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Tuesday, April 19, 2016

Bumpy Ride for Investors

Charles Schwab: On the Market
Posted: 4/19/2016 4:15 PM ET

Bumpy Ride for Investors

U.S. equities finished mixed in a choppy session with a sundry of earnings reports pitting weakness in the tech sector on IBM's disappointing outlook, with a rebound in crude oil prices, which benefitted the energy space. Meanwhile, financials got a boost from Goldman's Sachs beat, but Netflix's softer-than-expected guidance also weighed on the Nasdaq. Treasuries were lower, despite a disappointing housing construction report, gold prices jumped, and the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) rose 49 points (0.3%) to 18,054, the S&P 500 Index added 6 points (0.3%) to 2,101, while the Nasdaq Composite lost 20 points (0.4%) to 4,960. In moderate volume, 886 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.28 to $42.47 per barrel, wholesale gasoline was $0.04 higher at $1.48 per gallon and the Bloomberg gold spot price jumped $18.87 to $1,251.36 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 94.01.

Dow member Goldman Sachs Group Inc. (GS $163) reported 1Q earnings-per-share (EPS) of $2.68, above the $2.42 FactSet estimate, as revenues dropped 40.3% year-over-year (y/y) to $6.3 billion, below the projected $6.8 billion. The company said the operating environment this quarter presented a broad range of challenges, resulting in headwinds across virtually every one of its businesses. Shares traded higher.

Netflix Inc. (NFLX $94) posted 1Q EPS of $0.06, two cents north of forecasts, as revenues rose 24.4% y/y to $2.0 billion, roughly in line with estimates. However, the company issued softer-than-expected 2Q EPS guidance, while its outlooks for domestic and international streaming subscriber additions also missed expectations. NFLX was sharply lower.

Dow component International Business Machines Corp. (IBM $144) announced 1Q profits ex-items of $2.35 per share, above the projected $2.09, with revenues declining 5.0% y/y to $18.7 billion, versus the expected $18.3 billion. IBM reaffirmed its full-year EPS outlook, but its implied 2Q profit outlook came in well below analysts' expectations, per Bloomberg. Shares were noticeably lower.

Dow member UnitedHealth Group Inc. (UNH $130) reported 1Q EPS ex-items of $1.81, north of the expected $1.72, as revenues grew 25.0% y/y to $44.5 billion, compared to the projected $44.3 billion. UNH raised its full-year outlook. Shares were nicely higher.

Dow component Johnson & Johnson (JNJ $113) achieved 1Q earnings ex-items of $1.68 per share, topping the expected $1.65, as revenues increased 0.6% y/y to $17.5 billion, mostly in line with estimates. JNJ raised its full-year guidance and shares finished higher. 

For our latest analysis on earnings season, read Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Earnings Season for Investors: It's a Marathon, Not a Sprint, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

March housing construction activity misses the mark

Housing starts (chart) for March fell 8.8% month-over-month (m/m) to an annual pace of 1,089,000 units, compared to the Bloomberg forecast of a 1,166,000 unit rate. February's starts were upwardly revised to an annual pace of 1,194,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, dropped 7.7% m/m in March to an annual rate of 1,086,000, after February's upward revision to a 1,177,000 rate, and below the expected annual pace of 1,200,000 units. Activity for single-family and multi-family structures both declined in March.

The report is historically volatile and some economists are cautioning about reading too much into one month's worth of data, while yesterday's NAHB homebuilder sentiment report pointed out that builders remain cautiously optimistic about construction growth in 2016. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, holds an outperform rating on financials in his latest Schwab Sector Views: Don't Ignore the Big Picture, noting that mortgage demand appears to be healthy. Also, interest rates continue to be quite low and the high rental rates in some areas of the country provide the incentive for home buying. Meanwhile, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Recession: Your Time is Gonna Come … But Not Yet, although we’re unlikely to exit from a muddle-through state, the risk of recession is objectively low. Read more at www.schwab.com/marketinsight and follow Schwab and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

Tomorrow, we will get a look at the broadest measure of the U.S. housing sales market, courtesy of existing home sales, projected to rise 4.0% m/m in March to an annual rate of 5.28 million units, while MBA Mortgage Applications will also be released (economic calendar).

Treasuries finished lower, with the yields on the 2-year and 10-year notes, as well as the 30-year bond, rising 2 basis points (bps) to 0.76%, 1.79% and 2.60%, respectively. For our latest analysis on the bond markets see our latest video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Schwab's Managing Director of Trading and Derivatives, Randy Frederick, titled, Rate Hike—No Rate Hike: What's the Smart Bond Move?, by clicking on the "Insights & Ideas" tab at www.schwab.com/marketinsight and continuing to the "Market Commentary" section. Also, Schwab's Director of Income Planning, Rob Williams, offers a look at bond investing for retirement in his article, Bond Ladders: A Useful Tool for Retirement Income. Follow Schwab, Kathy and Randy on Twitter: @schwabresearch, @kathyjones and @randyafrederick.

Europe higher on earnings, German data and oil gains, Asia rebounds

European equities finished higher, with some resiliency in crude oil prices helping buoy sentiment and the energy sector, while mostly upbeat earnings reports offered some support. jumped more than expected for April, reaching the highest level this year. The euro gained ground on the U.S. dollar, while bond yields in the region moved to the upside. The latest Schwab Market Perspective: The Soft and Frustrating Middle, notes that just as we believe earnings in the U.S. are important to further domestic stock market gains, we also think the return of earnings growth is an important ingredient in getting global stocks to begin to move materially higher once again. Growth in global earnings is driven by economic growth and there appears to have been little of either in the first quarter. While still stuck in the middle ground here as well, potentially boding well for the future; it appears that the global economy may be showing signs of improvement, particularly in manufacturing where economic weakness has been focused. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Stocks in Asia finished mostly higher as crude oil prices showed some resiliency in the face of the weekend's disappointing production meeting between major world oil producers, while emerging markets continued to rally, with India's market gaining solid ground. Japanese equities jumped as the markets rebounded sharply from yesterday's drop that was exacerbated by last week's earthquakes in southern Japan, and as the yen, which has rallied as of late, weakened to help lift export-related stocks. Chinese securities and those traded in Hong Kong advanced, with markets in both countries snapping two-session losing streaks, buoyed by strength in basic materials and the energy sector. Australian stocks gained ground, led by resource-related issues, even as the minutes from the Reserve Bank of Australia's monetary policy meeting earlier this month noted that although "very accommodative" policy is appropriate, the strength of the Australian dollar could complicate the economy's rebalancing toward the non-mining sectors. Finally, South Korean listings ticked higher, with the Bank of Korea holding its monetary policy stance unchanged.

The international economic calendar for tomorrow will be fairly light, with PPI from South Korea and trade data from Japan being reported from the Asia-Pacific region, while from across the pond will come PPI from Germany and employment data from the U.K.

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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