Markets Take Breather from Recent Streak

Charles Schwab: On the Market

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

Markets Take Breather from Recent Streak

U.S. equities finished modestly lower, pausing a recent run that has driven the major indexes into positive territory for the year. Investors also appeared cautious ahead of a slew of service sector data slated for release tomorrow, as well as next week's start to 1Q earnings season. Crude oil prices fell, pressuring the energy sector, and gold and the U.S. dollar also saw losses, while Treasuries were nearly unchanged. Meanwhile, M&A activity dominated the equity headlines.

The Dow Jones Industrial Average (DJIA) fell 56 points (0.3%) to 17,737, the S&P 500 Index lost 7 points (0.3%) to 2,066, and the Nasdaq Composite declined 23 points (0.5%) to 4,892. In moderate volume, 806 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil decreased $1.09 to $35.70 per barrel, wholesale gasoline was $0.02 lower at $1.38 per gallon and the Bloomberg gold spot price dropped $5.85 to $1,216.75 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 94.52.

Alaska Air Group Inc. (ALK $79) announced an agreement to acquire Virgin America Inc. (VA $55) for $57.00 per share in cash or more than $2.5 billion, excluding debt. ALK said the deal expands Alaska Airlines' existing footprint in California, bolsters its platform for growth and strengthens the company as a competitor to the four largest U.S. airlines. ALK was solidly lower, while VA rallied over 40%. 

Brocade Communications Systems Inc. (BRCD $9) announced an agreement to acquire Ruckus Wireless Inc. (RKUS $13) for $14.43 per share in cash and stock, valued at about $1.5 billion. Under the terms of the deal, RKUS shareholders will receive $6.45 per share in cash and 0.75 shares of BRCD for each share they own. Additionally, BRCD increased its stock repurchase plan by $800 million. BRCD traded sharply lower, while RKUS jumped over 30%.

Factory orders drop as expected

Factory orders (chart) fell 1.7% month-over-month (m/m) in February, matching the Bloomberg expectation, while January's 1.6% increase was adjusted to a 1.2% gain. February durable goods orders—preliminarily reported two weeks ago—were revised to a 3.0% drop from the originally reported 2.8% fall.

Treasuries were little changed, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, were flat at 0.73%, 1.77% and 2.60%, respectively. For more on fixed income investing, see Schwab's Director of Income Planning, Rob Williams', article, How to Build a Bond Portfolio, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Also, for our latest analysis of the current stock market environment, see Schwab's Chief Investment Strategist Liz Ann Sonders' article, Echo: Are Stocks Getting Back in Cycle?, and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Risks to the Rally: What Could End the Stock Market Rebound?. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Jeff on Twitter: @lizannsonders and @jeffreykleintop.

Tomorrow, the all-important U.S. services sector will come into focus as the economic calendar will bring the March releases of the ISM non-Manufacturing Index and Markit's final Services PMI Index. ISM's report is projected to show growth in the sector accelerated slightly to 54.2 from 53.4 in February, while Markit's index is expected to be revised to 51.2 from 51.0, and up from the 49.7 level posted in the prior month. 50 is the demarcation point between expansion and contraction for both reports.

As noted in the Schwab Market Perspective: What a Quarter! What's Next?, the U.S. consumer—the lynchpin of the economy—continues to look healthy, with low energy prices, low unemployment, higher wages, and reduced debt loads. But they also are maintaining a deleveraging mindset, which suggests only modest U.S. economic growth. We remain neutral on equities—meaning investors should remain at their long-term equity allocations—and believe 2016 is shaping up to be much like the first quarter, volatile at times but generally trending higher. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

As well, the trade balance will be released, forecasted to show the deficit widened in February to $46.2 billion from $45.7 billion in January, as well as the JOLTS Job Opening report, a measure of unmet demand for labor, with economists anticipating 5.49 million job were available to be filled in February, down from the 5.54 million posted the month prior.

Europe mostly higher, Asia mixed on Friday's upbeat U.S. data

European equities traded mostly higher in the wake of Friday's advance in the U.S. on stronger-than-expected data on job growth, wages, consumer sentiment and manufacturing activity. The euro dipped versus the U.S. dollar, while bond yields in the region diverged, amid a flare-up in concerns about Greece's additional bailout funds. In economic news, the eurozone unemployment rate dipped to 10.3%, matching expectations, while the region's wholesale price inflation and investor confidence both missed expectations on the downside. Finally, U.K. construction output as reported by Markit expanded more than projected.

Further east, stocks in Asia finished mixed to begin the week, with traders digesting Friday's favorable U.S. data, while volume was lighter than usual as markets in mainland China and Hong Kong were closed for a holiday. Japanese equities declined, as the yen's continued rally weighed on export-related issues, while sentiment remained constrained by Friday's highly-disappointing read on 1Q manufacturing confidence.

Australia's markets dipped, with oil & gas issues falling amid the renewed pressure on oil prices, and following some mixed February data that showed retail sales failed to rise as expected, while building approvals grew more than estimated. The move comes ahead of tonight's monetary policy decision from the Reserve Bank of Australia, which is expected to keep its stance unchanged.

Meanwhile, Indian securities gained ground, with tonight's monetary policy decision from the Reserve Bank of India projected to show 25 bp cuts to some of its benchmark interest rates. Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global monetary policy landscape in her article, Are Central Banks Out of Options?, at www.schwab.com/oninternational. Also, follow Schwab on Twitter: @schwabresearch.

In addition to the monetary policy meetings in Australia and India, Services PMI reports across Europe will likely headline the international economic calendar tomorrow, while other releases scheduled include manufacturing orders from Germany and retail sales from the eurozone.

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.