Markets Finish Lower Ahead of Trump's Speech

Charles Schwab: On the Market

Posted: 2/28/2017 4:15 PM ET

Markets Finish Lower Ahead of Trump's Speech

U.S. equities finished lower, as investors await tonight's highly-anticipated Congressional speech by President Donald Trump. Political uncertainty took center stage, with a more than 15-year high in Consumer Confidence and stronger-than-expected regional manufacturing activity taking a back seat. Meanwhile, Treasuries were mixed, gold and crude oil prices were modestly lower, while the U.S. dollar was flat.

The Dow Jones Industrial Average (DJIA) fell 25 points (0.1%) to 20,812, the S&P 500 Index declined 6 points (0.3%) to 2,363, and the Nasdaq Composite decreased 36 points (0.6%) to 5,825. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.04 lower to $54.01 per barrel and wholesale gasoline lost $0.01 to $1.73 per gallon. Elsewhere, the Bloomberg gold spot price declined $3.20 to $1,249.53 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was little changed at 101.15.

Target Corp. (TGT $58) reported 4Q earnings-per-share (EPS) of $1.46, or $1.45 ex-items, below the $1.51 FactSet estimate, as revenues declined 4.3% year-over-year (y/y) to $20.7 billion, roughly in line with projections. 4Q same-store sales declined 1.5% y/y, compared to the forecasted 1.4% decrease. TGT issued 1Q and full-year EPS and same-store sales guidance that came in well below expectations. The company said the quarter reflected the impact of rapidly-changing consumer behavior, which drove very strong digital growth but unexpected softness in its stores.

In the wake of the disappointing results, TGT announced plans to combat the aforementioned headwinds, including lowering prices that are expected to pressure margins, investments of more than $7 billion over the next three years, and launching 12 new exclusive brands, projected to represent $10 billion in sales over the next two years. Shares fell sharply.

Priceline Group Inc. (PCLN $1,725) posted 4Q profits of $13.47 per share, or $14.21 ex-items, well above the estimated $12.89, as revenues rose 17.4% y/y to $2.4 billion, topping the expected $2.3 billion. The travel site registered stronger-than-expected gross bookings and accelerating growth in hotel room nights booked. Shares were nicely higher.

Shares of Valeant Pharmaceuticals International Inc. (VRX $14) fell after the company's guidance for 2017 operating earnings came in below estimates, and its outlook for a y/y drop in full-year revenue had a midpoint that missed forecasts, overshadowing its slightly stronger-than-expected 4Q results.

For a look at investing in the current bull market, see Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, Radioactive: Is Passive's Dominance Over Active Set to Wane?, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

First revision to 4Q GDP unchanged, while Consumer Confidence hits multi-year high

The second look (of three) at 4Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.9%, unrevised from the first release. The Bloomberg forecast called for an adjusted 2.1% pace of expansion. 3Q GDP grew by an unrevised 3.5% rate. Personal consumption came in at a 3.0% gain for 4Q, up from the preliminary estimate of a 2.5% increase, and compared to the expectations of a 2.6% increase. Personal consumption grew by an unrevised 3.0% in 3Q. The unchanged revision came as the upward adjustment to personal consumption was met with a downward revision to business investment.

On inflation, the GDP Price Index was revised to a 2.0% gain, versus forecasts of an unrevised 2.1% increase, while the core PCE Index, which excludes food and energy, was adjusted to a 1.2% rise, compared to expectations of an unrevised 1.3% gain.

The Consumer Confidence Index (chart) rose to 114.8 in February—the highest level since July 2001—from the downwardly revised 111.6 level in January, and compared to estimates of 111.0. Sentiment toward the present situation and expectations of business conditions for the next six months both improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—dipped to 5.9 from the 6.0 posted in January.

The Chicago Purchasing Managers Index (chart) moved further into a level depicting expansion (above 50), after rising to 57.4 in February—the highest level since January 2015—from 50.3 in January, and versus expectations of a gain to 53.5.

The advance goods trade deficit rose to $69.2 billion in January, from the downwardly revised $64.4 billion in December, and compared to expectations of it to widen to $66.0 billion.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.6% gain in home prices y/y in December, versus expectations of a 5.4% increase. Month-over-month (m/m), home prices were up 0.9% on a seasonally adjusted basis for December, above forecasts calling for a 0.7% gain.

The Richmond Fed Manufacturing Activity Index unexpectedly moved further into expansion territory (a reading above zero), rising to 17 for February from the 12 posted in January, and versus expectations of a 10 reading.

Treasuries finished mixed, as the yield on the 2-year note was 2 basis points (bps) higher at 1.22%, the yield on the 10-year note was flat at 2.36%, while the 30-year bond declined 2 basis points to 2.97%. 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.

Along with the host of data today, the markets continue to focus on cooled off post-election rallies in the U.S. dollar and Treasury yields, along with all-time high stock markets. Political risk in the U.S. and Europe has tempered conviction. As such, the global markets are likely anticipating tonight's speech in front of Congress by President Donald Trump, looking for details regarding his tax and regulatory reforms, along with infrastructure spending plans that have teamed up with recent solid economic data to fuel the rallies in the stock and bond markets and the greenback since the November election.

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.

Tomorrow's economiccalendar will again be busy, headlined by personal income and spending, with economists expecting a 0.3% m/m increase for both figures in January, compared to the respective 0.3% and 0.5% advances seen the month prior, as well as construction spending, forecasted to have gained 0.5% m/m in January from the 0.2% decline posted in December. Like the rest of the world, national manufacturing activity reads are on tap, with the Institute for Supply Management (ISM) Manufacturing Index expected to show a level of 56.2 during February, and Markit's final February US Manufacturing PMI to be revised to a level of 54.5, with values above 50 for both readings indicating expansion in activity. Rounding out the docket will be MBA Mortgage Applications, while in afternoon action the Federal Reserve will release its Beige Book—an anecdotal look at national economic activity—used as a tool by the Federal Open Market Committee (FOMC) to prepare for its two-day monetary policy meeting scheduled to end March 15.

Europe higher, Asia mixed as markets eye Presidential speech in U.S.

European equities nudged higher, despite festering global political uncertainty ahead of looming key elections in France and tonight's Congressional speech from U.S. President Donald Trump. 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 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 two months 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. French 4Q GDP growth came in at a 1.2% y/y pace, topping forecasts of 1.1%, while shares of Meggitt PLC. (MEGGY $12) jumped after the U.K. defense and energy engineer's earnings report topped expectations. Spanish stocks were noticeable gainers, bolstered by travel-related issues and solid gains in the financial sector. The euro ticked higher and the British pound declined versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed with the global markets cautiously awaiting tonight's Congressional speech from U.S. President Trump, amid the backdrop of heightened political uncertainty on both sides of the Atlantic. Moreover, a plethora of data was released today, ahead of this week's global reads on manufacturing and services sector activity. Japanese equities ticked higher, giving up early gains late in the session as the yen reversed losses. Japan reported an unexpected drop in industrial production for January, though its retail sales rose more than expected m/m for last month. Chinese stocks diverged to cap off this month's rally, with those traded in Hong Kong falling, while mainland Chinese equities advanced, with the nation set to report its manufacturing and services PMIs tonight. Strength in oil & gas issues was met with weakness in other sectors to lead a decline in Australia's markets, while South Korean securities rose, but Indian listing declined ahead of its 4Q GDP report. After the closing bell, India's 4Q GDP growth decelerated to a 7.0% y/y pace, from 7.4% expansion in 3Q, and compared to expectations of a 6.1% gain.

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.

Manufacturing PMI reads from across the globe will dominate tomorrow's international economic calendar, while other reports slated for release include South Korea's trade balance, and CPI from Germany.