Gains Continue

Charles Schwab: On the Market

Posted: 6/21/2016 4:15 PM ET

Gains Continue

U.S. equities slightly added to yesterday's rally, with technology issues leading the way, while energy stocks were resilient amid a modest decline in crude oil prices. Brexit uncertainty continued to swirl around the market ahead of Friday's vote, and Fed Chair Yellen offered little new information in her first day of testimony before Congress. Treasuries were nearly unchanged and the U.S. dollar was higher, while gold lost ground.

The Dow Jones Industrial Average (DJIA) rose 24 points (0.1%) to 17,830, the S&P 500 Index added 6 points (0.3%) to 2,089, and the Nasdaq Composite finished 7 points (0.1%) higher at 4,844. In moderate volume, 836 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.11 to $49.85 per barrel and wholesale gasoline added $0.01 to $1.59 per gallon, while the Bloomberg gold spot price tumbled $24.23 to $1,265.67 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.5% at 94.05.

Lennar Corp. (LEN $46) reported fiscal 2Q earnings-per-share (EPS) of $0.95, above the $0.87 FactSet estimate, as revenues rose 14.8% year-over-year (y/y) to $2.7 billion, exceeding the projected $2.6 billion. The company said the homebuilding market continued its slow and steady recovery sustained by low interest rates, modest wage growth, positive consumer confidence and low unemployment levels combined with tight inventory levels. LEN gave up an early gain and finished lower.

Werner Enterprises Inc. (WERN $22) issued softer-than-expected 2Q EPS guidance, noting sluggish freight market conditions, the cost of driver pay increases, and a soft used truck market. WERN added that to address the challenging market conditions, it continues to focus on various cost management initiatives. Shares of WERN fell.

CarMax Inc. (KMX $48) posted 1Q profits of $0.90 per share, two cents shy of estimates, with revenues increasing 2.8% y/y to $4.1 billion, below the forecasted $4.2 billion. Shares were solidly lower. 

Canadian Pacific Railway Ltd. (CP $124) issued a 2Q revenue and profit warning, due to lower-than-anticipated volumes in bulk commodities, the wildfires in northern Alberta and a strengthening Canadian dollar. CP said given the transitory nature of these impacts, coupled with an anticipated improvement in commodity volumes, it remains confident toward meeting its full-year guidance. Shares were lower.

Fed Chair Yellen takes to the Hill

Federal Reserve Chairwoman Janet Yellen kicked off her two-day semiannual monetary policy report to Congress, speaking to the Senate Banking Committee. In her prepared remarks, she noted that the economy has made further progress. "However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate," she added. Yellen also stressed that the Central Bank believes the recent slowing in employment growth is "transitory" but it is watching the job market carefully. Moreover, she said a U.K. vote to exit the European Union (EU)—known as a Brexit—"could have significant economic repercussions." Yellen concluded by saying the path of the fed funds rate will depend on economic and financial developments. Traders are paying close attention to the Q&A session following her remarks. Yellen will conclude her testimony tomorrow in front of the House Financial Services Committee.

May's severely disappointing labor report and continued Brexit uncertainty have applied pressure on global bond yields. Schwab's Chief Fixed Income Strategist Kathy Jones provides analysis in her latest article, Global Bonds: A World Without Yield, and she teams up with Schwab's Managing Director of Trading and Derivatives, Randy Frederick, in the video titled Fed on Pause: Watching and Waiting to Raise Rates, for further analysis in the Fed and the bond markets at www.schwab.com/insights.

Moreover, Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her latest article, Beast of Burden (No More): Households Choosing Savings over Debt, regardless of the efforts of the Federal Reserve, it’s unlikely a major new expansion of private sector debt is coming. The debt supercycle, lasting over three decades, allowed demand growth to exceed underlying income growth. That era has seemingly died and continued sluggish growth for the U.S. economy will likely continue to be a byproduct of that potential death. Read both articles at www.schwab.com/marketinsight, and follow Kathy, Liz Ann and Randy on Twitter: @kathyjones, @lizannsonders and @randyafrederick.

Treasuries were little changed, while the U.S. economic calendar was dormant today. The yields on the 2-year and 10-year notes were flat at 0.76% and 1.69%, respectively, while the 30-year bond rate dipped by 1 basis point to 2.49%.

Tomorrow, the economic front will awaken with the release of existing home sales, projected to rise 1.8% month-over-month (m/m) to an annual rate of 5.55 million units in May. As noted in the Schwab Market Perspective: Summer of Discontent?, investors should remain patient as positive signs are emerging. For the frustration in the stock market to end, we believe businesses need to pick up their capital spending but for now a relatively healthy consumer and housing are keeping the U.S. economy afloat. Read more at www.schwab.com/marketinsight.

Europe modestly adds to recent rally, Asia mixed

European equities finished modestly higher, coming off a strong two-day rally, with financials continuing to move upward and oil & gas issues showing some resiliency in the face of a retreat in crude oil prices from their run the past two days. European stocks have rallied as of late, fueled by eased concerns about a U.K. Brexit after polls over the weekend suggested the June 23 vote could favor the nation remaining in the EU. For our latest analysis on the Brexit issue ahead of Thursday's key vote read our article, Will the UK Stay or Go? Markets Wait for Brexit Vote at www.schwab.com/insights. However, the newest Brexit polls fostered some uncertainty and the markets focused on today's monetary policy testimony on Capitol Hill from U.S. Fed Chair Yellen, where she warned of possible "significant economic repercussions." The euro and British pound lost ground versus the U.S. dollar, while bond yields in the region mostly ticked higher. A favorable read on German investor confidence may have helped sentiment, as the ZEW reported an unexpected jump in its expectations survey for June, which rose to the highest level since August 2015.

Stocks in Asia finished mixed as some caution ahead of today's testimony from U.S. Fed Chair Yellen met recently eased concerns about a U.K. Brexit, which fueled a global market rally yesterday. A weaker yen helped lift Japanese equities higher, mainland Chinese securities declined as volatility fell and data remained light, while stocks traded in Hong Kong advanced. Australia's markets gained ground, as traders digested the minutes from the June monetary policy meeting from the Reserve Bank of Australia (RBA), where it kept its policy stance unchanged. The RBA noted some positive signs of economic activity, notably in non-mining, while adding that inflation was expected to remain low for some time. Meanwhile, stocks in India traded lower on the heels of yesterday's announcement that Reserve Bank of India Governor Rajan will step down at the end of his term in September. Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global political landscape in her article, Performing Reformers: How Political Change Can Affect Stocks, at www.schwab.com/oninternational, and be sure to follow Schwab on Twitter: @schwabresearch. Finally, South Korean equities ticked slightly higher.

Economic reports abroad will be very limited tomorrow, with the lone item of note being the Import Price Index from Germany.