Stocks Build Gains on Some Solid Manufacturing Data

Charles Schwab: On the Market

Posted: 4/1/2016 4:15 PM ET

Stocks Build Gains on Some Solid Manufacturing Data

After shaking off a sluggish morning start, U.S. equities closed the trading session nicely higher as some favorable domestic data was able to overshadow a disappointing Japanese manufacturing sentiment read and a drop in crude oil prices. Treasuries were mixed and gold was lower, while the U.S. dollar was flat. In equity news, the major automakers reported U.S. March sales that came in mostly below forecasts.

The Dow Jones Industrial Average (DJIA) advanced 108 points (0.6%) to 17,793, the S&P 500 Index gained 13 points (0.6%) to 2,073, and the Nasdaq Composite increased 45 points (0.9%) to 4,915. In moderately-heavy volume, 968 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.55 to $36.79 per barrel, wholesale gasoline was $0.05 lower at $1.40 per gallon and the Bloomberg gold spot price dropped $9.63 to $1,223.12 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.61. Markets were higher for the week, as the DJIA increased 1.6%, the S&P 500 Index gained 1.8%, and the Nasdaq Composite advanced 3.0%.

A consortium led by China's Anbang Insurance Group Co. Ltd announced that it has determined not to proceed with its proposal to acquire Starwood Hotels & Resorts Worldwide Inc. (HOT $79), due to various market considerations. In light of the announcement, Starwood and Marriott International Inc. (MAR $67) encouraged shareholders to vote in support of their proposed merger, with both companies holding their shareholder meetings on April 8. HOT and MAR both closed lower.

BlackBerry Ltd. (BBRY $7) reported a 4Q loss ex-items of $0.03 per share, versus the FactSet estimate of a $0.10 per share shortfall, on revenues of $487 million, compared to the expected $566 million. Shares traded sharply lower.

The major automakers reported U.S. March sales today, with Fiat Chrysler Automobiles NV's (FCAU $8) Chrysler brand posting adjusted sales growth of 0.1% year-over-year (y/y), compared to the FactSet estimate of a 5.8% gain. Ford Motor Co's (F $13) sales came in flat y/y, versus the forecasted 0.4% gain, while General Motors Co's (GM $31) sales fell 6.6%, compared to the projected 1.4% drop. The figures were adjusted by FactSet to account for two more selling days this year compared to the same period a year ago. Shares of all three companies were lower. However, Tesla Motors Inc. (TSLA $238) moved higher as the company's preorders for its Model 3 exceeded analysts' forecasts.

March labor report shows solid job growth to headline heavy economic docket

Nonfarm payrolls (chart) rose by 215,000 jobs month-over-month (m/m) in March, compared to the Bloomberg forecast of a 205,000 increase. February's gain was revised higher to 245,000 jobs. The total downward revision to job gains in February and January was 1,000. Excluding government hiring and firing, private sector payrolls increased by 195,000, versus the forecasted gain of 190,000, after expanding by an upwardly revised 236,000 in February. The unemployment rate ticked higher to 5.0% from 4.9%, where it was expected to remain, while average hourly earnings grew by 0.3% m/m, versus projections of a 0.2% gain, and February's 0.1% dip was unadjusted. Finally, average weekly hours remained at February's unrevised 34.4 hours level, compared to expectations of an increase to 34.5.

The Institute for Supply Management (ISM) Manufacturing Index (chart) in March moved back to expansion territory (above 50) for the first time since August 2015, rising to 51.8 from February's 49.5 level, and compared to forecasts calling for a rise to 51.0. New orders jumped to 58.3 and production rose to 55.3, though employment dipped to 48.1.

The final Markit U.S. Manufacturing PMI Index was revised to 51.5 from the 51.4 preliminary level for March, matching expectations. The index was above the 51.3 level posted in February, with a reading above 50 denoting expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

The final March University of Michigan Consumer Sentiment Index (chart) was revised to 91.0 from the preliminary level of 90.0, and compared to expectations of 90.5, courtesy of an upward adjustment for the outlook component of the report. However, the index was lower compared to February's level of 91.7. The 1-year and 5-10 year inflation outlooks were both unrevised at 2.7% but up from 2.5% in February.

Construction spending (chart) declined 0.5% m/m in February, versus projections of a 0.1% advance, and following January's upwardly revised 2.1% jump. Residential spending grew 0.9% m/m, while non-residential spending fell 1.4%.

Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his article, Risks to the Rally: What Could End the Stock Market Rebound?, we continue to believe 2016 will be a year of heightened market volatility. While the early weeks of the year the volatility was to the downside, the past month or so has seen that volatility on the upside. For now, the relief rally in risk assets remains intact, but the dollar, commodities, and economic data will be critical to sustaining it. For more on the current stock market environment, see Schwab's Chief Investment Strategist Liz Ann Sonders' article, Echo: Are Stocks Getting Back in Cycle?. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Jeff on Twitter: @lizannsonders and @jeffreykleintop.

Treasuries were mixed, with the yield on the 2-year note rising 3 basis points (bps) to 0.75% and the yield on the 10-year note gaining 1 bp to 1.78%, while the 30-year bond rate declined 1 bp to 2.60%. 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.

Europe and Asia begin new quarter mostly negative

European equity markets traded lower, with oil & gas issues falling as crude oil prices dropped, while a sharp miss in a read on Japanese manufacturing sentiment overshadowed upbeat business activity data out of China. However, stocks came off the worst levels of the day likely courtesy of some upbeat U.S. and eurozone economic data. Today's stronger-than-expected U.S. labor, manufacturing and consumer sentiment reports were preceded by the final Markit Eurozone Manufacturing PMI Index being revised to 51.6 from the preliminary level of 51.4, where economists had expected it to remain, with a reading above 50 denoting expansion. The index was also an acceleration from the 51.2 figure posted in February. The euro dipped versus the U.S. dollar and bond yields in the region mostly moved to the downside.

Stocks in Asia finished mostly lower to begin the new quarter with caution ahead of today's U.S. labor report being met with a disappointing read on Japanese manufacturing sentiment to overshadow some upbeat business activity data out of China. Japan's 1Q Tankan index of sentiment among large manufacturers fell to 6—the lowest since mid-2013—from 12 in 4Q and compared to the expected 8 figure. A positive number indicates that there is more optimism than pessimism. The yen strengthened following the report, suggesting risk appetites shrunk, while equities trading in the island nation fell.

Chinese stocks finished mixed, as traders digested the Japanese report and some upbeat business activity reports in the nation, along with a downgraded outlook of the nation's credit rating from Standard & Poor's. China's official Manufacturing PMI Index surprisingly rose to a level depicting expansion (above 50), improving to 50.2 for March, from 49.0 in February, and compared to the expected 49.4 figure. Also, the nation's non-Manufacturing PMI Index showed expansion in the sector accelerated, while a separate manufacturing read from Caixin/Markit showed a stronger-than-expected improvement but continued to show contraction. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers some data to consider when assessing China's economic strength in his article, Trust but Verify: Five Independent Indicators of China's Economy, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Australian securities dropped with pressure on financials resuming, while South Korean stocks declined on the heels of the nation's trade report that showed exports and imports fell in March. Finally, Indian equities traded lower following the data and ahead of next week's monetary policy decision by the Reserve Bank of India (RBA). The RBA is expected to lower some of its benchmark interest rates by 25 bps, and 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.

Dovish Fed Chief and data helps stocks get back on track

Stocks returned from the Easter weekend in positive fashion, getting back on track after snapping a five-week winning streak before the holiday break. Stocks moved higher for the week, with the Dow and S&P 500 adding to their yearly gains, led by a rebound in technology issues and bolstered by a recovery for the recently beaten down health care sector. For more on the volatility in the sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, Schwab Sector Views: What's Wrong with Health Care? at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

However, gains were limited by weakness in the energy sector as pressure on crude oil prices returned. Global sentiment found some relief from a speech by Federal Reserve Chairwoman Janet Yellen where she offered a dovish tone to counter recent hawkish commentary from other Fed officials, easing concerns about a near-term rate hike. The U.S. dollar fell on the week, courtesy of Yellen's comments. Finally, global economic concerns were likely held in check by Friday's plethora of economic data, with U.S. labor, consumer sentiment and manufacturing reports, along with business activity releases out of the eurozone and China, helping overshadow a severe miss in Japanese manufacturing sentiment.

As noted in the Schwab Market Perspective: What a Quarter! What's Next?, investors were taken on a wild ride through the first quarter. However, the second quarter is starting within shouting distance of the year’s starting mark. We believe the trend is generally higher, but bouts of volatility are likely to persist. Emerging markets have surged ahead, aided by a weaker U.S. dollar. Action has been encouraging but future gains likely hinge on improving global growth. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Services sector data and Fed to headline next week's economic calendar

Next week's domestic economic docket will yield key reads on March services sector output—the largest portion of U.S. economic activity—in the form of the ISM non-Manufacturing Index and Markit's Services PMI Index. Also, the Fed will remain in focus with the mid-week afternoon release of the minutes from the Federal Open Market Committee's (FOMC) March meeting, where it reminded us that the FOMC continues to be a bit more hawkish than the market, but appeared to be more dovish than the market was expecting, as discussed by Schwab's Brad Sorensen, CFA, in Fed Holds…For Now. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Other U.S. reports on next week's economic calendar include: factory orders, the trade balance, and the JOLTS Job Openings report.

International reports slated for next week include: Australia—building approvals, retail sales, trade balance and the Reserve Bank of Australia's monetary policy decision. China—Caixin/Markit Services PMI Index. India—Reserve Bank of India monetary policy announcement and trade balance. Japan—trade balance. Eurozone—Investor confidence, PPI, unemployment rate, Markit's business activity reports and retail sales. Germany—factory orders and trade balance. U.K.—Markit business activity reports, industrial and manufacturing production and trade balance.

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.