Markets Mixed in Choppy Action

Charles Schwab: On the Market

Posted: 1/5/2017 4:15 PM ET

Markets Mixed in Choppy Action

U.S. equities finished mixed, as investors weighed disappointing holiday sales reports from Macy's and Kohl's, as well as a host of upbeat global services sector reports. Treasuries rallied amid mixed labor data ahead of tomorrow's key December nonfarm payroll report, while the U.S dollar tumbled, and gold jumped. Crude oil prices inched higher in the wake of a larger-than-expected drop in the government's oil inventory report.

The Dow Jones Industrial Average (DJIA) declined 43 points (0.2%) to 19,899, the S&P 500 Index ticked 2 points (0.6%) lower to 2,269, while the Nasdaq Composite increased 11 points (0.2%) to 5,488. In moderate-to-heavy volume, 912 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.50 to $53.76 per barrel and wholesale gasoline lost $0.01 to $1.64 per gallon. Elsewhere, the Bloomberg gold spot price jumped $17.64 to $1,181.29 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—tumbled 1.2% to 101.51.

Macy's Inc. (M $31) reported that its same-store sales for November and December were down 2.0% year-over-year (y/y), the low end of its guidance, while also lowering its full-year earnings-per-share (EPS) outlook. The company said its performance during the holiday season reflects the broader challenges facing much of the retail industry. M reaffirmed its full-year same-store sales guidance. The company also announced that it plans to eliminate jobs and close stores. Shares were sharply lower.

Shares of Kohl's Corp. (KSS $42) fell after saying its holiday season same-store sales fell 2.1% y/y, and lowered its full-year EPS outlook. The company said sales were volatile throughout the holiday season, with strong sales on Black Friday and during the week before Christmas being offset by softness in early November and December.

Costco Wholesale Corp. (COST $163) gained ground after the company posted a 3.0% y/y gain in December same-store sales, topping the expected 2.4% increase.

Services sector activity reports top forecasts, ADP employment report misses

The December Institute for Supply Management (ISM) non-Manufacturing Index (chart) remained at November's 57.2, which was the highest since October 2015, and compared to the Bloomberg forecast of a dip to 56.8. A reading above 50 denotes expansion. New orders rose solidly to 61.6 and prices increased modestly to 57.0, while employment fell but continued to denote expansion. The ISM said comments from respondents were mostly positive about business conditions and the overall economy.

The final Markit U.S. Services PMI Index was revised to 53.9 in December from the preliminary 53.4 level, where it was forecasted to remain. The index was below the 54.6 figure posted in November. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently. A reading above 50 denotes expansion.

The stronger-than-expected growth in the services sector complemented a plethora of upbeat global reports that has helped continue the post-election rally in stocks as discussed by Schwab’s Chief Investment Strategist Liz Ann Sonders in her latest article, Luminous Times: Looking Ahead With Optimism About 2017. She notes that much of the stock market's sharp rally since November has been credited with the presidential election, which fostered rising business, consumer and investor confidence. However, Liz Ann points out that you could have looked in the rearview mirror on Election Day and seen an improvement in the economy along with a return to positive earnings growth. She concludes that we remain optimistic that this is an ongoing secular bull market in U.S. stocks; and the risk of it ending swiftly is low. Read more at www.schwab.com/marketinsight, and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

The ADP Employment Change Report showed private sector payrolls rose by 153,000 jobs in December, below forecasts of a 175,000 gain, while November's increase of 216,000 jobs was revised slightly lower to a 215,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of tomorrow's broader December nonfarm payroll report, expected to show an increase of 175,000 jobs, while private sector payrolls are projected to rise by 165,000 (economic calendar). The unemployment rate is forecasted to tick higher to 4.7% from 4.6%, and average hourly earnings are projected to rise 2.8% year-over-year (y/y), which would match the biggest y/y advance since the expansion began in June 2009, per Bloomberg.

The wage component of tomorrow's report is likely to garner the heaviest scrutiny as solid job growth has persisted for some time and given the positive impact of accelerating wage growth on the all-important U.S. consumer. However, a sharp upside surprise could foster further rallies for Treasury yields and the U.S. dollar and, as well as stoke simmering inflation expectations, to counter some of the enthusiasm. Schwab's Fixed Income Director, Collin Martin, CFA, discusses the impact of higher inflation in his article, Inflation Is Rising: Time to Consider Treasury-Inflation Protected Securities? at www.schwab.com/onbonds.

Weekly initial jobless claims (chart) fell 28,000 to 235,000 last week, below forecasts of a decline to 260,000, as the prior week's figure was revised lower to 263,000, while volatility around the holiday period likely had an impact. The four-week moving average dropped by 5,750 to 256,750, while continuing claims rose 16,000 to 2,112,000, north of the estimated level of 2,045,000.

Treasuries finished higher, with the yield on the 2-year note declining 5 basis points (bps) to 1.16%, the yield on the 10-year note dropping 8 bps to 2.36%, and the 30-year bond rate falling 9 bps to 2.95%.

Bond yields have been giving back some of a post-election rally, which had been bolstered by a string of upbeat economic data. Moreover, the rally in rates has been fostered by the Fed's December rate hike and a faster-than-previously-forecasted pace of rate increases for 2017. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? at www.schwab.com/insights. Kathy also addresses some common questions from investors and considers some of the potential changes facing the fixed income market in her article, Changing Conditions: A Bond Market FAQ, where she notes that yields have surged in recent weeks, extending a rise that started this summer. Kathy concludes that the incoming administration of President-elect Donald Trump raises the prospect of new tax and spending policies that could make the fixed income market more volatile. Read more at www.schwab.com/marketinsight, and follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

In addition to the jobs report, tomorrow’s domestic docket holds the trade balance, with economists expecting the November deficit to widen slightly to $44.5 billion from the $42.6 shortfall posted in October, as well as factory orders, forecasted to have fallen 2.5% during November following the 2.7% increase seen the month prior.

Europe ticks higher, Asia mixed following string of upbeat global data

Most European equities finished modestly higher, with a majority of the major sectors rising on continued global economic optimism fueled by a plethora of favorable data, including today's upbeat services sector reports out of the U.S., U.K., Japan, China and Australia. However, financials, which have enjoyed a reprieve this week on eased banking sector concerns, dipped as bond yields in the region were choppy and fell in the U.S. The euro and the British pound rallied versus the U.S. dollar amid some volatility in the currency markets. The greenback continued to give back its recent jump despite the aforementioned economic data, while yesterday's release of the U.S. Federal Reserve's December meeting minutes reiterated intentions of a gradual approach to monetary policy. Also, China's currency continued to stem a recent slide and the Mexican peso reversed to the upside as the nation's central bank announced that it has been intervening in the currency markets. In other economic news, eurozone retail sector output returned to expansion territory for last month.

For timely analysis of the global landscape, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly to the upside, with energy issues gaining ground as crude oil prices recovered from the previous day's sharp downside reversal and as services sector reports out of China, Japan and Australia showed growth in the sector accelerated in December. However, Japanese equities declined, giving back some of yesterday's rally as the yen recovered from a recent drop. The economic reports add to a recent string of favorable global data that has buoyed economic sentiment and adds credence to Schwab's Jeffrey Kleintop's, CFA, view in his article, Happy Unrecession: The Alice in Wonderland economy, that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. Mainland Chinese stocks and those traded in Hong Kong gained ground as the services sector reports were accompanied by eased liquidity/currency concerns as the yuan extended yesterday's jump and the U.S. dollar fell in the wake of the release of the U.S. Fed's December meeting minutes reiterated intentions of a gradual approach. Listings in India and Australia advanced, while South Korean stocks declined. Schwab's Director of International Research, Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read the above articles at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Tomorrow, the international economic calendar will be fairly light, with reports scheduled for release to include manufacturing orders and retail sales from Germany, as well as confidence data and retail sales from the Eurozone.