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Friday, May 13, 2016

Stocks Close Lower Despite Upbeat Data

Charles Schwab: On the Market
Posted: 5/13/2016 4:15 PM ET

Stocks Close Lower Despite Upbeat Data

U.S. stocks closed the trading day and week lower despite some upbeat domestic reports on retail sales and consumer sentiment. In equity news, another round of disappointing retailer results from J.C. Penney and Nordstrom weighed on the consumer discretionary sector. Treasuries, gold and the U.S. dollar were higher, while crude oil prices were lower.

The Dow Jones Industrial Average (DJIA) declined 185 points (1.0%) to 17,535, the S&P 500 Index shed 18 points (0.9%) to 2,046, and the Nasdaq Composite lost 20 points (0.4%) to 4,718. In moderate volume, 861 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.49 lower to $46.21 per barrel, wholesale gasoline increased $0.01 to $1.59 per gallon, and the Bloomberg gold spot price gained $10.37 to $1,274.05 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 94.56. Markets were lower for the week, as the DJIA declined 1.2%, the S&P 500 Index lost 0.5% and the Nasdaq Composite decreased 0.4%.

J.C. Penney Co. Inc. (JCP $8) reported a 1Q loss ex-items of $0.32 per share, smaller than the $0.38 per share shortfall that FactSet estimated, as revenues declined 1.6% year-over-year (y/y) to $2.8 billion, below the projected $2.9 billion. 1Q same-store sales dipped 0.4% y/y, versus the expected 3.2% gain, as the quarter was "clearly challenging from a sales perspective." JCP reaffirmed its full-year sales and earnings-per-share (EPS) guidance, as it sees a positive nature of its recent sales trends, while it lowered its gross margin forecast to reflect the rollout of appliances and the rapid growth of its online business. JCP traded lower.

Nordstrom Inc. (JWN $39) posted 1Q EPS of $0.26, well below the estimated $0.47, with revenues rising 2.5% y/y to $3.3 billion, roughly in line with forecasts. Same-store sales dropped 1.7% y/y, versus the anticipated 0.1% increase. The company said earnings were below expectations, primarily driven by lower-than-planned sales and higher markdowns to better align inventory to current trends. JWN lowered its full-year EPS and sales outlooks. Shares closed sharply lower.

NVIDIA Corp. (NVDA $41) achieved 1Q profits of $0.33 per share, above the $0.31 estimate, as revenues grew 13.0% y/y to $1.3 billion, roughly in line with expectations. The computer graphics chip maker issued stronger-than-expected 2Q revenue guidance. Shares rallied.

April retail sales top forecasts, and consumer sentiment jumps

Advance retail sales (chart) for April rose 1.3% month-over-month (m/m), versus the Bloomberg forecast of a 0.8% gain, while March's 0.3% decline was unadjusted. Also, last month's sales ex-autos gained 0.8% m/m, versus expectations of a 0.5% increase, and the upwardly revised 0.2% rise in the previous month. Sales ex-autos and gas grew 0.6% m/m for April, versus the anticipated 0.3% increase, and March's favorably adjusted 0.2% gain. Finally, the retail sales control group, a figure used to help calculate GDP, increased 0.9%, compared to the projected 0.4% gain, and the prior month's upwardly revised 0.2% rise. Sales gains were widespread, led by auto dealers, gasoline stations, and nonstore retailers—which includes online—though the lone exception was a fall in sales of building materials & garden equipment.

This was the first look at retail sales activity in the 2Q after a sluggish 1Q, which helped foster a ramp up in U.S. recession concerns, adding credence to Schwab's Chief Investment Strategist Liz Ann Sonders' view in her article, Recession: Your Time is Gonna Come … But Not Yet, that although we’re unlikely to exit from a muddle-through state, the risk of recession is objectively low. Also, see Liz Ann Sonders' article, Against the Wind: The Sentiment-Driven Rally Could Take a Breather. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in the latest Schwab Sector Views: Tech Hits Some Turbulence, But Will it Last?, there are a number of positives for consumers: reduced debt loads, continued improving job market and increasing wages. However, these are being counterbalanced by other issues, resulting in our marketperform rating. Read more at www.schwab.com/marketinsight and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

The preliminary University of Michigan Consumer Sentiment Index (chart) jumped to 95.8 this month—the highest level since June 2015—from 89.0 in April, and compared to estimates of 89.5. The economic conditions and outlook components both improved solidly. The 1-year inflation outlook fell to 2.5% from 2.8%, while the 5-10 year inflation estimate ticked higher to 2.6% from 2.5%.

The Producer Price Index (PPI) (chart) in April rose 0.2% m/m, versus expectations of a 0.3% increase, and March's unrevised 0.1% dip. The core rate, which excludes food and energy, increased 0.1% m/m, matching forecasts, and versus March's unrevised 0.1% dip. Y/Y, the headline rate was flat, versus projections of a 0.2% rise, and the core PPI was up 0.9% last month, in line with estimates. In March, producer prices were down 0.1% and up 1.0% y/y for the headline and core rates, respectively.

Business inventories (chart) grew 0.4% m/m in March, above forecasts of a 0.2% rise, and versus February's unrevised 0.1% dip. Sales rose 0.3% m/m, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—remained at February's 1.41 pace.

Treasuries were mostly higher, with the yield on the 2-year note flat at 0.75%, while the yield on the 10-year note declined 5 bps to 1.70% and the 30-year bond rate decreased 4 bps to 2.55%. For our latest analysis on the bond markets see the video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Managing Director of Trading and Derivatives, Randy Frederick, Is the Market Underestimating the Fed?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out Schwab's Senior Fixed Income Research Analyst, Cooper Howard's CFA, and Director of Income Planning, Rob Williams' article, 5 Cases Where Out-of-State Munis Might Make Sense at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Europe higher amid mixed data, Asia broadly lower to close out the week

European equities finished mostly to the upside, overcoming early losses following the stronger-than-expected U.S. retail sales and consumer sentiment reports, along with an upbeat German GDP release. However, oil & gas issues were hamstrung by the pressure on crude oil prices. Preliminary eurozone 1Q GDP growth was revised lower from the initial estimate to a rise of 0.5% quarter-over-quarter (q/q), and compared to the unrevised 0.6% expansion that economists had projected.

However, the expansion was an acceleration from the 0.3% growth registered in 4Q, and 1Q GDP q/q growth of 0.7% in Germany—Europe's largest economy—came in above expectations and gained steam versus 4Q's 0.3% increase. For our latest analysis on Europe, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Also, check out Schwab's Fixed Income Director Collin Martin's, CFA, latest article, The ECB's Latest Plan: What Does It Mean for U.S. Corporate Bonds?. Read both articles at www.schwab.com/marketinsight, and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. In other economic news, European new car registrations rose solidly in April, while U.K. construction output fell more than expected in March. The euro traded solidly lower versus the U.S. dollar, while bond yields in the region lost ground.

Stocks in Asia saw widespread losses ahead of a plethora of Chinese economic data and as the yen's recent surge dampened corporate earnings sentiment in Japan. Equities trading in China declined amid festering concerns about a renewed faltering of the economy and ramped up uncertainty regarding further stimulus measures from the government. The decline came ahead of flood of economic data, after the closing bell, China's April new yuan loans and aggregate financing—a measure of total credit issued—both severely missed expectations, while reads on industrial production and retail sales are set to be released tonight.

Moreover, Hong Kong reported a softer-than-expected 1Q GDP report after the trading session, with q/q output unexpectedly contracting by 0.4%, after growing 0.2% in 4Q and compared to expectations of a 0.1% increase. Y/Y, Hong Kong's 1Q GDP expanded by 0.8%, decelerating from 4Q's 1.9% pace of growth and below forecasts of a 1.5% gain. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses China data in his article, Trust but Verify: Five Independent Indicators of China's Economy. Also, Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016. Read more at www.schwab.com/oninternational, and be sure to follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch.

Japanese securities dropped with the yen recovering from yesterday's weakness to exacerbate earnings concerns. South Korean stocks ticked lower as the Bank of Korea left its benchmark interest rate unchanged, as expected, while Australian equities were bogged down by weakness in basic materials and financials issues. Finally, Indian listings fell with the markets digesting disappointing April inflation and industrial production reports.

Stocks dip as volatility remains

Stocks dipped as the markets continued to grapple with global monetary policy divergence, persistent commodity and currency volatility, and festering growth concerns. Following last week's disappointing U.S. labor report, China's exports unexpectedly dropped and U.K. manufacturing and industrial output missed forecasts. Moreover, the Bank of England cut its economic growth forecast and warned of the potential negative impact if next month's vote is in favor to leave the European Union.

U.S. Treasury yields finished mixed, with the yield curve flattening. Although 1Q U.S. earnings season wound down, retailers' results pressured the consumer discretionary sector, headlined by disappointing reports from Macy's Inc. (M $31), Kohl's Corp. (KSS $37) and Gap Inc. (GPS $19). Dow member Walt Disney Co. (DIS $101) missed quarterly expectations to weigh on the sector. However, energy stocks moved higher as crude oil prices gained ground, and the Japanese yen pulled back from its recent surge. The U.S. dollar finished higher, aided by Friday's upbeat reads on domestic retail sales and consumer sentiment.

As noted in the Schwab Market Perspective: Corporate Caution…Global Recession?, U.S. equities have again failed to break out to new highs, keeping with our expectations and consistent with weak earnings and elevated valuations. We would like to see corporate confidence, along with earnings, rise to help fuel the next leg higher. The U.S. economy continues to muddle along, contributing to the lack of corporate and consumer enthusiasm. Global yield curves aren’t indicating we’re on the cusp of a global recession, which argues against the “sell in May” adage for longer-term investors. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Housing and inflation data

Next week's domestic economic calendar will bring some key reads on inflation and housing, with the Consumer Price Index (CPI), the NAHB Housing Market Index, housing starts and building permits, as well as existing home sales. As noted in the Schwab Market Perspective, the Fed appears stuck, as the economy has recovered, employment has improved, housing has bounced back, and asset prices have appreciated. However, the economy is still not firing on all cylinders. As has been the case over the past couple of years, we expect economic activity to pick up in the second quarter from the weak first quarter, but whether it will be enough to allow the Fed to raise rates again, it’s too soon to tell. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Other U.S. reports for next week: the Empire Manufacturing Index, industrial production and capacity utilization, Fed April meeting minutes, the Philly Fed Manufacturing Index, and the Leading Index.

Next week's international reports: Australia—Reserve Bank of Australia meeting minutes and employment change. China—property prices. India—wholesale price inflation. Japan—1Q GDP, industrial production, and machine orders. Eurozone—trade balance, CPI, and European Central Bank April meeting minutes. U.K.—CPI, 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.

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