Stocks Temper Weekly Gains

Charles Schwab: On the Market

Posted: 2/26/2016 4:15 PM ET

Stocks Temper Weekly Gains

U.S. stocks finished mixed, unable to hold on to early gains that arose amid a broad based advance for global equities and an upbeat revision to domestic 4Q GDP, though inflation figures were hotter than expected. Treasuries and gold were lower and the U.S. dollar gained ground, while crude oil prices spiked higher in morning action only to reverse course and close lower. In equity news, Kraft Heinz and J.C. Penney topped the Street's quarterly projections, while Gap disappointed with its earnings guidance.

The Dow Jones Industrial Average (DJIA) declined 57 points (0.3%) to 16,640 and the S&P 500 Index was 4 points (0.2%) lower at 1,948, while the Nasdaq Composite gained 8 points (0.2%) to 4,590. In heavy volume, 1.0 billion shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.29 to $32.78 per barrel, wholesale gasoline decreased $0.01 to $1.30 per gallon, and the Bloomberg gold spot price lost $9.64 to $1,223.27 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.8% higher at 98.08. Markets were higher for the week, as the DJIA increased 1.5%, the S&P 500 Index added 1.6%, and the Nasdaq Composite Index gained 1.9%.

Kraft Heinz Co. (KHC $78) reported 4Q earnings-per-share (EPS) ex-items of $0.62, above the $0.58 FactSet estimate, as revenues declined 5.0% year-over-year (y/y) to $7.1 billion, compared to the expected $7.0 billion. KHC said cost savings and favorable pricing net of commodity costs were partially offset by unfavorable volume/mix. Looking ahead, the company said it believes it is positioned for a strong performance in 2016 and beyond. Shares finished higher.

Gap Inc. (GPS $27) issued much softer-than-expected EPS guidance for this year after posting roughly in line 4Q results, including its previously announced drop in same-store sales. GPS also announced a new $1.0 billion share repurchase program. Shares moved lower.

J.C. Penney Co. Inc. (JCP $10) rallied after posting 4Q adjusted profits of $0.39 per share, versus forecasts of $0.22, with revenues increasing 2.6% y/y to $4.0 billion, mostly in line with expectations. Same-store sales grew 4.1% y/y, versus the expected 4.0% rise. The company said it continues to win market share in a competitive environment. JCP issued stronger-than-expected full-year EPS guidance and projected same-store sales growth of 3-4%.

Monster Beverage Corp. (MNST $131) posted 4Q profits of $0.67 per share, versus the expected $0.82, though the results included a plethora of special items that may affect comparability. Revenues rose 6.6% y/y to $645 million, versus the forecasted $700 million. MNST also boosted its share repurchase program by an amount that could reach $1.75 billion. Shares were under pressure.

Foot Locker Inc. (FL $64) reported 4Q EPS ex-items of $1.16, compared to the expected $1.12, with revenue growth of 5.0% y/y to $2.0 billion, roughly in line with expectations. Same-store sales grew 7.9% y/y, versus estimates of a 5.9% gain. FL lost solid ground, giving up early gains during its analyst conference call, where it issued 2016 same-store sales guidance that was roughly in line with forecasts. 

First revision to 4Q GDP stronger than expected to headline upbeat economic calendar

The second look (of three) at 4Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.0%, revised upward from the 0.7% expansion reported in the first report. This compared to the Bloomberg forecast of a revised 0.4% pace of growth. 3Q GDP expanded by an unrevised 2.0% rate. Personal consumption came in at a 2.0% gain for 4Q, from the 2.2% increase previously reported, with expectations calling for an unrevised rise. Personal consumption grew by an unrevised 3.0% in 3Q.

The upward revision came as a positive change to private inventory investment and a downward revision to imports more than offset the negative adjustment to personal consumption and a downward revision to state and local government spending.

On inflation, the GDP Price Index was revised to a 0.9% gain, versus forecasts of an unrevised 0.8% increase, while the core PCE Index, which excludes food and energy, was adjusted to a 1.3% rise, versus expectations of an unrevised 1.2% increase.

Personal income (chart) was 0.5% higher month-over-month (m/m) in January, versus forecasts of a 0.4% gain, while December's 0.3% increase was unrevised. Personal spending came in 0.5% higher m/m last month, versus expectations of a 0.3% rise, while December's flat reading was adjusted to a 0.1% gain. The January savings rate as a percentage of disposable income remained at December's downwardly revised 5.2% rate. The PCE Deflator ticked 0.1% higher m/m, compared to the forecasted flat reading. Compared to last year, the deflator was 1.3% higher, above forecasts of a 1.1% gain. Excluding food and energy, the PCE Core Index was 0.3% higher, compared to expectations of a 0.2% increase, and the index was 1.7% higher y/y, topping estimates of a 1.5% gain.

The final February University of Michigan Consumer Sentiment Index (chart) was revised to 91.7 from the preliminary level of 90.7, and compared to expectations of 91.0, with upward adjustments for the current conditions and outlook components of the report. However, the index was lower compared to January's level of 92.0. The 1-year inflation projection was unrevised at January's level of 2.5%, while the 5-10 year inflation outlook was revised higher to 2.5% but was down from 2.7% in January.

Treasuries were lower, with the yield on the 2-year note jumping 7 basis points (bps) to 0.79% and the yields on the 10-year note and the 30-year bond advancing 4 bps to 1.76%, and 2.63%, respectively. For more on the bond markets see Schwab's Chief Fixed Income Strategist, Kathy Jones', article, Don't Look Back: Surviving in a Low-Yield World, at www.schwab.com/marketinsight, and follow Kathy on Twitter: @kathyjones.

Europe and Asia mostly higher to close out the week

European equities finished higher for a second-straight session, posting a second week of gains, on the heels of the favorable U.S. economic data, headlined by a stronger-than-expected 4Q GDP report. Commodity-related issues led the way, bolstered by extended gains for oil and lingering hopes of further global central bank stimulus measures. With the G-20 meeting of world leaders set to get under way, China's central bank leader hinted at further actions, while cooler-than-expected French and German inflation reports likely buoyed expectations that the European Central Bank will announce further measures following next month's meeting. Meanwhile, uncertainty regarding the exit of the U.K. from the European Union (EU) remained, with the British pound lower versus the U.S. dollar after dropping sharply early in the week. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, discusses the possible implications of a U.K. exit in his article, Brexit: 5 Things Investors Need to Know, at www.schwab.com/marketinsight. Also, follow Jeff on Twitter: @jeffreykleintop. The euro was lower versus the U.S. dollar and bond yields in the region finished mixed. In economic news, French 4Q GDP growth was revised higher to a 0.3% quarter-over-quarter pace, versus expectations of an unrevised gain of 0.2%, matching the growth seen in 3Q.

Stocks in Asia finished mostly to the upside following the advances in the U.S. and Europe yesterday, bolstered by gains in crude oil prices. Japanese stocks posted their first back-to-back weekly gain since November, per Bloomberg, despite a flat read on consumer price inflation and as the yen overcame early losses late in the session. The yen was relatively stable for the week, after rallying recently on 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.

Mainland Chinese equities rebounded from yesterday's tumble on a flare-up in liquidity concerns, which added to festering growth worries for the world's second largest economy that 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. Stocks trading in Hong Kong also rebounded from Thursday's drop, aided by comments from the People's Bank of China (PBoC) Governor who noted while world finance chiefs and central bankers gathered in Shanghai for the G-20 meeting that China still has some "monetary policy space" and "multiple policy instruments to address possible downside risks," per Bloomberg.

Australian equities finished flat amid some weakness in resource-related issues, South Korean securities ticked higher, and Indian stocks rose, recovering some of the week's losses that have stemmed from caution ahead of next week's key federal budget release.

Stocks go back-to-back

U.S. stocks closed higher for the second-straight week. Global risk aversion relatively waned, with the Japanese yen trimming its recent rally and U.S. Treasury yields moving higher after being pressured as of late by the heightened global market volatility and Fed rate-hike uncertainty. Stocks showed some resiliency in the face of elevated uncertainty regarding the possibility that the U.K. could leave the EU. U.S. data helped foster some of positive sentiment, with Friday's plethora of favorable reports being preceded by the highest annual rise in existing home sales in six months and durable goods orders jumping broadly—including the largest gain for the component pertaining to business spending since June 2014. Also, 4Q earnings season continued to roll on, highlighted by Dow member Home Depot Inc's(HD $125) stronger-than-expected results and guidance. Of the 482 companies in the S&P 500 that have reported thus far, nearly 75% have bested earnings forecasts, while only about 46% have topped sales estimates, per data compiled by Bloomberg.

As noted in the Schwab Market Perspective: Confidence is Key, history has proven that times like these can make or break successful investing strategies. The correction in stocks doesn’t yet seem to be corroborated by a sharp U.S. economic downturn. In fact, recent economic data has been encouraging, but shattered confidence can lead to a self-fulfilling prophecy. Recent economic readings from around the world also suggest that the globe is not slipping into a recession. Read more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

Heavy dose of data awaits the markets

The February nonfarm payroll report to end next week will likely garner the most attention, but the data point that has the potential to carry the most weight of the robust U.S. economic calendar is Thursday's ISM non-Manufacturing Index. The report is a measure of business activity in the more heavily-weighted domestic services sector and will follow Wednesday's ISM Manufacturing Index. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her Q&A with Liz Ann Sonders: What's Behind the Recent Market Volatility?, recession risk is elevated, just not glaring yet. Although the U.S. economy remains bifurcated—manufacturing is in recession, but services are hanging in there—talk of recession got louder after the latest reading from the Institute of Supply Management on services came in weaker than expected. Overall, the leading economic indicators have not rolled over to the extent typically seen before recessions. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Other U.S. reports slated for next week include: Chicago PMI Index, Markit's business activity reports, the Fed's Beige Book, factory orders, and the trade balance.

Internationally next week: Australia—Reserve Bank of Australia's monetary policy decision, building approvals, 4Q GDP, trade balance, and retail sales. China—Manufacturing and non-Manufacturing PMI reports. India—Fiscal budget. Japan—industrial production, retail sales, and household spending. Eurozone—CPI, unemployment rate, and Markit's business activity reports, along with German retail sales and unemployment change. U.K.—Markit's business activity reports.

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.