Stocks Tick Slightly Lower

Charles Schwab: On the Market

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

Stocks Tick Slightly Lower

U.S. stocks closed the trading session with mild declines, but managed to post solid weekly gains as did many global equity indexes. Crude oil prices were lower, ahead of a key production meeting among major oil producers to be held this weekend. The Street digested some upbeat quarterly corporate earnings reports and another installment of stronger-than-anticipated Chinese economic data, while domestic consumer sentiment and industrial production declined. Treasuries and gold were higher, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) declined 29 points (0.2%) to 17,897, the S&P 500 Index shed 2 points (0.1%) to 2,081, and the Nasdaq Composite ticked 8 points lower to 4,938. In moderately-heavy volume, 990 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.14 to $40.36 per barrel, wholesale gasoline was $0.05 lower at $1.46 per gallon and the Bloomberg gold spot price gained $6.16 to $1,234.04 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 94.69. Markets were higher for the week, as the DJIA and the Nasdaq Composite increased 1.8%, while the S&P 500 Index advanced 1.6%.

Citigroup Inc. (C $45) reported 1Q earnings-per-share (EPS) of $1.10, north of the $1.03 FactSet estimate, as revenues dropped 11.0% year-over-year (y/y) to $17.6 billion, above the projected $17.4 billion. Trading and investment banking revenues both declined, though fixed income trading revenues topped estimates. The company's operating costs came in below forecasts and it noted that it grew loans and deposits in its core businesses. The company said while its market-sensitive products clearly suffered from weak investor sentiment during the quarter, it continued to make progress in several key areas. Shares finished nearly unchanged after relinquishing solid early gains.

Costco Wholesale Corp. (COST $153) announced a 12.5% increase of its quarterly cash dividend to $0.45 per share, payable May 13 to shareholders of record at the close of business on April 29. COST moved to the upside.

Industrial production declines, while consumer sentiment unexpectedly drops

Industrial production (chart) declined 0.6% month-over-month (m/m) in March, versus the Bloomberg estimate of a 0.1% dip, and matching February's downwardly revised decrease. Manufacturing production declined 0.3%, while utilities output fell 1.2% and mining production dropped 2.9%. Capacity utilization fell to 74.8% compared to projections for it to remain at February's downwardly revised 75.3% rate. Capacity utilization is 5.2 percentage points below its long-run average.

The preliminary University of Michigan Consumer Sentiment Index (chart) fell to 89.7 this month—the lowest since September 2015—from 91.0 in March, and compared to estimates calling for 92.0. The economic conditions and outlook components both declined. The 1-year inflation outlook remained at 2.7%, while the 5-10 year inflation estimate dipped to 2.5% from 2.7%.

The Empire Manufacturing Index showed output from the New York region jumped further into expansion territory (a reading above zero) for April, rising to 9.6 from March's unrevised 0.6 level, with forecasts calling for an improvement to 2.0.

Treasuries were higher, with the yields on the 2-year and 10-year notes and the 30-year bond all decreasing 4 basis points (bps) to 0.73%, 1.75% and 2.56%, 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, follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

For more on the stock markets, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Don't Ignore the Big Picture, in which he notes we believe the bigger-picture view is important for two main reasons: First, the macroeconomic environment can have a big impact on the performance of individual sectors and second, investors should have sector allocations that make sense in the context of the current macro backdrop. 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.

Europe's winning streak ends, Asia dips despite China data

European equities traded mostly lower, with the Stoxx Europe 600 Index paring its solid weekly gain to 3.3%. The index snapped a five session winning streak that was fueled by signs of economic stabilization for China's economy, a recovery in the recently beaten down financial sector, and as earnings season began on both sides of the pond. Stocks shrugged off another dose of stronger-than-expected Chinese economic data, and caution likely prevailed ahead of this weekend's key production meeting between major world oil producers in Doha, with expectations elevated regarding a resulting freeze in output. In economic news, eurozone new car registrations rose in March, while the region's trade surplus came in below forecasts for February. The euro was higher versus the U.S. dollar, and bond yields in the region moved to the downside.

Stocks in Asia finished slightly lower on the day, but posted some solid gains for the week. Traders may have been cautious ahead of this weekend's key production meeting between oil producers and as southern Japan was hit by a magnitude 6.5 earthquake yesterday evening. Another round of upbeat Chinese economic data failed to continue the weekly rally, which came courtesy of the recent pullback in the yen from its surge and optimism that the Chinese economy was stabilizing. China reported 1Q GDP growth of 6.7% y/y, matching forecasts, and compared to the 6.8% expansion posted in 4Q. The world's second largest economy also released data on industrial production, retail sales, fixed asset investment, new yuan loans, and aggregate financing—a gauge of total credit issued—for March, which all topped expectations. Be sure to read Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Trust but Verify: Five Independent Indicators of China's Economy, and Schwab's Director of International Research, Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016, at www.schwab.com/oninternational, and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. Equities in China and Hong Kong finished slightly lower, however, the Shanghai Composite and Hang Seng Indexes registered weekly advances of 3.1% and 4.6%, respectively.

Stocks trading in Japan declined, despite some late-session weakness in the yen, but the island nation's Nikkei 225 Index recorded a weekly jump of nearly 6.5%. South Korean equities slipped, Australian securities rose on the heels of the plethora of stronger-than-expected China data and India's markets remained closed for a holiday.

Stocks bounce back for the week

U.S. stocks rebounded this week after falling in the prior period, with some support coming from overseas. A plethora of Chinese economic data continued to suggest stabilization in the world's second-largest economy, to bolster commodity-related stocks, while Japanese markets rallied with the yen retreating from its recent surge that has weighed on global sentiment. Also, 1Q earnings season got under way, headlined by Dow member JPMorgan Chase & Co's (JPM $62) stronger-than-expected results that helped the financial sector lead the S&P 500 higher, along with eased concerns about Italian banks as the nation announced a plan to combat bad loans. The U.S economic calendar painted a mixed picture, with the Fed's Beige Book showing moderate economic expansion, while retail sales disappointed and inflation figures came in cooler than expected.

As noted in the Schwab Market Perspective: The Soft and Frustrating Middle, the U.S. economy continues to trudge ahead at a low growth rate—not able to generate “escape velocity” on the upside, but not looking like a recession. But U.S. manufacturing looks to have exited its six-month contraction, at least partially courtesy of the reversals in the dollar and commodity prices, and global manufacturing has been muddling along, but there are signs of improvement which could lead to rising global stock prices. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Housing data set to dominate economic front, while tech to heat up earnings season

Next week's economic calendar will bring the housing market into focus, courtesy of the April NAHB Housing Market Index, which will be followed by March data on housing starts and building permits, as well as existing home sales. However, a heated up earnings season is poised to garner more attention from the markets, fueled by a plethora of results from key technology companies. Schwab's Brad Sorensen, CFA, maintains an outperform rating for the technology sector in his latest Schwab Sector Views, noting that tech tends to benefit from an improving economy, while the flattening out of the dollar should help the sector, which does quite a bit of business overseas. Additionally, with wage costs going up, including minimum-wage increases gaining steam in multiple states, we believe companies will increasingly look to technology to replace more-expensive human inputs. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Other reports on next week's economic calendar include: the Philly Fed Manufacturing Index, Leading Index and Markit's preliminary Manufacturing PMI Index.

International reports due out next week include: Australia—Reserve Bank of Australia meeting minutes and business confidence. China—property prices. India—trade balance and wholesale price inflation. Japan—trade balance. Eurozone—European Central Bank monetary policy decision, consumer confidence, Markit's business activity reports and German investor confidence. U.K.—employment change and retail sales.

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.