Stocks Mostly Flat, Yellen Hints at Possibility of March Hike

Charles Schwab: On the Market

Posted: 3/3/2017 4:15 PM ET

Stocks Mostly Flat, Yellen Hints at Possibility of March Hike

U.S. stocks oscillated around the unchanged mark to close mostly flat as the markets eyed the afternoon speech from Fed Chairwoman Janet Yellen, where she suggested a March rate hike could be a possibility. Treasury yields were nearly unchanged despite domestic services sector growth unexpectedly accelerating to the highest pace since October 2015. The U.S. dollar fell; giving back some of its recent rally, while gold and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) ticked nearly 3 points higher to 21,006, the S&P 500 Index added 1 point to 2,383, and the Nasdaq Composite increased 10 points (0.2%) to 5,871. In moderately-heavy volume, 825 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.72 higher to $53.33 per barrel and wholesale gasoline added $0.01 to $1.65 per gallon. Elsewhere, the Bloomberg gold spot price ticked $0.50 higher to $1,234.75 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.8% lower at 101.39. Markets were higher for the week, as the DJIA increased 0.9%, the S&P 500 Index advanced 0.7%, and the Nasdaq Composite ticked 0.4% higher.

Costco Wholesale Corp. (COST $170) reported fiscal 2Q earnings-per-share (EPS) of $1.17, below the $1.36 FactSet estimate, with revenues rising 5.7% year-over-year (y/y) to $29.8 billion, south of the projected $29.9 billion. 2Q same-store sales rose 3.0% y/y, compared to the expected 3.2% gain. Separately, the company announced that it will increase its annual membership fees. Shares finished solidly lower.

Marvell Technology Group Ltd. (MRVL $16) posted a 4Q loss of $0.15 per share, or EPS of $0.22 ex-items, above the forecasted profit of $0.19 per share, as revenues declined 5.2% y/y to $571 million, topping the expected $568 million. The company issued 1Q guidance that exceeded estimates. Shares gained ground.

General Motors Co. (GM $38) reversed to the upside amid reports that Peugeot SA's (PUGOY $20) board met today and approved the acquisition of GM's Opel unit. Neither company commented on the reports.

The technology sector has been one of the best performing groups in the post-election rally for the markets and amid earnings season that is winding down. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses in his latest Schwab Sector Views: Can the Tech Rally Continue?at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

ISM services sector report unexpectedly improves

The February Institute for Supply Management (ISM) non-Manufacturing Index (chart) surprisingly rose to 57.6—the highest since October 2015—from January's unrevised 56.5 level, where the Bloomberg forecast called for it to remain. A reading above 50 denotes expansion. New orders improved to 61.2 and employment ticked higher to 55.2, while prices declined to 57.7. The ISM said comments from respondents continued to be mixed, with some uncertainty, however, the majority indicated a positive outlook on business conditions and the overall economy.

The final Markit U.S. Services PMI Index was revised to 53.8 in February from the preliminary 53.9 level, versus estimates of a 54.0 reading, and compared to the 55.6 figure posted in January. However, a reading above 50 depicts expansion. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

As noted in the latest Schwab Market Perspective: Not So Fast!, economic data has continued to beat expectations, but the number of upside surprises may start to level off. That doesn't mean things are getting worse, just that expectations are catching up with the improvements in the data, which could have a dampening impact on investor enthusiasm in the near term. However, ultimately, we believe fiscal stimulus is coming—although perhaps later than anticipated—and the bull market in U.S. stocks will continue. Read more at www.schwab.com/marketinsight.

Treasuries were nearly unchanged, with the yields on the 2-year and 10-year notes, as well as the 30-year bond flat at 1.31%, 2.48% and 3.07%, respectively. Bond yields paused from a recent rally, while the U.S. dollar pulled back from a run as of late and the stock markets were flat after yesterday's retreat from all-time highs.

With expectations of a possible Fed rate hike later this month jumping this week in the wake of continued strong economic data and commentary from Central Bank members, the markets focused on Federal Reserve Chairwoman Janet Yellen's speech on the economic outlook, where she noted that the economy has exhibited remarkable resilience and is close to meeting the Fed's goals of maximum employment and price stability. These comments appeared to preserve elevated rate hike expectations.  For analysis of the Fed, check out Schwab's Chief Fixed Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors? at www.schwab.com/onbonds, and follow Kathy on Twitter: @kathyjones. Political risk remains in focus following President Trump's first speech in front of Congress this week as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend in his latest article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights.

Finally, in light of the rally to all-time highs for stocks, Schwab’s Chief Investment Strategist Liz Ann Sonders offers a look at investing strategies in the current bull market in her latest article, Radioactive: Is Passive's Dominance Over Active Set to Wane?, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Europe mixed, Asia lower

European equities finished mixed, with financials gaining ground as bond yields in the region and the U.S. extend rallies, bolstered by boosted expectations of a possible rate hike in the U.S. later this month. The markets awaited today's speech from U.S. Fed Chairwoman Janet Yellen today. Also, eurozone political risk continued to fester as a key French Presidential election looms, as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Also, be sure to check out Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertaintyat www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop. In economic news, Markit's final Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was unrevised at 56.0 for February, matching expectations and above the 54.4 level posted in January. A reading above 50 denotes expansion. Markit's U.K. Composite PMI Index showed although activity decelerated, it remained in expansion territory. The euro was higher and the British pound dipped versus the U.S. dollar.

Stocks in Asia finished mostly lower on the heels of the drop in the U.S. markets from all-time highs, amid the backdrop of heightened expectations of a possible rate hike in the nation later this month, while the markets awaited today's speech from U.S. Fed Chair Janet Yellen. Japanese equities declined, with the yen recovering from a recent slide and as data showed household spending dropped more than expected in January, though the nation's core consumer price inflation unexpectedly rose. Chinese stock markets traded lower, continuing to pare recent rallies that have been bolstered by upbeat economic data. The favorable data continued today as a read on key services sector activity showed growth accelerated last month. Australian securities dropped and South Korean listings fell, while Indian equities finished flat. 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 Portfolioat 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 continue to rally as data counters political risk

U.S. stocks extended a rally on the week, registering fresh all-time highs. They joined a global equity market push to the upside that was bolstered by a plethora of upbeat global business activity reports, as favorable data out of China and Europe was met with a jump in the U.S. ISM Manufacturing Index to the highest level since August 2014. Expectations of a Fed rate hike later this month rose, which helped send the U.S. dollar higher, revived a rally in Treasury yields and helped boost the financial sector. Along with the economic optimism, President Donald Trump's dialed-down tone in his first address to Congress, although lacking details of his reflationary policy plans, appeared to be met positively by the markets.

With earnings season all but in the books and Fedspeak going quiet ahead of its March 14-15 meeting, all eyes will likely focus on next week's U.S. economic calendar, which will deliver reads on factory orders, the trade balance and 4Q nonfarm productivity and unit labor costs. However, the docket will be headlined by Friday's key nonfarm payroll report for February.

As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations, U.S. stock indexes broke to the upside, on better economic data but also heightened expectations of tax and regulatory reform. The bar is now set higher for policy action to support the rhetoric, setting up the possibility for a market pullback and/or a pickup in volatility. The economic picture continues to look good, but inflation is heating up, which has put a March rate hike by the Federal Reserve firmly on the table. An earnings growth recovery has helped fuel a global rally, but there are risks that expectations and valuations have gotten a bit extended. Read more at www.schwab.com/marketinsight.

International reports due out next week that deserve a mention include: Australia—retail sales and the Reserve Bank of Australia's monetary policy decision. China—trade balance and inflation reports. Japan—trade balance and 4Q GDP. Eurozone—investor confidence, 4Q GDP and the European Central Bank monetary policy decision, along with German factory orders and trade balance. U.K.—industrial and manufacturing production, trade balance and inflation forecast.