014.
Also, the data is forward looking, adding credence to Schwab's Chief Investment Strategist, Liz Ann Sonders' article, Life in the Fast Lane: Look Through the Windshield, Not the Rear View Mirror. Liz Ann also adds in her article, Changes: Turn and Face the Strange (Market), 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.
Weekly initial jobless claims (chart) grew by 10,000 to 272,000 last week, versus estimates of 270,000 and the prior week's unrevised 262,000. The four-week moving average declined by 1,250 to 272,000, while continuing claims dropped by 19,000 to 2,253,000, in line with forecasts.
The Kansas City Fed Manufacturing Activity Index for February fell to -12 from January's -9 level, versus forecasts of an improvement to -6, with a reading south of zero depicting contraction.
Treasuries were higher, with the yield on the 2-year note declining 3 basis points (bps) to 0.72%, the yield on the 10-year note dropping 4 bps to 1.71%, and the 30-year bond rate losing 2 bps to 2.58%. For more on the bond markets see Schwab's Director of Income Planning, Rob Williams', latest article, Low Rates, Volatile Markets: Income Investing Outlook 2016, at www.schwab.com/marketinsight and follow us on Twitter: @schwabresearch.
Tomorrow, the U.S. economic calendar will bring the second look (of three) at 4Q Gross Domestic Product (GDP), projected to show growth at an annualized 0.4% quarter-over-quarter pace, a decrease from the initial read of 0.7% and after registering 2.0% in 3Q. Shortly after the opening bell, we will also receive the final University of Michigan Consumer Sentiment Index for February, expected to inch higher to 91.0 from the preliminary read of 90.7.
Europe rebounds on a bank jump, Asia mixed in face of a tumble in China
European equities traded nicely higher after seeing pressure the past couple sessions, with oil & gas issues holding onto gains despite the turn lower for crude oil prices. In economic news, U.K. 4Q GDP growth was unrevised at a 0.5% quarter-over-quarter pace, matching forecasts, while eurozone consumer price inflation rose at a y/y level just shy of expectations for January. The British pound ticked higher after its recent tumble versus the U.S. dollar that came courtesy of increased uncertainty regarding a U.K. exit from the European Union, as discussed in Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Brexit: 5 Things Investors Need to Know, at www.schwab.com/marketinsight. Also, follow Jeff on Twitter: @jeffreykleintop. The euro was modestly higher versus the U.S. dollar and bond yields in the region were mostly lower.
Stocks in Asia finished mixed on the heels of yesterday upside reversal in the U.S. as crude oil prices turned higher, and ahead of the G-20 meeting tomorrow in Shanghai, while Chinese markets dropped sharply. China's Shanghai Composite Index tumbled 6.4% as signs of tighter liquidity conditions added to festering Chinese growth concerns, which have been exacerbated by the recent weakness in the yuan. Schwab's Director of International Research, Michelle Gibley, CFA, discusses in her article, Currency Wars: Is a Weaker Currency Good or Bad?, while Michelle also offers 5 Reasons China Won't Crash the Global Economy in 2016. Read both articles at www.schwab.com/oninternational, and follow Schwab on Twitter:@schwabresearch.
An advance for Japanese equities was aided by a pullback in the yen, which has rallied recently amid concerns about the decision by the Bank of Japan (BoJ) to adopt a negative interest rate policy (NIRP). Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers a look at the increasing moves by central banks to NIRP in his article, Negative Interest Rate Policy Adds Up To Less than Zero for Investors, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop. Meantime, Australian securities ticked higher, led by strength in technology issues and South Korean listings also finished to the upside. Indian stocks decreased in volatile trading as derivatives contracts were set to expire, while the nation unveiled its railway budget, ahead of next week's key federal budget.
The international economic docket for tomorrow will deliver a plethora of reports, beginning with the CPI from Japan and property prices from China. Releases from across the pond will include consumer confidence from the U.K. and the eurozone, CPI from Germany, consumer spending, CPI, PPI and GDP from France and hourly wages from Italy.
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.