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Wednesday, August 24, 2016

Oil and Housing Reports Pressure Stocks

Charles Schwab: On the Market
Posted: 8/24/2016 4:15 PM ET

Oil and Housing Reports Pressure Stocks

U.S. equities finished lower in the wake of a disappointing existing home sales report, some lackluster earnings, and a tumble in crude oil prices on the heels of a bearish government inventory report. Moreover, an amount of caution continued as the global markets await Friday's speech from Federal Reserve Chairwoman Janet Yellen. Treasuries were flat and gold was lower, while the U.S. dollar inched higher.

The Dow Jones Industrial Average (DJIA) declined 64 points (0.4%) to 18,483, the S&P 500 Index fell 11 points (0.5%) to 2,176, and the Nasdaq Composite decreased 42 points (0.8%) to 5,218. In moderate volume, 745 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $1.33 to $46.77 per barrel, wholesale gasoline lost $0.01 to $1.41 per gallon and the Bloomberg gold spot price declined $11.81 to $1,325.75 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 94.78.

Intuit Inc. (INTU $110) reported fiscal 4Q earnings-per-share (EPS) of $0.08, compared to the FactSet estimate of a $0.02 per share loss, with revenues rising 8.0% year-over-year (y/y) to $754 million, above the projected $733 million. The business and financial software maker issued 1Q guidance that came in below expectations and a mixed current year outlook. Shares were solidly lower.

La-Z-Boy Inc. (LZB $27) posted fiscal 1Q profits of $0.28 per share, one penny below estimates, with revenues roughly flat y/y to $341 million, missing the forecasted $358 million. Shares of LZB fell sharply.

Express Inc. (EXPR $12) announced 2Q EPS of $0.13, south of the projected $0.17, as revenues decreased 6.0% y/y to $505 million, versus the expected $521 million. 2Q same-store sales fell 8.0% y/y, versus the forecasted 4.6% decline. EXPR issued softer-than-expected 3Q guidance, while lowering its full-year outlook. Shares tumbled over 25%.

Existing home sales snap a four-month string of gains

Existing-home sales in July declined month-over-month (m/m) for the first time since February, decreasing 3.2% to a 5.39 million annual rate compared to the Bloomberg forecast of a 5.51 million pace. June's figure was unrevised at a 5.57 million annual rate—the highest since February 2007. Compared to last year, sales were 1.6% lower, the first y/y decline since November 2015. The median existing-home price was up 5.3% y/y at $244,100. Housing supply came in at a 4.7-month pace at the current sales rate. Sales were lower in all regions except for in the West as single-family and condominium and co-op sales both fell. National Association of Realtors (NAR) Chief Economist Lawrence Yun said severely restrained inventory and the tightening grip it's putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month.

As noted in the Schwab Market Perspective: The Calm Before the…., the latest batch of U.S. economic data doesn’t appear to presage an imminent recession, which would typically lead to a bear market. Consumer confidence has firmed, with the labor market continuing to improve, housing looking good, and wages finally starting to rise. Additionally, we’ve seen both revolving consumer credit and bank loans increase, indicating consumers may be more comfortable taking on debt. Read the whole perspective at www.schwab.com/marketinsight, where you can also find more on investing in the housing sector, courtesy of Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: There's a New Sector Coming. Follow Schwab on Twitter: @schwabresearch.

The MBA Mortgage Application Index declined 2.1% last week, after falling 4.0% in the previous week. The decrease came as a 3.2% drop for the Refinance Index was accompanied by a 0.3% dip for the Purchase Index. The average 30-year mortgage rate rose 3 basis points (bps) to 3.67%.

Treasuries were little changed, as the yields on the 2-year and 10-year notes were flat at 0.76% and 1.55%, respectively, while the 30-year bond rate ticked 1 bp higher to 2.23%. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds? Also, for commentary on the recent record highs for the stock market, see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Randy Frederick, titled Long-Running Bull Finally Attracting Believers? See both videos at www.schwab.com/insights and follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

Tomorrow, the headlining event on the U.S. economic calendar will likely be the release of the preliminary durable goods orders report, projected to rebound 3.4% m/m in July, after June's 3.9% drop. Excluding transportation, orders are anticipated to rise 0.4%, after declining by the same amount in the month prior. Orders for non-defense capital goods excluding aircraft—a proxy for business spending—are expected to tick 0.2% higher on the heels of June's 0.4% increase. As noted in the Schwab Market Perspective, it will be difficult to get the U.S. economy rolling without an improvement in productivity. A contributing factor to weak productivity is undoubtedly ongoing tepid capital spending. Additionally, industrial production has been relatively weak, but there is some hope as gains have been posted in the past two months. Read more at www.schwab.com/marketinsight.

As well, weekly initial jobless claims will be released, forecasted to move higher to a level of 265,000 from the prior week's 262,000, as well as the Kansas City Fed Manufacturing Index, with economists expecting the measure of activity to rise from July's level of -6 to -2 for August, with a reading below zero denoting contraction in activity.

Europe mostly higher, Asia mixed amid caution ahead of Fed Chair speech

European equities moved mostly to the upside, with financials leading the way, though the global markets continue to tread lightly ahead of Friday's speech from Federal Reserve Chairwoman Janet Yellen at the Central Bank's annual monetary policy gathering in Jackson Hole, Wyoming. The euro traded lower versus the U.S. dollar to lend some support, while bond yields in the region ticked higher. In economic news, Germany's 2Q GDP growth was unrevised as expected at a 0.4% quarter-over-quarter pace, after expanding 0.7% in 1Q. However, the U.K. markets lagged behind amid some weakness in basic materials stocks, while the British pound continued its recent rally to a three-week high versus the greenback on the heels of a report that showed consumer credit rose by the fastest pace in almost a decade, per Bloomberg. The upbeat report was the latest in a string of data to suggest the U.K. economy is seeing a limited impact from the late-June vote to leave the European Union, known as Brexit. For commentary on the potential impact of the Brexit vote, see the Schwab Center for Financial Research's article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight. Gains were limited by some weakness in oil & gas issues as crude oil prices saw pressure on the heels of two bearish oil inventory reports.

Stocks in Asia finished mixed with volume subdued amid some caution ahead of Friday's key speech from U.S. Fed Chair Yellen, while economic data in the region remained on the lighter side. Japanese equities rose, aided by some modest weakness in the yen, while mainland Chinese markets dipped and those in Hong Kong fell markedly, with banking stocks seeing pressure following a recent run. Strength in resource-related issues, along with technology and financial stocks helped Australian stocks tick higher, while securities in India gained modest ground, and South Korean equities declined. Amid the lull in volatility in the global markets, now might be a good time for investors to assess portfolio asset allocations, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification, complemented by his latest article, Your portfolio may be less diversified than you think. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Tomorrow's international economic calendar will have a few reports for investors to chew on, including inflation data out of Japan, sentiment reports from France, GDP from Spain, and Germany's Ifo Business Climate Survey.

Schwab Center for Financial Research - Market Analysis Group

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