Stocks Continue Post Fed Advance

Charles Schwab: On the Market

Posted: 9/22/2016 4:15 PM ET

Stocks Continue Post Fed Advance

U.S. stocks joined in a broad-based global equity advance as the markets continued to react positively to yesterday's Fed decision to hold off on raising rates, though it hinted at a year-end rate hike the central bank also lowered its projection for the pace of future increases. Treasuries and gold were higher, while the U.S. dollar was under pressure and crude oil prices extended an advance. In economic news, weekly jobless claims surprisingly fell, existing home sales dropped and the Leading Index declined.

The Dow Jones Industrial Average (DJIA) rose 99 points (0.5%) to 18,392, the S&P 500 Index gained 14 points (0.7%) to 2,177, and the Nasdaq Composite increased 44 points (0.8%) to 5,340. In moderate volume, 839 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.98 to $46.32 per barrel, wholesale gasoline was unchanged at $1.40 per gallon and the Bloomberg gold spot gained $2.11 to $1,337.28 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 95.41.

Bed Bath & Beyond Inc. (BBBY $43) reported 2Q earnings-per-share (EPS) of $1.11, below the $1.16 FactSet estimate, as revenues declined 0.2% year-over-year (y/y) to $3.0 billion, compared to the projected $3.1 billion. 2Q same-store sales declined 1.2% y/y, versus the expected 0.5% gain. BBBY reaffirmed its full-year EPS outlook. Shares finished nicely higher.

Red Hat Inc. (RHT $80) posted 2Q earnings ex-items of $0.55 per share, one penny north of estimates, as revenues grew 19.0% y/y to $600 million, compared to the projected $590 million. RHT issued stronger-than-expected 3Q guidance and raised its full-year outlook. Shares rallied.

AutoZone Inc. (AZO $748) announced fiscal 4Q EPS $14.30, versus the expected $14.25, as revenues rose 3.3% y/y to $3.4 billion, roughly in line with estimates. 4Q same-store sales increased 1.0% y/y, below the forecasted 2.1% rise. AZO announced an additional $750 million to its share repurchase program. Shares lost modest ground.

Dow member Cisco Systems Inc. (CSCO $32) and Salesforce.com Inc. (CRM $75) announced a global strategic alliance. The two companies will jointly develop and market solutions that join Cisco's collaboration, IoT and contact center platforms with Salesforce Sales Cloud, IoT Cloud and Service Cloud. Shares of both companies closed higher.

Existing home sales decline, jobless claims surprisingly drop

Existing-home sales in August decreased 0.9% month-over-month (m/m) to a 5.33 million annual rate compared to the Bloomberg forecast of a rise to a 5.45 million pace. July's figure was downwardly revised to a 5.38 million annual rate. Compared to last year, sales were 0.8% higher. The median existing-home price was up 5.1% y/y at $240,200. Housing supply came in at a 4.6-month pace at the current sales rate. Sales were solidly higher in the Northeast, while declining in all other regions, as single-family home sales declined, while condominium and co-op sales jumped. National Association of Realtors (NAR) Chief Economist Lawrence Yun said recent job growth is not yielding higher home sales as inventory is not picking up to tame price growth and replace what is being quickly sold.

As noted in the Schwab Market Perspective: Round and Round We Go…, economic data appeared to be perking up in June and July, aided by better housing reports, but the recent round of data has thrown some cold water on the hopes for a sustainable uptick in growth. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his article, Real Estate Sector: Marketperform, positives of low interest rates, an improving economy, and favorable apartment trends are counterbalanced by the potential for rising rates, a changing consumer, and a potential inflection point for the favorable apartment trends, leading to our marketperform rating. Read these articles at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Weekly initial jobless claims (chart) decreased by 8,000 to 252,000 last week, versus estimates of an increase to 261,000, with the prior week's figure unrevised at 260,000. The four-week moving average declined by 2,250 to 258,500, while continuing claims dropped 36,000 to 2,113,000, south of the estimated level of 2,140,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) declined 0.2% m/m in August, versus projections calling a flat reading. Support came from the components pertaining to stock prices and the yield curve, while the index was bogged down by average workweek and ISM new orders.

The Kansas City Fed Manufacturing Activity Index for September rose to 6 from August's -4 level, compared to forecasts of a gain to -3, with a reading north of zero depicting expansion.

Treasuries were higher, with the yield on the 2-year note flat at 0.77%, while the yields on the 10-year note and the 30-year bond decreased 3 basis points to 1.62% and 2.34%, respectively. Bond yields extended yesterday's declines as the Fed held its monetary policy steady, noting that "the case for an increase in the federal funds rate has strengthened, but decided, for the time being, to wait for further evidence of continued progress toward its objectives." For more on this topic, see our latest article, Fed Stands Pat, but Hints at Future Rate Hike at www.schwab.com/insights, and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will cool down, with the lone major release expected to be Markit's preliminary Manufacturing PMI Index for September, which is forecasted to remain at the 52.0 level posted in August, with a reading above 50 denoting expansion in activity.

Europe and Asia higher following Fed decision

European equities traded nicely higher, amid a broad-based rally across the sectors, while the global markets digested the decision by the U.S. Federal Reserve to hold off on raising rates, but hint at a possible rate hike this year. However, the Fed lowered its projections to a more gradual pace of hikes down the road, which is weighing on the U.S. dollar and the nation's bond yields. The euro and British pound moved higher versus the greenback, while bond yields in the region lost ground. Amid the likely continued volatility surrounding the timing of the next Fed rate hike, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read these articles at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop. In economic news, French business confidence unexpectedly improved for September.

Stocks in Asia finished higher on the heels of yesterday's decision in the U.S. to not hike rates, which followed the Bank of Japan's decision to change its monetary policy focus to targeting the yield curve and committing to overshooting its inflation target, boosting the global financial sector. However, volume was light as Japanese markets were closed for a holiday. Stocks in China and Australia increased, with basic materials stocks rallying and oil & gas issues showing some strength. South Korean and Indian equities also rallied in the wake of the U.S. monetary policy decision. For a look at the global economic front, Schwab's Jeffrey Kleintop, CFA, offers his article, World Tour: An Around The World Look At the Economic Landscape at www.schwab.com/oninternational.

The international economic docket for tomorrow will be limited, offering the All Industry Activity Index from Japan and Markit's preliminary Manufacturing PMIs for Germany, France and the Eurozone.