Stocks Lose Previous Day's Gains

Charles Schwab: On the Market

Posted: 5/3/2016 4:15 PM ET

Stocks Lose Previous Day's Gains

U.S. stocks were under prevalent pressure and followed European equities broadly lower with crude oil prices falling and global sentiment souring as a continued rally for the yen joined disappointing U.K. and China manufacturing reports and softer-than-expected European banking sector results. Treasuries were nicely higher, though the domestic economic calendar was void of any major releases today, while the U.S. dollar also advanced and gold was lower.

The Dow Jones Industrial Average (DJIA) dropped 140 points (0.8%) to 17,751, the S&P 500 Index fell 18 points (0.9%) to 2,063, and the Nasdaq Composite increased 54 points (1.1%) to 4,763. In moderately-heavy volume, 989 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil was down $1.13 to $43.65 per barrel, wholesale gasoline was $0.05 lower at $1.51 per gallon, and the Bloomberg gold spot price declined $4.64 to $1,286.91 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 92.94.

Dow member Pfizer Inc. (PFE $34) reported 1Q earnings-per-share (EPS) ex-items of $0.67, above the $0.55 FactSet estimate, as revenues rose 20.0% year-over-year (y/y) to $13.0 billion, versus the projected $12.1 billion. The company's 1Q figures included results from Hospira—acquired in September 2015—which were not included in the prior year's results. PFE boosted its full-year earnings and revenue guidance. Shares finished nicely higher.

CVS Health Corp. (CVS $104) posted 1Q adjusted profits of $1.18 per share, two cents north of expectations, with revenues increasing 18.9% y/y to $43.2 billion, above the projected $43.0 billion. CVS issued softer-than-expected 2Q EPS guidance, while it reaffirmed its full-year profit outlook. Shares traded higher.

American International Group Inc. (AIG $56) announced 1Q operating income of $0.65 per share, well below the projected $1.00, though the company said its results reflected the negative impact of market volatility on investments that totaled $0.48 per share, which may be impacting comparability. AIG moved solidly lower.

Sprint Corp. (S $4) reported a fiscal 4Q loss ex-items of $0.06 per share, versus the projected $0.12 shortfall, with revenues declining 2.5% y/y to $8.1 billion, above the estimated $8.0 billion. S reaffirmed its full-year adjusted operating profit outlook and shares moved to the upside.

The major automakers reported U.S. April sales today, with Fiat Chrysler Automobiles NV's (FCAU $8) Chrysler brand posting adjusted sales growth of 1.7% y/y, compared to the FactSet estimate of a 1.5% gain. The figures were adjusted to reflect one more selling day this year compared to the same period a year ago. Ford Motor Co's (F $13) adjusted sales ticked 0.1% higher y/y, below the forecasted 0.7% gain, while General Motors Co's (GM $31) sales declined 7.1%, compared to the projected 6.3% decrease. Toyota Motor Corp. (TM $101) posted flat adjusted sales, versus the 0.8% increase that was anticipated. Shares of all companies traded lower.

Economic front quiet today

Treasuries were higher, while the U.S. economic calendar was void of any major releases today. The yield on the 2-year note declined 4 basis points (bps) to 0.75%, the yield on the 10-year note dropped 8 bps to 1.80% and the 30-year bond rate fell 7 bps to 2.66%. For our latest analysis on the bond markets see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Mixed Signals From the Bond Market: Something's Got to Give, at www.schwab.com/marketinsight and follow Kathy on Twitter: @kathyjones.

The economic calendar will heat back up tomorrow with key releases from the ISM and Markit on the all-important U.S. services activity, with both reports projected to show expansion in the sector accelerated modestly. However, the highlight of the week will likely be Friday's April nonfarm payroll report, and the data will come as the global markets continue to grapple with the timing of the next rate hike from the Federal Reserve. Schwab's Chief Fixed Income Strategist, Kathy Jones and Schwab's Managing Director of Trading and Derivatives, Randy Frederick, offer analysis for bond investors in the video titled, Rate Hike—No Rate Hike: What's the Smart Bond Move?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Although the economic front is dormant today, global earnings season remained in focus and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his article, Earnings Season for Investors: It's a Marathon, Not a Sprint, the return of earnings growth is a key factor in getting global stocks to move materially higher. Successful long-term investing is like a marathon since investors must be prepared, disciplined, able to overcome setbacks, and focused on their goal in order to be successful. Read more at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop. Also, for our latest analysis on the recent stock market rally see our video by Schwab's Chief Investment Strategist, Liz Ann Sonders and Schwab Center for Financial Research Senior Vice President, Mark Riepe, CFA, titled Is This Recovery for Real?, at www.schwab.com/insights. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Other reports expected on tomorrow's busy domestic docket include final March durable goods orders, projected to rise 0.8%, matching the preliminary increase and the ADP Employment Change Report, forecasted to show the private sector added 195,000 jobs during April after posting a gain of 200,000 in March. Additionally, preliminary 1Q nonfarm productivity and unit labor costs, the trade balance and weekly MBA mortgage applications will be released.

Europe lower on global data and bank pressure, Asia mixed on data and surprise rate cut

European equities moved broadly lower, led by oil & gas and basic materials stocks, with a contradicting manufacturing report out of China being followed by a disappointing read on U.K. manufacturing activity. The U.K. markets returned from yesterday's holiday and the global markets reacted to a surprise rate cut in Australia, but a plethora of bank earnings in the region also weighed on the markets. Markit's U.K. PMI Manufacturing Index unexpectedly fell to 49.2 in April, from 50.7 in March, and compared to the forecasted 51.2 level. This was the first reading suggesting contraction (below 50) in three years. The British pound traded solidly lower versus the U.S. dollar, while the euro dipped. Bond yields in the region finished mostly to the downside. For more 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, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed, though overall volume was lighter than usual as Japanese markets were shut as they began a three-day holiday break, while traders digested an unexpected rate cut in Australia and a disappointing read on Chinese manufacturing activity. The Japanese yen continued its recent surge to an 18-month high versus the U.S. dollar. Australian securities rallied, led by financials and the country's dollar fell as the Reserve Bank of Australia (RBA) surprisingly cut its benchmark interest rate by 25 bps to 1.75%. The RBA noted that inflation has been quite low for some time and recent data were unexpectedly low, and these results, coupled with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast. Schwab's Director of International Research, Michelle Gibley, CFA, offers commentary on the global monetary policy front in her article, Are Central Banks Out of Options?. Read more at www.schwab.com/oninternational, and be sure to follow Schwab on Twitter: @schwabresearch.

Mainland Chinese stocks jumped, while those trading in Hong Kong fell on the heels of a manufacturing report from Markit/Caixin that showed the contraction in the sector unexpectedly accelerated in April, contradicting the nation's report on the sector over the weekend that showed continued expansion. Mainland Chinese stocks found some support from speculation the government will take steps to boost investor interest in equities after the nation's politburo—the nation's highest decision-making body—urged "healthy" development of the stock market, per Bloomberg. Schwab's Jeffrey Kleintop, CFA, provides analysis of China in his article, Trust but Verify: Five Independent Indicators of China's Economy, and Schwab's Michelle Gibley, CFA, offers 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. Finally, South Korean equities advanced and stocks in India declined.

The international economic calendar for tomorrow will be relatively light, with Markit Composite PMI Index reports expected from Italy, France, Germany and the eurozone, while we will also receive the trade balance from France 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.