Stocks Manage Gains Following Jobs Report

Charles Schwab: On the Market

Posted: 2/3/2017 4:15 PM ET

Stocks Manage Gains Following Jobs Report

U.S. stocks staged a solid advance on the heels of a mostly better-than-expected January labor report, though wage growth decelerated more than forecasted. Financials led the ascent as President Trump signed a couple of injunctions aimed at reforming parts of the Dodd-Frank Act and rescinding what's commonly referred to as the fiduciary rule, which deals with the relationship between certain retirement account owners and their advisors. Treasuries were mixed, crude oil prices and gold ticked higher and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) increased 187 points (0.9%) to 20,071, the S&P 500 Index was 17 points (0.7%) higher at 2,297, and the Nasdaq Composite gained 31 points (0.5%) to 5,667. In moderate volume, 851 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.29 higher to $53.83 per barrel and wholesale gasoline lost $0.02 to $1.53 per gallon. Elsewhere, the Bloomberg gold spot price added $3.17 to $1,219.13 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—nearly unchanged at 99.76. Markets were mixed for the week, as the DJIA decreased 0.1%, while the S&P 500 Index and Nasdaq Composite gained 0.1%.

Amazon.com Inc. (AMZN $810) reported 4Q earnings-per-share (EPS) of $1.54, above the $1.37 FactSet estimate, as revenues rose 22.0% year-over-year (y/y) to $43.7 billion, compared to the forecasted $44.7 billion. AMZN issued 1Q revenue guidance that missed expectations. Shares traded solidly lower.

Dow member Visa Inc. (V $86) posted fiscal 1Q EPS of $0.86, above the projected $0.78, with revenues rising 25.0% y/y to $4.5 billion, exceeding the forecasted $4.3 billion. The company reiterated its full-year revenue outlook. Shares rallied.

Amgen Inc. (AMGN $168) announced 4Q profits ex-items of $2.89 per share, above the estimated $2.79, as revenues increased 8.0% y/y to $6.0 billion, topping the projected $5.8 billion. AMGN issued 2017 guidance that came in a bit shy of expectations. Shares were nicely higher despite the guidance as the company also announced positive results from a trial of its cholesterol drug Repatha.

Macy's Inc. (M $33) jumped on a report from Dow Jones that Canada's Hudson's Bay Co. (HBAYF $8) made a takeover approach of the department store, citing people familiar with the matter. The report also noted that talks are in the early stage and may not lead to a deal. The Wall Street Journal added that the two companies are also discussing other ways to cooperate, including the possibility of doing a real estate deal. Both companies declined to comment on the reports.

January labor report tops forecasts but wages slow, services sector growth continues

Nonfarm payrolls (chart) rose by 227,000 jobs month-over-month (m/m) in January, compared to the Bloomberg forecast of a 180,000 increase. December was upwardly revised to a gain of 157,000 jobs though the total revision to the prior two months' growth was to the downside by 39,000. Excluding government hiring and firing, private sector payrolls increased by 237,000, versus the forecasted gain of 175,000, after increasing by 165,000 in December, revised positively from the 144,000 rise that was initially reported. Job gains were led by retail trade, construction and financial activities.

The unemployment rate ticked higher to 4.8% from 4.7%, where it was expected to remain, while average hourly earnings rose 0.1% m/m, versus projections of a 0.3% increase, and December's downwardly revised 0.2% increase. Y/Y, wage growth decelerated to a 2.5% increase, the slowest pace since August, from December's downwardly revised 2.8% gain. Finally, average weekly hours remained at December's upwardly revised 34.4 rate, compared to expectations of a 34.3 hours level.

Despite the strong job growth, the slowdown in wage growth likely fostered concerns about the strength in the consumer, the largest contributor to GDP output, but also appeared to ease concerns about the pace of Fed rate hikes this year. The wage data follow's this week's Fed monetary policy decision, which appeared to foster a dovish takeaway by the markets. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Fed Leaves Rates Unchanged, expectations for future rate hikes eased in the immediate aftermath of the Fed's decision, and our view had been that a March rate hike could be on the table; however if the probability does not rise to at least 50% before the meeting, we would expect the Fed to hold off until May or June. As always, the probabilities remain data-dependent. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The January Institute for Supply Management (ISM) non-Manufacturing Index (chart) dipped to 56.5 from December's downwardly revised 56.6 level, and compared to forecasts of 57.0. However, a reading above 50 denotes expansion. New orders declined but remained comfortably in expansion territory, and prices rose to 59.0, while growth in employment accelerated. The ISM said comments from respondents were mixed, indicating both optimism and a degree of uncertainty in the business outlook as a result of the change in government administration.

The final Markit U.S. Services PMI Index was revised to 55.6 in January from the preliminary 55.1 level, and compared to the 53.9 figure posted in December. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently. A reading above 50 denotes expansion.

Factory orders (chart) rose 1.3% m/m in December, versus expectations of a 0.5% increase, while November's figure was adjusted favorably to a 2.3% decline. December durable goods orders—preliminarily reported a week ago—were adjusted lower to a 0.5% decrease, versus expectations of an unrevised 0.4% decline. Orders of non-defense capital goods excluding aircraft—a proxy for business spending—were revised slightly lower to a 0.7% increase.

Treasuries were mixed, as the yield on the 2-year note declined 1 basis point (bp) to 1.20%, the yield on the 10-year note was nearly unchanged at 2.48%, and the 30-year bond rate increased 1 bp to 3.10%. 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.

Treasury yields, the U.S. dollar and the stock markets have been choppy amid the heightened political uncertainty in the wake of the plethora of moves from President Donald Trump, recent record highs for stocks, and this week's unchanged monetary policy decision from the Fed. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, 5 Themes to Watch as the Trump Era Begins, at www.schwab.com/insights. Also, Schwab’s Liz Ann Sonders points out in Rise Up: Dow 20k Fails to Thrill Individual Investors, that individual sentiment has become less bullish, while other measures show highly elevated optimism. She adds that extremely low volatility isn't likely to persist, but the bull market is. Read more at www.schwab.com/marketinsight.

Europe gains ground, Asia mixed 

European equities moved higher, with the markets digesting a plethora of mixed earnings and economic data, including the January U.S. nonfarm payroll report, and shrugging off lingering U.S. political uneasiness. Markit's final Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised higher to 54.4 for last month, matching December's level, with a reading above 50 denoting expansion. Separately, eurozone retail sales for December unexpectedly declined. Shares of Banco Popular Espanol SA (BPESY $4) fell after the Spanish bank posted a loss, while Skanska AB (SKBSY $26) rallied after the Swedish builder reported growth in quarterly earnings. The euro was higher and the British pound dipped versus the U.S. dollar, while bond yields in the region were mixed.

For more on global market investing, see Schwab's Jeffrey Kleintop's, CFA, latest article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Also, Jeff delivers his articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read all these articles at www.schwab.com/oninternational.

Stocks in Asia finished mixed ahead of today's January employment report in the U.S., while the markets continued to grapple with U.S. political uncertainty. For more on Trump's policies, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? at www.schwab.com/oninternational, where you can also find Schwab's Director of International Research, Michelle Gibley's, CFA, latest article, Currency Hedging: 5 Things You Need to Know. Meanwhile, mainland Chinese markets declined, returning to action follow a week long Lunar New Year holiday, while the People's Bank of China increased its short-term interest rate unexpectedly and a report showed growth in manufacturing activity slowed for January. Stocks trading in Hong Kong were also lower.

Japanese equities finished flat as skepticism of the Bank of Japan's bond yield targeting actions was met with the yen pulling back from a recent jump. Australian securities declined and South Korean stocks ticked higher. Indian listings nudged to the upside, continuing a rally that stemmed from this week's annual budget release. For more on international investing, see Michelle Gibley's, CFA, article, 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.

Stocks end little changed on the week

U.S. stocks finished mixed after oscillating around the unchanged mark, with another flurry of policy actions and comments from President Donald Trump exacerbating concerns regarding, geopolitics, trade relations and immigration. The focus on the political front continued to vector attention away from another string of upbeat economic data, highlighted by accelerated manufacturing output reported by ISM, as well as a mixed earnings front, as Dow member Apple Inc. (AAPL $129) stood out on the upside, while shares of Under Armour Inc. (UA $18) and United Parcel Service Inc. (UPS $106) were hurt by their results. Per data compiled by Bloomberg, of the 274 companies that have reported out of the S&P 500, roughly 50% have topped revenue forecasts, while about 75% have bested earnings estimates. The U.S. dollar continued its recent pullback to a more than two-month low and Treasury yields on the short-to-mid end of the curve retreated. The moves came amid a slightly weaker-than-expected January wage growth component of the labor report and the Fed's unchanged monetary policy decision, which appeared to ease expectations about an acceleration in rate hikes this year. Crude oil prices moved to the upside.

Although next week's domestic economic calendar will be relatively light, headlined by the trade balance, the JOLTS job openings report and the preliminary University of Michigan Consumer Sentiment Index, earnings season will continue to roll on and focus on U.S. politics shows no signs of easing.

As noted in the latest Schwab Market Perspective: A New World, the recent sideways movement of U.S. stocks was a healthy pause in the sharp post-election rally. Continued solid economic data and a decent earnings reporting season bolster our confidence in the continuation of the bull market in stocks. However, rising inflation, possibly forcing the Fed to be more aggressive, could lead to bouts of volatility and more pullbacks. Issuing executive orders to roll back previous executive orders is relatively easy in a lot of cases; but getting tax reform and new health care legislation written and passed will prove to be more difficult for President Trump. Investor and corporate confidence may have gotten a bit ahead of the pace at which many of the administration’s policy priorities can get enacted, and the balance between those which are growth-friendly and those which could retard growth and confidence. Read more at www.schwab.com/marketinsight.

International reports next week that deserve a mention include: Australia—retail sales and the Reserve Bank of Australia's monetary policy decision. China—Caixin China PMI Services Index and trade balance. India—the Reserve Bank of India's monetary policy decision, industrial production and trade balance. Japan—trade balance and machine orders. Eurozone—investor confidence, along with German factory orders, industrial production and trade balance. U.K.—trade balance and industrial production.

FINANCIAL REVIEW

Lather, Rinse, Repeat

Sinclair Noe — November 4, 2014

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Financial Review

DOW + 17 = 17,383
SPX – 5 = 2012
NAS – 15 = 4623
10 YR YLD – .01 = 2.34%
OIL – 1.31 = 77.47
GOLD + 2.90 = 1169.20
SILV – .11 = 16.13

Election Day 2014! We should all be very, very happy. Forget about red and blue, we can all count our blessings because the campaign ads on radio and TV are going away. There is one redeeming thing about this whole election. It will be over in a few hours. Say hallelujah!

Or you could say that it’s amazing that anyone bothers to vote given that our choices are between tweedle dumb and tweedle dumber. Still, I went to the polls today, early, and I cast my ballot. I was the only voter voting. In a few hours we’ll get the results. And the most likely result is that not much will change, despite the drama and despite hundreds of millions to persuade you. It takes a fortune for a politician to get beat these days, but most of the money isn’t real, it’s magic money that doesn’t belong to anybody, or at least nobody is willing to admit they spend money on politics. We’ve got the best politicians money can buy.

The present split Congress is the least-productive in US history. Regardless of the election’s outcome, the 114th Congress is unlikely to be any more productive than the 113th. Maybe that’s good news; when they do something is when they become dangerous. There are plenty of issues worthy of intelligent discussion and debate, however that never seemed important in this midterm election. That we have been burden with such an abundance of bull and still survived just shows we are a super nation.

Lather, rinse, repeat.

Let’s look at the economic news.

Home prices were down slightly in September, according to Corelogic prices were down 0.1% for the month and that resulted in year to year growth of 5.6%, the slowest pace in 2 years. So, the rate of growth in home prices has clearly slowed. For Arizona, home prices are still down 30% from the peak.

New orders for US factory goods fell for the second straight month, down 0.6% in September. August’s orders were slightly revised to show a 10.0 percent fall instead of the previously reported 10.1 percent decline. The decline in orders was led by aircraft, machinery, capital goods and computers and electronic products.

Yesterday we reported that auto sales were up in the third quarter, but the car companies are calling them back faster than they can sell them. Toyota is recalling 5,850 vehicles because of a possible loss of steering control. Ford is looking at 5 recalls totaling 202,000 vehicles for a variety of issues, including an incorrect repair of a steering problem in a previous recall.

Oil futures dipped under $76 a barrel for a while today. If there was any doubt on which country Saudi Arabia was targeting with their price shattering oil production, there is not any doubt now. While Russia, Iran and Venezuela might turn out to be collateral damage in the Saudi oil production surge, the message that Saudi Arabia is trying to send is directed to the US shale producers. The Kingdom made no secret of their displeasure yesterday when they cut oil prices to US buyers while raising them for everyone else in the world. Saudi Aramco next month will sell its Arab Light to clients in Asia for 10 cents less than Middle East benchmarks, the November discount was $1.05 yet it lowered prices for all grades to the US.

The plan is to maintain market share in the US and bury the US energy producers. The Saudis fear predictions that US oil imports could fall to zero by 2037 as a reason they need to nip US oil producers in the bud. They are threatened by US oil production and they are acting to try to break the US producers back. That is one of the reasons todays balance of trade numbers weren’t much higher, even in the face of a strong dollar. The US not only has reduced oil imports but has become a major exporter of oil products.

The nation’s trade deficit increased 7.6% in September to the highest level since the late spring as exports to Europe, China and Japan all fell. In turn, this will likely lead to a lower revision of third quarter GDP; probably a drop from the 3.5% initial estimate, down to about 3%. In September, the trade gap climbed to a seasonally adjusted $43 billion from a slightly revised $40 billion in August. Yet if petroleum is excluded, the nation’s trade gap climbed to $47.2 billion in September to mark the highest level in seven years. Here’s the downside of a strong dollar: US exports of goods fell 3.2% with China, 6.5% with the European Union and 14.7% with Japan.

It’s not just a strong dollar but a combination of weak global economies. Today the European Commission said the Eurozone will need another year to reach even a modest level of economic growth. The new forecast calls for 0.8% growth across the Eurozone economy this year, and just 1.1% growth next year.

The Independent Evaluation Office of the International Monetary Fund issued a report that basically says the IMF did a poor job responding to the financial crisis; the IMF ignored its own research and pushed too early for richer countries to trim budgets. They admit the IMF was overly concerned about high debt levels and large fiscal deficits, and urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis. At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries. In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis.

The European Central Bank meets Thursday to try and figure out their next course of action.

Lather, rinse, repeat.

While every major economy in the world has followed essentially the same monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks.

Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth, as in the case of Britain from 2010 to 2012, Japan this year and the United States after the 2013 “sequester” and fiscal cliff deal. In more extreme cases, such as Italy and Spain, fiscal tightening has plunged them back into deep recession and aggravated financial crises. Meanwhile countries that ignored their deficit problems, as in the United States for most of the post-crisis period, or where governments decided to downplay their fiscal tightening plans, as in Britain this year or Japan in 2013, have generally done better, both in terms of economics and finance.

When faced with private sector deleveraging, there are limits to the persuasive powers of low interest rates to revive private economic activity; low rates may help in an inflationary environment, but in a deflationary environment, spending is needed to stimulate demand. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening. As a result, any reduction in budget deficits becomes more and more deflationary. The flip side is that fiscal expansion could truly provide economic stimulus without the worry of interest rate increases. That doesn’t mean that we will see fiscal expansion to correct the problem, just because there is indisputable mathematics to support it.

Lather, rinse, repeat.

JPMorgan Chase has added $2.4 billion to its estimate of the amount of legal costs it may face. That figure was disclosed yesterday in a securities filing in which the bank also formally acknowledged that it was facing a criminal investigation by the Justice Department into the behavior of traders in the foreign exchange market. In the past few days, Citigroup, Royal Bank of Scotland, HSBC, and Barclays all announced new reserves totaling more than $2.3 billion to deal with investigations into foreign exchange rate manipulation. Deutsche Bank added more than $1 billion to legal reserves for the expected cost of settlements. The cases involve collusion in the $5.3 trillion daily foreign exchange market to affect rates.

If it sounds familiar, well that is because we have seen settlements like this before. In 2012 Barclays and UBS entered deals to pay fines totaling almost $2 billion; a UBS subsidiary pleaded guilty to rigging Libor. The prosecutors and regulators probably thought the agreements would deter further bad behavior. The deals involved non-prosecution or deferred prosecution agreements. The agreements allow the Justice Department to reinstate charges if there is any future violation of the law. Most important, admissions by the bank as part of the settlement can be used against it as evidence later, essentially stripping the bank of any possible defenses if the case were to proceed further. There is little chance, then, that a bank could fight the charges, so it would have to agree to a new settlement with more onerous terms and a new penalty.

But it turns out that simply slapping the banks with more and bigger fines, does not deter future bad behavior. The government is not required to minimize the collateral consequences of a conviction, and individuals are usually required to fend for themselves if they are convicted of a crime. But the foreign exchange inquiry involves a number of leading global banks, each with thousands of employees worldwide. So federal prosecutors go for punishment that does not threaten the continued existence of one of the banks. In other words, punishment that doesn’t actually punish.

The government has imposed billions of dollars in fines over the past few years for corporate violations, part of an effort to show that no company is “too big to jail”, while steadfastly refusing to actually jail a bank or major bank executives for criminal violations.

Lather, rinse, repeat.