Charles Schwab: On the MarketPosted: 7/5/2017 4:15 PM ET
Stocks Mixed Amid Rise in Tech, Fall in Oil
U.S. equities finished mixed in their return to action from yesterday's Independence Day holiday, as strength in the tech sector was tempered by a decline in energy stocks amid a tumble in crude oil prices on flared-up OPEC production cut uncertainty. Treasuries were modestly higher following a factory orders report and the release of the Fed's June meeting minutes, while appearing to shrug off yesterday's first test of an intercontinental ballistic missile (ICBM) by North Korea. Gold was higher, while the U.S. dollar was nearly unchanged.
The Dow Jones Industrial Average (DJIA) lost 1 point to 21,478, the S&P 500 Index gained 5 points (0.2%) to 2,434, while the Nasdaq Composite increased 41 points (0.7%) to 6,151. In moderate volume, 885 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil dropped by $1.94 to $45.13 per barrel and wholesale gasoline lost $0.03 to $1.50 per gallon. Elsewhere, the Bloomberg gold spot price gained $3.14 to $1,226.56 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 96.24.
Vantiv Inc. (VNTV $60) announced a tentative agreement to acquire U.K.-based Worldpay Group PLC. ((WPYGY $15) for about $10.0 billion in cash and stock. The companies said they are still negotiating the final terms of the deal. VNTV traded lower, while WPYGY rallied in U.S. trading.
O'Reilly Automotive Inc. (ORLY $179) tumbled over 18% after warning that its Q2 same-store sales rose at a pace that was below its previous forecast, noting that after exiting Q1 and entering April on an improved sales trend, it faced a more challenging sales environment than it expected for the remainder of the quarter. The auto parts chain said it saw continued headwinds from a second consecutive mild winter and overall weak consumer demand.
Tesla Inc. (TSLA $327) saw marked pressure after announcing Q2 deliveries that came in below the Street's forecasts, citing a severe production shortfall of battery packs that impacted deliveries, which it said was addressed in early June.
Amid the recent volatility in the tech sector that has led the stock markets to record highs recently, Schwab's Chief Investment Strategist Liz Ann Sonders offers her commentary, The Space Between … Tech Today Doesn't Resemble Tech Circa 2000, as well as her latest article, 2017 Mid-year US Equity Outlook: Rattle and Hum. Liz Ann notes that we think the latest pullback in tech is more likely to represent a pause that refreshes some excess optimistic sentiment than it is the start of something nastier. We are maintaining our outperform rating on the tech sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: From the Top Down for more, but as with any fast-growing segment of a portfolio’s holdings, we also remind investors of the power of diversification and periodic rebalancing.
Also, Liz Ann adds that stocks have had a remarkable—and recently drama-free—run over the past eight-plus years. We are likely in a more mature phase, which could be marked by bouts of volatility and/or pullbacks—possible driven by Fed policy. But liquidity remains ample, financial conditions loose and earnings growth healthy; which have underpinned this bull for much of its history. Those are the key things on which to keep an eye as we head into the year's second half. Read these articles on the Markets & Economy page at www.schwab.com and follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.
Factory orders drop more than expected, Fed offers minutes
Factory orders (chart) fell 0.8% month-over-month (m/m) in May, versus the Bloomberg expectation of a 0.5% decline, while April's figure was negatively revised to a 0.3% decrease. May durable goods orders—preliminarily reported last week—were unadjusted at the preliminarily-reported 1.1% fall.
At 2:00 p.m. ET, the Federal Reserve released the minutes from its June monetary policy decision, in which it raised its target for the fed funds rate by 25 bps and provided some insight into its plans to reduce the size of its balance sheet. The report showed that the Committee was divided on the timing of the balance sheet program, noting, " Several preferred to announce a start to the process within a couple of months,' but others' emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation." At the June meeting the Fed said it would trim holdings on Treasuries initially at $6 billion per month, increasing by $6 billion every three months over 12 months, until it reaches $30 billion. For agency- and mortgage-backed securities, the cap would begin at $4 billion, and rise by $4 billion every three months until it hits $20 billion a month. The Committee also reiterated its stance for continued gradual rate increases. Schwab's Chief Fixed Income Strategist, Kathy Jones provides additional insight in her article Fed Raises Rates, Sticks With Plans for One More Hike This Year.
As noted in the latest Schwab Market Perspective: Shifting Sentiment?, a more hawkish Fed than the market in terms of the expected trajectory of rate hikes, despite the mixed economic picture along with softer inflation readings, has raised concerns over a possible monetary mistake. We believe there is a strong desire among most Fed members to get rates to a more normal level and to start the process of reducing the balance sheet; but they also remain focused on not making decisions that may harm economic activity. Ongoing Fed policy uncertainty is likely to result in increased bouts of volatility. Read more on the Markets & Economy page at www.schwab.com
This sets the stage for tomorrow's robust economic calendar, which will offer reads on the labor market ahead of Friday's key June nonfarm payroll data in the form of weekly initial jobless claims and ADP's Employment Change report. Also, the critical U.S. services sector will be in focus following the releases of the ISM non-Manufacturing Index and Markit's final Services PMI Index, with both expected to show continued expansion. MBA mortgage applications and the trade balance will round out the day.
Treasuries finished higher with the yield on the 2-year note flat at 1.41%, while the yield on the 10-year note declined 2 basis points (bps) to 2.33% and the 30-year bond rate dipped 1 bp to 2.86%.
Bond yields have rebounded from depressed levels and Schwab's Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. We expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read Kathy's articles, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.
Finally, for a look at the political front, which remains a source of market uncertainty, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.
Europe mixed on data and geopolitics, Asia mostly higher
European equities finished mixed, with the euro dipping versus the U.S. dollar, while the global markets digested a rise in geopolitical concerns following actions by North Korea. Economic data in the region likely aided sentiment, with Markit's eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—being revised to a faster pace of growth than preliminarily estimated for June. Eurozone retail sales rose in line with forecasts and Markit's U.K. Composite PMI Index slowed but remained in expansion territory for last month. The British pound was little changed versus the greenback and bond yields in the region were mixed. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com, while Jeff and Vice President of Trading and Derivatives, Randy Frederick offer the video, How Do U.S. Equity Market Valuations Compare to Other Developed Markets?, on the Insights & Ideas page at www.schwab.com. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Technology issues rebounded, while oil & gas stocks saw pressure as crude oil prices fell after a recent string of gains, exacerbated by reports that Russia is opposing any changes to the current OPEC-led production cuts.
Stocks in Asia finished mostly to the upside with the U.S. markets set to return to action following yesterday's Independence Day holiday, while shrugging off flared-up geopolitical concerns as North Korea conducted a test of an intercontinental ballistic missile (ICBM) yesterday. For more, 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. Japanese equities gained ground, with the yen paring gains late in the session, and South Korea's Kospi Index also moved to the upside. Mainland Chinese stocks and those traded in Hong Kong advanced on the heels of a report from Caixin that showed the nation's key services sector output slowed but continued to showed growth. Indian securities ticked higher following data showing growth in the country's business activity accelerated, but markets in Australia declined, with oil & gas and healthcare weakness overshadowing strength in basic materials. The move comes in the wake of this week's decision by the Reserve Bank of Australia to leave its monetary policy unchanged. For a look at the global landscape, see Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.