Charles Schwab: On the MarketPosted: 5/6/2016 4:15 PM ET
Stocks Manage Gains Despite Jobs Report Miss
U.S. stocks managed to move above the flatline in afternoon action and close the regular trading session with decent gains, displaying some resiliency in the face of a disappointing monthly labor report which showed job growth missed forecasts and the unemployment rate failed to decline. Treasuries were lower and the U.S. dollar was nearly unchanged, while gold and crude oil prices advanced.
The Dow Jones Industrial Average (DJIA) advanced 80 points (0.5%) to 17,741, the S&P 500 Index gained 7 points (0.3%) to 2,057, and the Nasdaq Composite added 19 points (0.4%) to 4,736. In moderately-heavy volume, 955 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.34 higher to $44.66 per barrel, wholesale gasoline increased $0.01 to $1.60 per gallon, and the Bloomberg gold spot price gained $11.01 to $1,288.75 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 93.85. Markets were lower for the week, as the DJIA declined 0.2%, the S&P 500 Index lost 0.4% and the Nasdaq Composite decreased 0.8%.
Activision Blizzard Inc. (ATVI $38) reported 1Q earnings-per-share (EPS) ex-items of $0.23, above the $0.12 FactSet estimate, as revenues rose 29.2% year-over-year (y/y) to $908 million, north of the projected $814 million. The video game publisher issued 2Q guidance that topped expectations, while it raised its full-year outlook. Shares traded nicely higher.
Cigna Corp. (CI $131) posted 1Q earnings of $2.32 per share, above the $2.16 estimate, as revenues rose 6.0% y/y to $9.9 billion, below the projected $10.0 billion. CI raised its full-year EPS outlook and reaffirmed its revenue guidance. Separately, the company said in light of the complexity of the regulatory process and the dynamic environment, it is possible that regulatory approval of its merger with Anthem Inc. (ANTM $137) may not be obtained in 2016. Shares closed lower.
Herbalife Ltd. (HLF $64) achieved 1Q EPS ex-items of $1.36, well above the $1.09 expectation, with revenues rising 1.0% y/y to $1.1 billion, roughly in line with forecasts. HLF raised its full-year profit outlook. Separately, the company said it is in late-stage talks regarding the investigation into its marketing practices with the Federal Trade Commission (FTC), estimating that if a settlement is reached, the likely cost would be $200 million. HLF rallied.
Endo International PLC. (ENDP $16) fell over 35% after the pharmaceutical company slashed its full-year guidance, despite topping the Street's 1Q EPS and revenue projections. The company cited increasing competitive and pricing pressures across both its generics and branded businesses, as well as delays on regulatory actions related to certain products.
April labor report misses job growth expectations
Nonfarm payrolls (chart) rose by 160,000 jobs month-over-month (m/m) in April, compared to the Bloomberg forecast of a 200,000 increase. The initial rise of 215,000 seen in March was revised to a gain of 208,000 jobs. The total downward revision to job gains in March and February was 19,000. Excluding government hiring and firing, private sector payrolls increased by 171,000, versus the forecasted gain of 195,000, after expanding by a downwardly revised 184,000 in March, from the 195,000 rise that was initially reported. Job gains occurred in professional and business services, health care, and financial activities, while job losses continued in mining.
The unemployment rate remained at 5.0%, compared to expectations of a dip to 4.9%, while average hourly earnings grew by 0.3% m/m, matching projections, and March's 0.3% rise was adjusted to a 0.2% increase. Finally, average weekly hours rose to 34.5 from March's unrevised 34.4 hours level, in line with expectations.
The job growth, which was the lowest in seven months, likely exacerbated recently flared up global growth concerns and could be preserving worries about a potential U.S. recession. However, over the past 12 months, employment growth has averaged 232,000 per month, adding credence to Schwab's Chief Investment Strategist Liz Ann Sonders' analysis in her article, Recession: Your Time is Gonna Come … But Not Yet, that data still suggests although we’re unlikely to exit from a muddle-through state, the risk of recession is objectively low.
Also, an upbeat aspect of the report was the rise in wages, which now have increased 2.5% over the past 12 months, an acceleration from the 2.3% pace in the prior month. Wage growth helps underpin consumer spending, which is the main driver of the U.S. economy and could help the housing market—another key economic driver—improve further as noted by Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, in the latest Schwab Sector Views: A Housing Update—and Why It Matters. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.
Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $29.7 billion during March, well above the $16.0 billion forecast of economists polled by Bloomberg, while February's figure was adjusted down to an increase of $14.2 billion from the originally reported $17.2 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $18.6 billion, while revolving debt, which includes credit cards, increased by $11.1 billion.
Treasuries were lower, with the yields on the 2-year note and the 30-year bond increasing 2 basis points (bps) to 0.73% and 2.63%, respectively, and the yield on the 10-year note ticking 3 bps higher to 1.78%. For our latest analysis on the bond markets see the video by Schwab's Managing Director of Trading and Derivatives, Randy Frederick, and Fixed Income Director Collin Martin, CFA, titled Yields Are Down, Prices Are Up: What Should Bond Investors Do?, at www.schwab.com/insights. Follow Randy and Schwab on Twitter: @randyafrederick and @schwabresearch.
Europe mixed, Asia mostly lower
European equities finished mixed, posting a solid weekly loss. Traders digested the softer-than-expected U.S. April employment report that appeared to dampen Fed rate hike expectations, likely helping crude oil prices overcome early pressure to boost the energy sector, and supporting an upside reversal in basic materials stocks. Basic materials issues showed some resiliency and the euro gained modest ground on the U.S. dollar, while bond yields in the region mostly moved lower. 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, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.
Stocks in Asia finished mostly to the downside amid cautious trading ahead of today's key employment report in the U.S. Japanese stocks declined, returning to action following a three-day holiday break with the yen showing some late-day strength to weigh on the markets. Chinese stocks fell with the recent pullback in commodity prices pressuring the resource sector. Also, this week's reports on manufacturing and services sector activity, which showed growth slowed, continued to foster uneasiness regarding the health of the world's second largest economy. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides analysis of China in his article, Trust but Verify: Five Independent Indicators of China's Economy, and Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016.
Indian equities dipped ahead of the U.S. jobs report, while Australian securities rose after overcoming early pressure as the Reserve Bank of Australia lowered its inflation outlook, sending the Australian dollar lower. The forecast comes as inflation was cited as a reason for the central bank to unexpectedly cut its benchmark interest rate this week. Schwab's Michelle Gibley, CFA, offers commentary on the global monetary policy front in her article, Are Central Banks Out of Options?. Read all these articles at www.schwab.com/oninternational, and be sure to follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. Markets in South Korea remained closed for a holiday.
Stocks pullback on soured global sentiment
U.S. stocks posted a back-to-back weekly loss as global growth sentiment was challenged by U.S. and Chinese manufacturing reports clinging to expansion territory, and U.K. manufacturing output unexpectedly contracting, while the Reserve Bank of Australia surprisingly announced a rate cut. Also, volatility in the Japanese yen persisted and banking results in Europe did little to soothe heightened concerns about the health of the sector. Reports showing solid expansion in the all-important U.S. services sector and a surprising upwardly revised eurozone manufacturing growth were largely overshadowed. Crude oil prices pulled back to weigh on the energy sector and basic materials stocks saw pressure, while Treasury yields moved lower and the U.S. dollar gained some ground. Earnings season, which is now in the home stretch, continued to paint a mixed picture, with about 76% of the 437 companies that have reported in the S&P 500 topping profit forecasts, while only about 54% have bested sales projections, per data compiled by Bloomberg.
As noted in the Schwab Market Perspective: Great Expectations!, currency moves have been a hot topic during 1Q earnings season with a lot of companies citing the strong dollar over the past year as a drag on profits. Others in Europe and Japan have acknowledged concerns over weaker exports stemming from the sharp year-to-date rise in their currencies. These drags may begin to fade if currency moves become less pronounced, and may help to lift earnings out of the slump they have been in for the past year or so. 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. Read more at www.schwab.com/marketinsight. Also, follow Schwab and Jeff on Twitter: @schwabresearch and @jeffreykleintop.
Health of the consumer set to take center stage
Next week's domestic economic calendar is poised to be headlined by data pointing to the health of the key U.S. consumer, with the releases of April retail sales and the preliminary University of Michigan Consumer Sentiment Index for May. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, maintains in his latest Schwab Sector Views, our marketperform rating for the consumer discretionary sector, as the American consumer continues to present a mixed picture. Data on retail sales and consumer confidence suggest a still-cautious shopper, but we think these reports underestimate what is actually occurring, as some services and experience-type items aren’t included in those numbers. The trend may also be shifting as consumers appear to have slowed paying down their debt balances, potentially a positive development for spending, but still seem reluctant to increase their borrowing. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.
Other key U.S. reports next week include: the NFIB Small Business Optimism Index, wholesale and business inventories, the JOLTS Job Openings report, the Import Price Index, and the Producer Price Index.
International reports slated for next week include: Australia—consumer confidence. China—trade balance, Consumer Price Index (CPI) and PPI, foreign direct investment, new yuan loans, and aggregate financing. India—trade balance, CPI and industrial production. Japan—trade balance. Eurozone—investor confidence, industrial production, new car registrations and 1Q GDP, as well as German factory orders, trade balance and CPI. U.K.—trade balance, industrial and manufacturing production and the Bank of England monetary policy decision.
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.