Stocks Manage Nice Gains

Charles Schwab: On the Market

Posted: 5/20/2016 4:15 PM ET

Stocks Manage Nice Gains

U.S. stocks finished the trading week in positive fashion as the equity markets reclaimed some of the recent losses that commenced on the heels of the release of the minutes from the Fed's April monetary policy meeting. In light economic news, existing home sales topped forecasts, while on the equity front, Applied Materials reported upbeat results to help boost the tech sector. Treasuries and the U.S. dollar were nearly unchanged, gold was a touch lower and crude oil prices were mixed.

The Dow Jones Industrial Average (DJIA) advanced 66 points (0.4%) to 17,501, the S&P 500 Index increased 12 points (0.6%) to 2,052, and the Nasdaq Composite rallied 57 points (1.2%) to 4,770. In moderately-heavy volume, 962 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.26 lower to $48.41 per barrel, wholesale gasoline increased $0.01 to $1.64 per gallon, and the Bloomberg gold spot price lost $2.23 to $1,252.52 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.35. Markets were mixed for the week, as the DJIA declined 0.2%, while the S&P 500 Index added 0.3% and the Nasdaq Composite increased 1.1%.

Deere & Co. (DE $78) reported fiscal 2Q earnings-per-share (EPS) of $1.56, above the $1.48 FactSet estimate, with sales of its equipment operations declining 3.9% year-over-year (y/y) to $7.1 billion, compared to the expected $6.7 billion. The heavy machinery company said its 2Q performance reflected the continuing impact of downturn in the global farm economy and further weakness in the construction equipment sector. However, DE added that its businesses benefitted from the strength of a broad product portfolio and its success creating a more flexible cost structure. Looking ahead, the company forecasted lower results this year in light of ongoing market pressures. Shares closed solidly lower.

Applied Materials Inc. (AMAT $23) posted 2Q EPS ex-items of $0.34, topping the projected $0.32, with y/y revenues roughly flat at $2.5 billion, north of the estimated $2.4 billion. The chip manufacturing equipment maker said its 2Q orders were up 52.0% quarter-over-quarter (q/q) and 37.0% y/y. AMAT issued stronger-than-expected 3Q guidance and shares rallied sharply.

Foot Locker Inc. (FL $55) achieved 1Q profits of $1.39 per share, as revenues rose 3.7% y/y to $2.0 billion, both roughly in line with expectations, though same-store sales grew 2.9% y/y, below the forecasted 4.5% increase. The footwear retailer said it continues to manage the business tightly, particularly in terms of inventory, occupancy expense and wages. Shares finished lower. For our latest analysis of the all-important U.S. consumer, see the video by Schwab's Chief Investment Strategist, Liz Ann Sonders and Managing Director of Trading and Derivatives, Randy Frederick, titled Could the Consumer Help Stocks Break Out?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

Campbell Soup Co. (CPB $60) reported fiscal 3Q EPS ex-items of $0.65, one penny above projections, as revenues declined 2.0% y/y to $1.9 billion, roughly in line with expectations. CPB reaffirmed its full-year revenue outlook, while raising its profit guidance. CPB traded sharply lower after the company noted a continued challenging consumer environment and that it was "unsatisfied" with its 3Q organic sales growth, which was largely due to a weaker U.S. soup season.

Existing home sales top forecasts

Existing-home sales in April rose 1.7% month-over-month (m/m) to a 5.45 million annual rate, compared to the Bloomberg forecast of a 5.40 million pace. March's figure was revised upward to a 5.36 million annual rate. Compared to last year, sales were 6.0% higher and the median existing-home price was up 6.3% at $232,500. Housing supply came in at a 4.7-month pace at the current sales rate. Sales were mixed regionally, with the Northeast gaining ground and the Midwest jumping, while declines were seen in South and the West. Single-family home sales rose modestly, while condominium and co-op sales jumped.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said the report signaled slowly building momentum for the housing market this spring. Yun added, "The temporary relief from mortgage rates currently near three-year lows has helped preserve housing affordability this spring, but there's growing concern a number of buyers will be unable to find homes at affordable prices if wages don't rise and price growth doesn't slow."

The report adds credence to Schwab's Chief Investment Strategist Liz Ann Sonders' article, Recession: Your Time is Gonna Come … But Not Yet, where she points out that U.S. data has improved markedly since the beginning of this year. Liz Ann offers data that support her conclusion that 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 Liz Ann on Twitter: @lizannsonders.

Treasuries were mostly flat, with the yields on the 2-year and 10-year notes nearly unchanged at 0.89% and 1.85%, respectively, while the yield on the 30-year bond dipped 1 basis point to 2.64%. Bond yields have been choppy after Wednesday's jump that followed the release of the Federal Reserve's April meeting minutes, which showed the Central Bank hadn't ruled out the possibility of a June rate hike. 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, titled Is the Market Underestimating the Fed?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out Kathy Jones' articles, Mixed Signals From the Bond Market: Something's Got to Give, and Bond Index Investing: Why You Should Track More Than One Benchmark, at www.schwab.com/marketinsight.

Europe trades higher, Asia finishes mostly to the upside

European equities traded higher, led by healthcare stocks, while commodity-related issues rebounded from recent weakness that has been exacerbated by increased U.S. Fed rate hike expectations. The global markets recovered from the flared-up rate hike concerns in the U.S. that have come from hawkish commentary from the Fed and the Central Bank's April meeting minutes. Also, the U.K. markets moved nicely higher, aided by this week's polls that suggested support for the nation to vote against leaving the European Union (EU), known as a Brexit. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses the possible implications in his article, Brexit: 5 Things Investors Need to Know. Read more at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop. Travel-related issues rebounded from initial pressure as the investigation of the EgyptAir plane that disappeared during a flight between Paris and Cairo continued. The euro ticked higher and the British pound was lower compared to the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mostly higher to close out the week, shrugging off the flared-up U.S. rate hike expectations that have come from hawkish commentary from Fed officials and exacerbated by Wednesday's April meeting minutes. An advance for Japanese equities was aided by some late-day weakness in the yen, while the G-7 meeting in Japan is set to begin. Japanese stocks posted back-to-back weekly gains, bolstered by stronger-than-expected 1Q GDP and machine orders reports and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his latest article, Japan: Another Recession Coming?, Japan’s economy struggled in the first quarter and the second quarter is not shaping up to be much better. Yet economists expect a sharp rebound in economic growth this year. We see hefty headwinds offsetting the potential positives for Japan. Stocks trading in mainland China, Hong Kong, Australia and South Korea advanced. Bucking the global trend, Indian equities declined on the increased Fed rate hike focus which has boosted the U.S. dollar versus emerging market currencies including the rupee, which posted its worst weekly drop since January, per Bloomberg.

Stocks eke out weekly gain despite rate hike concern flare-up

U.S. stocks finished the week modestly higher, though volatility ramped up as Fed rate hike expectations resurfaced. The markets appeared to be surprised by the April monetary policy meeting minutes that showed the Central Bank may have been closer to raising rates for a second time than anticipated. Moreover, domestic economic data showed inflation continued to gain steam, housing starts topped forecasts, and industrial production easily bested estimates. The reports accompanied a plethora of hawkish rhetoric from Fed officials to boost the financial sector, along with Treasury yields and the U.S. dollar. Crude oil prices rose to lift the energy sector, despite some pressure from the stronger dollar, supported by supply disruptions in Canada and Nigeria, as well as a decline in U.S. output and an upbeat oil price forecast from Goldman Sachs.

Technology issues also rallied, aided by upbeat earnings reports from Dow component Cisco Systems Inc. (CSCO $28) and Applied Materials. However, consumer discretionary stocks declined as disappointing retail sector results continued to pour in, headlined by Target Corp's (TGT $69) softer-than-expected sales and Dow member Home Depot Inc's (HD $132) stronger-than-expected 1Q results being overshadowed by signs of slowing sales growth. However, Dow member Wal-Mart Stores Inc. (WMT $70) was a standout winner after surging on its 1Q results and favorable outlook. As noted in our article, What Will It Take to Get Stocks to New Highs?, we continue to have a “neutral” view of U.S. stocks though bouts of volatility are likely to persist amid uncertainty over the Fed, the upcoming U.S. elections, and how fast the global economy will grow. Increased capital investments from businesses is what we think is needed to push the S&P 500 past its all-time high, a level that it has failed to eclipse three times in the last year. Read more at www.schwab.com/insights. Be sure to follow Schwab on Twitter: @schwabresearch.

Fed set to remain in focus next week

Next week's U.S. economic front will bring the key releases of Markit's business activity reports, new home sales, preliminary durable goods orders, the second look (of three) at 1Q GDP, and the final University of Michigan Consumer Sentiment Index. However, the attention of the global markets will likely remain on the Fed, with another plethora of officials set to speak, including a speech from Chairwoman Janet Yellen on Friday. As noted in the Schwab Market Perspective: Corporate Caution…Global Recession?, 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. 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.

International reports due out next week include: China—industrial profits. Japan—trade balance and consumer inflation. Eurozone—Markit's eurozone business activity reports, along with 1Q GDP, investor and business confidence reports out of Germany. U.K.—1Q GDP.