Stocks Stage a Solid Advance

Charles Schwab: On the Market

Posted: 3/11/2016 4:15 PM ET

Stocks Stage a Solid Advance

U.S. stocks rallied in Friday's trading session to close out the week positive, with higher oil prices and a delayed positive reaction to yesterday's further stimulus measures from the European Central Bank aiding in the equity advance. Treasuries were lower, along with gold prices, while the U.S. dollar was mildly higher. Ulta Salon highlighted the corporate earnings front with its better-than-expected quarterly results and also announcing upbeat guidance and an accelerated share repurchase plan.

The Dow Jones Industrial Average (DJIA) advanced 218 points (1.3%) to 17,213, the S&P 500 Index jumped 33 points (1.6%) to 2,022, and the Nasdaq Composite rallied 86 points (1.9%) to 4,748. In moderately-heavy volume, 896 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.66 to $38.50 per barrel, wholesale gasoline was unchanged at $1.33 per gallon and the Bloomberg gold spot price lost $21.97 to $1,250.27 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 96.22. Markets were higher for the week, as the DJIA increased 1.2%, the S&P 500 Index added 1.1%, and the Nasdaq Composite Index gained 0.7%.

VeriFone Systems Inc. (PAY $28) reported fiscal 1Q earnings-per-share (EPS) ex-items of $0.48, above the $0.46 FactSet estimate, as revenues rose 5.5% year-over-year (y/y) to $514 million, compared to the $501 million expectation. The company said the worldwide market for electronic payments is growing. PAY issued full-year 2016 guidance that topped forecasts. Shares finished solidly higher.

Ulta Salon, Cosmetics & Fragrance Inc. (ULTA $192) posted 4Q EPS of $1.69, north of the estimated $1.54, with revenues rising 21.1% y/y to $1.3 billion, above the forecasted $1.2 billion. 4Q same-store sales grew 12.5% y/y, topping the expected 9.4% increase. ULTA said it continues to benefit from strong demand in the beauty category. The company issued stronger-than-expected 1Q guidance and a full-year same-store sales outlook. Also, ULTA announced a $200 million accelerated share repurchase plan. Shares rallied.

Colgate-Palmolive Co. (CL $68) increased its quarterly dividend by 3.0% to $0.39 per share, effective in the second quarter 2016. CL closed slightly higher.

Import prices fall by smaller amount than projected

The Import Price Index (chart) declined 0.3% month-over-month (m/m) for February, compared to the Bloomberg projection of a 0.7% decrease, and January's 1.1% decline was revised to a 1.0% fall. Y/Y, prices were lower by 6.1%, versus the 6.5% forecasted drop, and following January's downwardly revised 6.3% fall.

Treasuries were lower, with the yield on the 2-year note rising 3 basis points (bps) to 0.95%, the yield on the 10-year note increasing 4 bps to 1.98%, and the 30-year bond rate gaining 5 bps to 2.75%. For our latest commentary on the wild swings in the markets, see Schwab's Director of Income Planning, Rob Williams', article, Market Volatility: What If You Don't Have Time to Recover?, at www.schwab.com/marketinsight and follow us on Twitter: @schwabresearch.

Europe snaps-back from yesterday's ECB-fueled drop, Asia mostly higher

European equities moved broadly higher, with financials rallying on an apparent delayed positive reaction to yesterday's mixed monetary policy messages from the European Central Bank (ECB). The ECB cut its benchmark refinancing rate to 0.00% from 0.05%, where it was expected to remain, while cutting its deposit rate to -0.40% from -0.30%, as expected. Also, the central bank increased its monthly asset purchases from 60 billion euros to 80 billion euros, announced that non-bank investment grade bonds will be eligible for purchase, and new Targeted Longer-Term Refinancing Operations (TLTROs). However, Draghi added that he does not anticipate the need to cut rates further, sparking yesterday's sharp downside reversal and a surge in the euro. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis of the global monetary policy landscape in his articles, Negative Interest Rate Policy Adds Up To Less than Zero for Investors and Central Banks to the Rescue?, at www.schwab.com/oninternational. Also, follow Jeff on Twitter: @jeffreykleintop. The euro modestly gave back some of yesterday's rally, while bond yields in the region were mostly lower.

Oil & gas issues gained ground as oil prices recovered from yesterday's declines that came courtesy of uncertainty regarding a March 20 production freeze meeting between major world oil producers. Oil was buoyed by comments from the International Energy Agency (IEA), which suggested oil prices may have bottomed out. In economic news, German consumer price inflation was unrevised at a 0.4% m/m gain, as expected for February, while Italian industrial production rose more than expected in January. Also, the U.K. trade deficit came in smaller than expected and the nation's construction output unexpectedly declined for January.

Stocks in Asia finished higher, closing out a mixed week by overcoming early sluggishness that stemmed from the sign from the European Central Bank that further rate cuts may be done, which fostered wild rides in the U.S. and European markets yesterday. However, the markets seemed to overcome early pressure as traders appeared to begin to warm up to the plethora of further stimulus measures announced yesterday by the ECB. Japanese equities advanced with the yen giving back some of yesterday's gain late in the session to help foster some resiliency. Stocks trading in mainland China ticked higher and those trading in Hong Kong gained ground ahead of a flood of key economic reports released after the markets closed. Shortly following the final trade of the day, China's new yuan loans and aggregate financing—a measure of total credit issued—came in well below forecasts for February. Later tonight, we will get the releases of industrial production and retail sales for last month but the data may have been skewed by the Lunar New Year holidays celebrations. For our analysis on reading Chinese data see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Trust but Verify: Five Independent Indicators of China's Economy, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Indian stocks extended a recent rally, aided by measures taken by the government to bolster investment and economic growth, including a new real estate bill and eased rules for mining companies, per Bloomberg. Australian securities increased with strength in technology and financial issues helping overshadow some sluggishness for oil & gas stocks. Finally, South Korean equities ticked higher.

Stocks post four-in-a-row in a wild week

Global market volatility remained during the week that had U.S. data relatively light—sans a larger-than-expected drop in jobless claims—while China reported disappointing trade data and the European Central Bank offered a mixed monetary policy message. The ECB expanded its stimulus measures but signaled that further rate cuts may be over, sparking the biggest ever intraday reversal in the euro versus the U.S. dollar. However, domestic stocks registered a fourth-consecutive weekly gain, with oil prices maintaining their rally and the global markets bouncing back sharply following the ECB-fueled volatility.

As noted in the Schwab Market Perspective: Neutral Does Not Mean Boring, recently, stock indexes have moved out of correction territory but have remained quite volatile, with triple-digit Dow moves more common than not. This illustrates why we continue to recommend that investors have a neutral allocation toward equities in their portfolio. Uncertainty remains elevated and trying to chase, or even interpret, every move in the stock market seems to us to be a losing game. Read more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

Fed and BoJ keep monetary policy in focus

Next week's economic calendar will heat back up, with the releases of retail sales, consumer and producer price inflation (CPI & PPI), industrial production and capacity utilization, the NAHB Housing Market Index, housing starts and building permits, and culminating with the preliminary University of Michigan Consumer Sentiment Index.

However, global monetary policy will likely continue to garner the most attention, with Wednesday's U.S. Federal Open Market Committee (FOMC) rate decision being preceded by the Bank of Japan's (BoJ) policy announcement on Tuesday. The Fed will deliver updated economic projections and Chairwoman Janet Yellen will conduct her press conference following its statement. The Fed is not expected to change its stance but its statement could be poised to command attention for clues on the Central Bank's outlook given the tough backdrop of heightened global volatility, sings of rising inflation, and the continued improvement in the labor market. As noted in the Schwab Market Perspective, the Fed has been put into a bit of a pickle and is still biased toward normalizing policy, but the market may be underestimating the chances of further hikes this year, especially given the latest uptick in inflation. Read more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

According to Bloomberg Intelligence, the BoJ is not expected to deliver additional stimulus at this meeting. The BoJ's late-January adoption of a negative interest rate policy (NIRP) and this week's move to go deeper into NIRP territory by the ECB have been met with disappointment and boosted global market volatility. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his article, Negative Interest Rate Policy Adds Up To Less than Zero for Investors and Central Banks to the Rescue?, while the main economic risks of a NIRP have yet to be realized, increasingly negative interest rates may weigh more heavily on the stock market and pose a threat to the drivers of the global economy. at www.schwab.com/oninternational. Also, follow Jeff on Twitter: @jeffreykleintop.

Other international reports worth noting for next week include: Australia—Reserve Bank of Australia meeting minutes and employment change. China—property prices. India—trade balance and CPI and PPI. Japan—machine orders and trade balance. Eurozone—industrial production, 4Q employment, new car registrations, trade balance and CPI. U.K.—Bank of England monetary policy decision and unemployment rate.

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.