Charles Schwab: On the MarketPosted: 3/28/2017 4:15 PM ET
Stocks Seize Confident Gains
U.S. stocks seized solid gains, shaking-off recent sluggishness amid a rebound in crude oil prices and a surprising jump to a multi-year high for Consumer Confidence. Treasury yields and the U.S. dollar also managed sizable gains, with comments out of Washington suggesting last week's failed health-care reform bill likely won't derail efforts for tax reform and infrastructure spending. In equity news, Red Hat and Darden Restaurants posted upbeat quarterly results, while GM rejected a shareholder proposal. Gold was lower.
The Dow Jones Industrial Average (DJIA) advanced 151 points (0.7%) to 20,702, the S&P 500 Index increased 17 points (0.7%) to 2,359, and the Nasdaq Composite was 35 points (0.6%) higher at 5,875. In moderate volume, 824 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.64 to $48.37 per barrel and wholesale gasoline gained $0.01 to $1.64 per gallon. Elsewhere, the Bloomberg gold spot price decreased $4.20 to $1,250.66 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—advanced 0.5% to 99.71.
Red Hat Inc. (RHT $86) reported 4Q earnings-per-share (EPS) of $0.36, or $0.61 ex-items, compared to the $0.61 FactSet estimate, as revenues rose 16.0% year-over-year (y/y) to $629 million, versus the projected $619 million. The open source solutions company's closely-watched billings growth topped expectations. RHT issued 1Q revenue and full-year guidance that exceeded estimates. Shares finished solidly higher.
Darden Restaurants Inc. (DRI $83) posted fiscal 3Q EPS of $1.32, versus the expected $1.27, with revenues rising 1.7% y/y to $1.9 billion, roughly in line with forecasts. The parent of Olive Garden said its same-restaurant sales grew 0.9% y/y, topping the projected 0.3% increase. DRI raised its full-year outlooks for earnings and same-restaurant sales. Separately, the company announced an agreement to acquire Cheddar's Scratch Kitchen for $780 million in an all-cash transaction. Shares rallied.
General Motors Co. (GM $36) gained solid ground after rejecting a proposal by shareholder Greenlight Capital LLC to split GM's common stock into two separate classes: one that would receive the current dividends and one that would participate in the remaining earnings and cash flows and future growth of the company. Greenlight, which is a hedge fund run by David Einhorn, said it believes adopting this plan would lower GM's cost of capital, improve financial flexibility, and unlock between $13-38 billion of shareholder value. GM said the proposal creates unacceptable risks and is not in the best interests of shareholders and it is executing a transformational plan that is expected to return approximately $7 billion in cash to shareholders in 2017, bringing total cash returns to about $25 billion since 2012.
Ford Motor Co. (F $12) announced that it is investing $1.2 billion in three Michigan manufacturing facilities aimed at bolstering its truck and SUVs production, as well as supporting its expansion to an auto and mobility company. Shares finished higher.
Consumer Confidence jumps to highest since 2000
The Consumer Confidence Index (chart) unexpectedly surged to 125.6 in March—the highest level since December 2000—from the upwardly revised 116.1 level in February, and compared to the Bloomberg estimate of a dip to 114.0. Sentiment toward the present situation and expectations of business conditions for the next six months both solidly improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—jumped to 12.2 from the 7.0 level posted in February.
The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.7% gain in home prices y/y in January, versus expectations of a 5.6% increase. Month-over-month (m/m), home prices were up 0.9% on a seasonally adjusted basis for January, topping forecasts calling for a 0.7% gain.
The advance goods trade deficit shrunk to $64.8 billion in February, from the downwardly revised $68.8 billion in January, and compared to expectations for it to decline to $66.4 billion.
Preliminary wholesale inventories rose 0.4% m/m in February, above forecasts for a 0.2% increase, and following January's unfavorably revised 0.3% decline.
The Richmond Fed Manufacturing Activity Index surprisingly moved further into expansion territory (a reading above zero), jumping to 22 for March—the highest since April 2010—from the 17 posted in February, and versus expectations of a 15 reading.
Treasuries finished lower, with the yield on the 2-year note gaining 3 basis points (bps) to 1.30%, and the yields on the 10-year note and the 30-year bond ticking 4 bps higher to 2.41% and 3.02%, respectively.
Treasury yields and the U.S. dollar remain in focus and have pulled back as of late, along with the stock markets, courtesy of the Fed's statement and outlook after its March rate increase that appeared to ease concerns regarding a larger-than-expected acceleration in Fed interest rate hikes this year. Also, risk aversion has ramped up amid flared-up concerns regarding the implications of last week's failed healthcare bill on President Donald Trump's ability to get his business-friendly agenda through Congress.
For analysis of the Fed's actions on the bond markets, see the video by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, titled, Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?, and Randy's and Schwab's Chief Fixed Income Strategist, Kathy Jones' video, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.
However, economic data has remained solid and Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data, after a "typical" weak first quarter, economic growth should accelerate and based on history, soft data is likely to retreat, while hard data is likely to accelerate. Read more at www.schwab.com/marketinsight, and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.
Tomorrow, the U.S. economic calendar will slow from today's pace with major releases to include pending home sales, expected to have increased 2.5% m/m in February, and the weekly MBA mortgage applications report.
Europe and Asia higher as global markets stabilize
European equities finished higher following some upbeat U.S. economic data, with the global markets appearing to calm down after a ramp up in U.S. political uncertainty, while oil & gas and basic materials issues rebounded. However, European political concerns remained as next month's key French election looms, and the U.K. is expected to trigger article 50 tomorrow to formally begin negotiations to leave the European Union. For analysis of the European political front, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights, and Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop. The economic front was relatively quiet, though the lone major report showed Italian industrial orders fell more than expected in January. The euro and British pound declined versus the U.S. dollar, while bond yields in the region were mostly lower. Shares of Wolseley PLC. (WOSYY $6) rallied after the plumbing and heating products company posted favorable first-half results.
Stocks in Asia finished mostly higher, with the U.S. markets showing some intra-day resiliency yesterday in the face of heightened political uneasiness after last week's failed healthcare reform attempt. The U.S. dollar and crude oil prices, which have come under pressure also stabilized to help sentiment. Politics in the U.S. and Europe, along with a Fed rate hike and slightly more dovish outlook earlier this month have driven some of the moves in the global currency and bond markets. For analysis of the impact of the Fed's actions on the markets in Asia, see Schwab's Michelle Gibley's, CFA, recent article, Fed Rate Hikes May Benefit Japanese Stocks, and Jeffrey Kleintop's, CFA, commentary, The Fed has China in a Tough Spotat www.schwab.com/oninternational. Japanese equities rose, with the yen retreating somewhat from a recent rally, while recoveries in resource-related issues helped lift Australian securities higher. Stocks trading in Hong Kong advanced on strength in casino operators, while optimism toward the financial sector boosted Indian listings and South Korean issues advanced following a stronger-than-expected 4Q GDP report, though mainland Chinese equities declined as the markets continue to grapple with the aforementioned impact of the Fed actions on mainland Chinese markets.
The international economic docket for tomorrow will yield retail sales and small business confidence from Japan, the Import Price Index from Germany, consumer credit from the U.K. and consumer confidence from Italy and France.