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Tuesday, February 23, 2016

Yesterday's Rally Tempered

Charles Schwab: On the Market
Posted: 2/23/2016 4:15 PM ET

Yesterday's Rally Tempered

The gains that U.S. equities enjoyed yesterday were diluted today, as a plethora of mixed earnings results and downbeat economic news dampened sentiment, while any hopes of production cuts in crude oil were quickly dashed following comments from Saudi Arabia's oil minister, to the detriment of the commodity and the energy sector. Meanwhile, Treasuries, the U.S. dollar and gold were all higher.

The Dow Jones Industrial Average (DJIA) fell 189 points (1.1%) to 16,432, the S&P 500 Index lost 24 points (1.3%) to 1,921, and the Nasdaq Composite tumbled 67 points (1.5%) to 4,504. In moderately-heavy volume, 942 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.52 to $31.87 per barrel and wholesale gasoline lost $0.03 to $1.22 per gallon, while the Bloomberg gold spot price rose $14.86 to $1,223.84 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 97.50.

Dow member Home Depot Inc. (HD $125) reported 4Q earnings-per-share (EPS) of $1.17, above the $1.10 FactSet estimate, with revenues rising 9.5% year-over-year (y/y) to $21.0 billion, versus the expected $20.4 billion. 4Q same-store sales rose 7.1% y/y, compared to the projected 4.3% gain. HD issued full-year EPS guidance that was roughly in line with forecasts, while its revenue outlook topped expectations. Separately, the company raised its quarterly dividend by 17.0% to $0.69 per share. Shares were higher.

Macy's Inc. (M $42) achieved 4Q earnings ex-items of $2.09 per share, above the expected $1.89, as revenues declined 5.3% y/y to $8.9 billion, versus the estimated $8.8 billion. Same-store sales decreased 4.3% y/y, compared to the anticipated 5.1% decline. M issued full-year profit guidance with a midpoint below forecasts, while its revenue outlook topped estimates. Shares were nicely higher.

Dow member United Technologies Corp. (UTX $92) confirmed that it has previously engaged in preliminary, exploratory conversations about a range of potential collaborative options with Honeywell International Inc. (HON $104). However, UTX said it never explored these options further due to significant regulatory obstacles, customer concerns and valuation issues. UTX and HON were both lower.

J.M. Smucker Co. (SJM $124) posted fiscal 3Q EPS ex-items of $1.76, above the forecasted $1.62, as revenues jumped 37.0% y/y to $2.0 billion, reflecting the contribution of its recently acquired Big Heart Pet Brands, roughly in line with estimates. SJM lowered its full-year revenue outlook and shares finished lower.

Motorola Solutions Inc. (MSI $71) reported 4Q profits ex-items of $1.58 per share, topping the expected $1.46, with revenues declining 8.0% y/y to $1.7 billion, roughly in line with estimates. MSI issued softer-than-expected 1Q guidance, but its full-year outlook bested forecasts. Shares were solidly higher..

Toll Brothers Inc. (TOL $27) announced fiscal 1Q EPS of $0.40, matching projections, as revenues rose 9.0% y/y to $929 million, versus the anticipated $915 million. The luxury homebuilder narrowed its full-year revenue and housing deliveries outlooks. Separately, the company announced the retirement of Vice Chairman Bruce Toll from its board. TOL overcame early losses and was higher.

Existing home sales unexpectedly rise, while Consumer Confidence drops

Existing-home sales in January rose 0.4% month-over-month (m/m) to a 5.47 million annual rate—the highest annual rate in six months—compared to the Bloomberg forecast of a decrease to a 5.33 million pace. December's figure was revised slightly lower to a 5.45 million annual rate. Sales were 11.0% higher y/y, the highest annual gain since July 2013. The median existing-home price was 8.2% higher versus a year ago at $213,800, and housing supply came in at a 4.0-month pace at the current sales rate. Single-family home sales rose m/m, while condominium sales were down. Sales were higher in the Northeast and Midwest, while flat in the South and down in the West.

National Association of Realtors (NAR) chief economist Lawrence Yun said, "The housing market has shown resilience in recent months, but home prices are still rising too fast because of ongoing supply constraints." Yun added that despite the global economic slowdown, the housing sector continues to recover and will likely help the U.S. economy avoid a recession. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, holds an outperform rating for the financial sector in his latest Schwab Sector Views: Looking for Income, attributing some of the rating to the housing sector. Brad notes that mortgage demand appears to be healthy, interest rates continue to be quite low and the high rental rates in some areas of the country provide the incentive for home buying. Read more at and follow us on Twitter: @schwabresearch.

The Consumer Confidence Index (chart) fell to 92.2 in February from the downwardly revised 97.8 level in January, and compared to estimates of 97.2. Sentiment toward the present situation and expectations of business conditions declined m/m. Also, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—decreased to -2.1 from the -0.6 posted last month.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.7% y/y in December, versus the expectation of a 5.8% rise. M/M, home prices were higher by 0.8% on a seasonally adjusted basis for December, below forecasts of a 0.9% increase.

The Richmond Fed Manufacturing Activity Index unexpectedly fell into contraction territory (a reading below zero), dropping to -4 in February from 2 in January, where economists had expected it to remain.

Treasuries were higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, all dipped by 1 basis point to 0.74%, 1.74% and 2.60%, respectively. 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. Read more at and follow us on Twitter: @schwabresearch.

More housing data is on tomorrow's horizon, with the release of new home sales, forecasted to have fallen 4.4% m/m during January to an annual rate of 520,000 units, as well as MBA Mortgage Applications. Rounding out the day will be Markit's preliminary Services PMI Index, with economists predicting a slight increase to a level of 53.5 for February from the 53.2 posted in January, with a reading above 50 denoting expansion in activity.

Europe lower on earnings and economic data, Asia dips

European equities traded lower, with the U.S. markets showing some weakness and following a lackluster session in Asia, while a pullback in crude oil prices weighed on the energy sector. Also, some disappointing earnings and economic data dampened the tone in the region, along with festering uncertainty regarding the U.K.'s future in the European Union. The British pound extended yesterday's drop versus the U.S. dollar. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers a look at the U.K. uncertainty in his article, Brexit: 5 Things Investors Need to Know, at, and follow Jeff on Twitter: @jeffreykleintop. In economic news, German business confidence fell for a third month in February, while the nation's 4Q GDP growth was unrevised at a 0.3% quarter-over-quarter pace, matching expectations and the growth seen in 3Q. Moreover, French business confidence surprisingly declined for this month. The euro dipped versus the U.S. dollar and bond yields in the region were mixed.

Stocks in Asia finished mostly lower, retreating modestly after posting a solid string of gains, despite yesterday's continued rally in Europe and the U.S. as commodity and oil & gas issues continued to recover. Japanese equities declined with the yen rallying to apply some pressure to the markets. The yen has showed strength recently on concerns about the late-January 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 BoJ's decision in his article, Negative Interest Rate Policy Adds Up To Less than Zero for Investors. Lingering economic growth concerns weighed on stocks in mainland China and Hong Kong, which have recently rebounded solidly, along with a weakening yuan as the People's Bank of China (PBoC) cut its reference rate by the most in six weeks, per Bloomberg. For more on China, see Schwab's Director of International Research Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016. Read both articles at, and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. Stocks in Australia and South Korea declined, while India's markets fell amid some cautious trading as the nation begins its key budget discussions.

Tomorrow's international economic calendar will offer wage data from Australia, the Leading Index from Japan, and industrial sales and orders 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.

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