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Friday, April 21, 2017

Stocks off Lows, but Stay Red on Close

Charles Schwab: On the Market
Posted: 4/21/2017 4:15 PM ET

Stocks off Lows, but Stay Red on Close

U.S. stocks finished lower with financial stocks leading the decline, while an extension of recent losses for crude oil prices also weighed on the energy sector. Traders were likely exercising some caution ahead of this weekend's first round of a key French Presidential election. In economic news, existing home sales hit the fastest annual pace in over a decade and business activity reports missed forecasts. In other developments, President Trump stated that there will likely be an announcement on tax reform next week on Wednesday or shortly thereafter. Treasury yields were mixed and the U.S. dollar and gold were higher.

The Dow Jones Industrial Average (DJIA) declined 31 points (0.2%) to 20,548, the S&P 500 Index decreased 7 points (0.3%) to 2,349, and the Nasdaq Composite shed 6 points (0.1%) to 5,911. In moderate volume, 931 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.09 to $49.62 per barrel and wholesale gasoline was $0.02 lower at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price increased $2.92 to $1,284.82 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 99.91. Markets were higher for the week, as the DJIA advanced 0.5%, the S&P 500 Index gained 0.9%, and the Nasdaq Composite rallied 1.8%.

Dow member General Electric Co. (GE $30) reported 1Q earnings-per-share (EPS) of $0.10, or $0.21 ex-items, compared to the FactSet estimate of $0.17, as revenues declined 1.0% year-over-year (y/y) to $27.7 billion, versus the projected $26.4 billion. The company said it expects cash flow to improve throughout the remainder of the year, while reaffirming its 2017 guidance. Shares closed lower amid analyst concerns about the company's cash that came in weaker than expected.

Dow component Visa Inc. (V $91) posted fiscal 2Q earnings of $0.18 per share, or $0.86 ex-items, compared to the projected $0.79, with revenues rising 23.0% y/y to $4.5 billion, above the estimated $4.3 billion. The company reaffirmed its full-year revenue outlook, while announcing a new $5.0 billion share repurchase program. V finished flat. 

Mattel Inc. (MAT $22) announced a 1Q loss of $0.33 per share, or a loss of $0.32 ex-items, versus the expected shortfall of $0.17, as revenues declined 15.0% y/y to $736 million, below the forecasted $794 million. The company said its softer-than-expected results were due to a retail inventory overhang coming out of the holiday period, but it remains encouraged by strong performance at retail for its key core brands. Shares fell.

Honeywell International Inc. (HON $127) reported 1Q EPS of $1.71, or $1.66 ex-items, above the expected $1.62, as revenues were flat y/y to $9.5 billion, topping the forecasted $9.3 billion. HON finished nicely higher.

Existing home sales hit fastest pace in over a decade, business activity slips

Existing-home sales in March rose 4.4% month-over-month (m/m) to a 5.71 million annual rate—the fastest pace since February 2007—compared to the Bloomberg forecast of a 5.60 million pace. February's figure was revised to a 5.47 million annual rate. Sales of single-family homes rose 4.3% m/m and purchases of condominium and co-op units grew 5.0%. The median existing-home price was up 6.8% y/y at $236,400. Housing supply came in at a 3.8-month pace at the current sales rate, and the inventory of homes for sale is down 6.6% y/y. Sales grew in all regions except for the West. Existing home sales are based on contract closings instead of signings and account for the majority of the housing sales market.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said, "The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market." Yun pointed out that finding available properties to buy continues to be a strenuous task, and sales will go up as long as inventory does.

Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Housing—Building Bubble or Growing Trouble?, discusses the constrained supply in the housing market, which is conspiring with price gains, an uptick in mortgage rates, and modest wage gains to decrease affordability for homebuyers. Brad concludes that we believe the housing market is a modestly positive contributor to overall U.S. economic activity. Read more on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

The preliminary Markit U.S. Manufacturing PMI Index came in at 52.8 for April, below March's final read of 53.3, and compared to estimates calling for an improved level of 53.8. The preliminary Markit U.S. Services PMI Index for April declined to 52.5 from March's reading of 52.8, versus forecasts of an improvement to 53.2. Readings above 50 for both reports denote expansion in activity.

Treasuries straddled the unchanged mark, with yield on the 2-year note dipping 1 basis point (bps) to 1.18%, the yield on the 10-year note flat at 2.23% and the 30-year bond rate gaining 1 bp to 2.89%. 

For analysis of the moves in the bond and currency markets see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Senior Fixed Income Research Analyst, Collin Martin's, CFA, video What's Driving the Ongoing Drop in Long-Term Bond Yields? on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones discusses, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Markets & Economy page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Europe mixed ahead of French election, Asia diverges amid lingering uncertainty

European equities finished mixed to little changed, with financials extending a recovery as the recent pressure on bond yields continued to show relative signs of lessening, but oil & gas issues fell as crude oil prices added to a weekly slide. The markets appeared cautious in the face of heightened geopolitical and political uncertainty as France heads for the first round of its key Presidential election this weekend, exacerbated by yesterday's terrorist attack in the nation. Also, the U.K. approved an election for June this week and German elections are slated for later this year. For more on the political front in the region, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? on the Insights & Ideas page at www.schwab.com. Also, check out our article, Brexit Begins: What's Next for the U.K.?, on the Insights & Ideas page at www.schwab.com, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. In economic news, eurozone business activity in the manufacturing and services sectors unexpectedly showed expansion accelerated slightly for April, while U.K. retail sales fell more than expected for March. The euro and British pound were lower versus the U.S. dollar.

Stocks in Asia finished mostly to the upside, on the heels of the solid gains in the U.S. yesterday that were fueled by a plethora of earnings reports that tilted to the positive side and comments that caused U.S. tax reform optimism to resurface. Japanese equities gained ground, with the yen holding onto recent weakness and as a report showed that growth in the nation's manufacturing output accelerated slightly in April. Australian securities advanced and shares trading in South Korea were also higher. However, Indian stocks dipped, while mainland Chinese equities finished flat and Hong Kong listings ticked lower with festering concerns about regulatory crackdowns continuing to hamstring sentiment in the world's second largest economy. Political and geopolitical concerns remained, ahead of this weekend's key French election and amid recent rhetoric from North Korea. For analysis of the global front, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, and his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Stocks show some resiliency coming out of Easter break

U.S. stocks followed a long holiday weekend with a weekly advance despite lingering headwinds off elevated geopolitical and political concerns, as well as a pullback in crude oil prices on U.S. supply concerns that pressured the energy sector. Earnings season heated up and appeared to provide some support as about 71% of the 94 companies that reported results from the S&P 500 Index topped forecasts and 82% bested earnings estimates, per data compiled by Bloomberg. However, the Dow lagged the major markets, with gains being limited by disappointing earnings reports from International Business Machines Corp. (IBM $161), Verizon Communications Inc. (VZ $48) and Goldman Sachs Group Inc. (GS $217). The markets got a late-week boost by comments from U.S. Treasury Secretary Mnuchin that appeared to foster resurfaced tax-reform optimism. Treasury yields and the U.S. dollar remained in focus, with both extending recent slides but showing modest signs of life as the week matured to help financials rebound, along with upbeat earnings from Morgan Stanley (MS $42), while exacerbating the pressure on crude oil prices.

Looking to next week, along with ramped-up earnings season, the economic calendar will deliver reads on new home sales, durable goods orders, Consumer Confidence and the University of Michigan Consumer Sentiment Index. However, the headlining report will likely be the first look (of three) at 1Q GDP, projected to show growth slowed from a quarter-over-quarter annualized rate of 2.1% in 4Q to 1.3%. The docket will deliver a good mix of "soft" data (confidence/survey-based) and "hard" data, which have diverged to cause some concern in the markets. We note in the latest Schwab Market Perspective: Reassessing Risk and Reflation, that some convergence between the two is expected, and this topic is drilled into by Schwab’s Chief Investment Strategist Liz Ann Sonders in her article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data.

Per the Schwab Market Perspective, investors appear to be shying away from risk, resulting in the recent pullback in stocks. We view this as temporary, although patience will be required and sharper downturns could occur within the ongoing bull market as political and geopolitical uncertainty abounds, while the Fed has begun to address the slow draining of its balance sheet. Global earnings have aided stock market gains, but the expectations bar is getting higher to hurdle. The next several weeks should show whether gains will persist or if expectations may have gone too far. Read both these articles on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

International reports due out next week include: Australia—Consumer Price Inflation (CPI). China—industrial profits. Japan—Bank of Japan monetary policy decision, CPI, retail sales and industrial production. Eurozone—European Central Bank monetary policy decision and CPI, along with German retail sales. U.K.—1Q GDP and consumer confidence.

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