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Saturday, February 25, 2017

Markets Rally to the Finish

Charles Schwab: On the Market
Posted: 2/24/2017 4:15 PM ET

Markets Rally to the Finish

U.S. equities rallied in the final minutes of the week to finish in the green after spending most of the day lower, as investors mulled a mixed bag of earnings and economic data, as well as growing domestic and European political risk. Treasury yields extended a decline, and crude oil prices lost ground, while gold and the U.S. dollar were higher. News on the equity front continued to surround earnings reports, while economic reports showed that new home sales missed forecasts and consumer sentiment topped expectations.

The Dow Jones Industrial Average (DJIA) rose 11 points (0.1%) to 20,822, the S&P 500 Index added 4 points (0.2%) to 2,367, and the Nasdaq Composite gained 10 points (0.2%) to 5,845. In moderately-heavy volume, 932 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil was $0.46 lower at $53.99 per barrel and wholesale gasoline lost a penny to $1.74 per gallon. Elsewhere, the Bloomberg gold spot price rose $8.23 to $1,257.79 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 101.13. Markets were higher for the week, as the DJIA increased 1.0%, the S&P 500 Index advanced 0.7%, and the Nasdaq Composite ticked 0.1% higher.

Hewlett Packard Enterprise Co. (HPE $23) reported fiscal 1Q earnings-per-share (EPS) of $0.16, or $0.45 ex-items, compared to the FactSet estimate of $0.44, as revenues declined 10.0% year-over-year (y/y) to $11.4 billion, below the forecasted $12.1 billion. HPE issued 2Q EPS guidance that missed estimates and lowered its full-year profit outlook. Shares fell sharply.

J.C. Penney Co. Inc. (JCP $7) posted 4Q earnings of $0.61 per share, or $0.64 ex-items, versus the forecast of $0.61, with revenues dipping 0.9% y/y to $4.0 billion, roughly in line with projections. 4Q same-store sales declined 0.7% y/y, compared to the expected 0.3% decrease. JCP issued 2017 earnings guidance with a midpoint below estimates and its same-store sales forecast came in just shy of expectations. Separately, the company announced that it expects to close two distribution facilities and up to 140 stores over the next few months as it aims to redirect capital resources to invest in locations and initiatives that offer the greatest revenue potential. JCP traded lower.

Foot Locker Inc. (FL $75) announced 4Q EPS of $1.42, or $1.37 ex-items, above the estimate of $1.32, as revenues increased 5.3% y/y to $2.1 billion, matching expectations. 4Q same-store sales rose 5.0% y/y, north of the forecasted 4.5% gain. Shares rallied.

Nordstrom Inc. (JWN $46) reported 4Q EPS of $1.15, in line with forecasts, but profits were $1.37 per share ex-items, with revenues rising 2.4% y/y to $4.2 billion, versus the projected $4.4 billion. 4Q same-store sales declined 0.9% y/y, compared to the expected 0.5% decrease, but gross margin topped the Street's expectation. JWN issued EPS and same-store sales guidance for the current year that came in just shy of forecasts. Shares gained solid ground on analyst margin optimism.

New home sales miss, while consumer sentiment revised higher than expected

New home sales (chart) rose 3.7% month-over-month (m/m) in January to an annual rate of 555,000, below the Bloomberg forecast of 571,000 units, and compared to the downwardly revised 535,000 unit pace in December. The median home price was up 7.5% y/y to $312,900. New home inventory remained at a 5.7 months' supply at the current sales pace. Sales declined m/m in the West, but rose in the Northeast, Midwest and South. New home sales are based on contract signings instead of closings.

The final February University of Michigan Consumer Sentiment Index (chart) was revised to 96.3 from the preliminary level of 95.7, above estimates calling for an adjusted 96.0 reading. The index was down compared to January's level of 98.5, which was the highest since January 2004. Compared to January, the expectations component declined, while the current conditions component ticked higher. The 1-year inflation outlook dipped to 2.7% from January's 2.8% rate, and the 5-10 year inflation projection remained at 2.5%.

Treasuries were higher, as the yield on the 2-year note decreased 5 basis points (bps) to 1.14%, while the yields on the 10-year note and the 30-year bond dropped 6 bps to 2.31% and 2.95%, respectively. For a look at the bond markets, see Schwab's Director of Income Planning, Rob Williams', CFP, and Senior Research Analyst, Cooper Howard's, CFA, latest article, Short-Term Bonds: Why They Could Outperform As Interest Rates Rise, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

As noted in the latest Schwab Market Perspective: Not So Fast!, elevated earnings and economic expectations could lead to a pullback or more sideways action but we believe the bull market in U.S. stocks will continue. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here. Read more at www.schwab.com/marketinsight, where you can also find Schwab's Chief Fixed Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors?. Follow Kathy on Twitter: @kathyjones. Finally, for a look at the U.S. political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington's Way: Why Trump's Policy Changes Could Take Time, at www.schwab.com/insights.

Europe lower on earnings and political uncertainty, Asia lower

European equities lost ground, with the Stoxx Europe 600 Index pulling back from a 14-month high, as a plethora of earnings reports weighed on sentiment and the global markets took a breather from a recent surge. U.S. and European political uncertainty continued to fester to foster the pullback in the markets, with the former dealing with high expectations of promised reflationary policy pledges and the latter facing a looming key French Presidential election. For more on the global markets and the European political risk, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, The stock market sees nothing to worry about—that may be about to change. Jeff notes that Europe's economy is performing the best in many years on many key measures and stock markets are currently behaving as if there is nothing to worry about, but that may be about to change now that we are within 45 trading days of the French Presidential election. He concludes that savvy investors should be prepared for a rise in volatility in global stock markets in the coming months. Read more at www.schwab.com/oninternational, and be sure to check out Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Follow Jeff on Twitter: @jeffreykleintop.  The euro was little changed and the British pound declined versus the U.S. dollar, while bond yields in the region finished lower.

Stocks in Asia finished mostly lower as the recent global market rally pauses amid heightened political uncertainty in the U.S. and Europe. Japanese equities declined, with the yen extending an advance as of late, while basic materials weighed on Australian securities. Stocks in South Korea and Hong Kong fell, while those traded in mainland China bucked the trend and modestly higher. Markets in India were closed for a holiday. Schwab's Director of International Research, Michelle Gibley, CFA, provides some timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio 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.

Stocks higher in the shortened week, Dow notches more record highs

The major U.S. equity markets finished out the week near record highs in choppy action, as the global markets grappled with the timing and details of promised reflationary policy pledges in U.S., while a looming key French Presidential election fostered uneasiness. The U.S. Dollar Index finished little changed. Financials, which have helped lead the post-election surge, dipped as Treasury yields pulled back, leading to a rally in utilities. Bond yields lost ground despite the minutes from the Fed's most recent policy meeting suggesting a March rate hike remained on the table. The retail sector came into focus as mixed earnings reports poured in, highlighted by Dow members Wal-Mart Stores Inc. (WMT $72) and Home Depot Inc. (HD $146), though a severely softer-than-expected outlook from L Brands Inc. (LB $51) hammered its stock. Tesla Inc. (TSLA $257) also came under pressure after posting a larger-than-expected loss. With earnings season winding down, of the 461 companies that have reported out of the S&P 500, about 73% have topped earnings estimates, while roughly 52% have exceeded sales projections, per data compiled by Bloomberg.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Better Days: Earnings Growth Picks Up Sharply in 2017, correlations have come down markedly, especially among sectors. In fact, one of the reasons why volatility has been so low is due to the "offsetting" effect. Earnings are moving from a four-quarter recession to strong double-digit growth in 2017 and forward valuation looks reasonable when looking through an inflation-filtered lens. Read more at www.schwab.com/marketinsight and for a look at all our sector ratings see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Trump Plus OPEC Equals ...What for Energy?. Follow Liz Ann on Twitter: @lizannsonders.

With the possibility of a March Fed rate hike on the table comes a fully-loaded economic calendar for next week, headlined by national manufacturing and services sector reads by the ISM and Markit, durable goods orders, the second look (of three) at 4Q GDP, along with personal income and spending. Also, the week will conclude with Federal Reserve Chairwoman Janet Yellen's economic outlook speech in Chicago. Rising global manufacturing activity and willingness to spend on large ticket items despite financing rates creeping higher are some of the five meaningful indicators of global growth that Schwab's Jeffrey Kleintop, CFA, points to in his article, Simple Indicators In A Complex World, buoying our belief that the bull market remains intact. Read more at www.schwab.com/marketinsight.

In addition to a plethora of global manufacturing and services reports, other international reports due next week include: Australia—4Q GDP and trade balance. India—4Q GDP. Japan—Household spending, consumer price inflation (CPI), industrial production, retail sales and 4Q capital spending. Eurozone—CPI, unemployment rate and retail sales. U.K.—Consumer confidence.

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