Markets Bounce After Two-Day Rout

Charles Schwab: On the Market

Posted: 6/28/2016 4:15 PM ET

Markets Bounce After Two-Day Rout

U.S. equities were able to climb out of their two-day hole to finish with solid gains, as investors snapped up beaten-down issues in the aftermath of Friday's Brexit vote. Equity news was sparse, while on the domestic economic front 1Q GDP mostly matched expectations, consumer confidence jumped and a regional manufacturing report surprised to the downside. Treasuries were modestly lower, gold and the U.S. dollar also lost ground, while crude oil prices finished higher.

The Dow Jones Industrial Average (DJIA) jumped 269 points (1.6%) to 17,409, the S&P 500 Index gained 36 points (1.8%) to 2,036, and the Nasdaq Composite rallied 97 points (2.1%) to 4,692. In heavy volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.52 to $47.85 per barrel and wholesale gasoline was $0.03 higher at $1.52 per gallon, while the Bloomberg gold spot price fell $11.64 to $1,312.96 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 96.10.

Carnival Corp. (CCL $44) announced 2Q earnings per share ex-items of $0.49, topping the $0.39 FactSet estimate, while revenues rose 3.5% year-over-year (y/y) to $3.7 billion, roughly matching expectations. The company issued an improved outlook for its full year 2016 net revenue yields and increased the low and high ends of its full year earnings per share guidance. Shares of CCL gave up early gains and finished lower.

Marriott International Inc. (MAR $63) and Starwood Hotels & Resorts Worldwide Inc. (HOT $71) announced they have received clearance from the European Commission for MAR to acquire HOT in a previously announced merger transaction. The Commission found that the takeover would not adversely affect competition in Europe. Shares of both companies were higher.

Final read on 1Q GDP mostly in line with expectations

The final look (of three) at 1Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.1%, revised upward from the 0.8% and the 0.5% expansion reported in the second and first revisions, respectively. This compared to the Bloomberg forecast of a revised 1.0% pace of growth. 4Q GDP expanded by an unrevised 1.4% rate. Personal consumption came in at a 1.5% gain for 1Q, down from the preliminary estimate of 1.9%, while forecasts called for an upwardly revised 2.0% pace of growth. Personal consumption grew by an unrevised 2.4% in 4Q.

On inflation, the GDP Price Index was revised to a 0.4% gain, versus forecasts of an unrevised 0.6% increase, while the core PCE Index, which excludes food and energy, was adjusted down a tick to a 2.0% rise, versus expectations for it to remain at 2.1%.

The Consumer Confidence Index (chart) jumped to 98.0 in June from the downwardly revised 92.4 level in May and compared to the estimated rise to 93.5. The sentiment towards the present situation rebounded nicely after last month it registered the lowest level since November, while expectations of business conditions also saw solid improvement. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—inched higher to 0.1 from the 0.0 posted in May.

The Richmond Fed Manufacturing Activity Index unexpectedly fell deeper into contraction territory (a reading below zero), dropping to -7 in June from the -1 posted in May, while economists had anticipated the index to move back into an expansionary state to a reading of 3.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.4% y/y in April, roughly matching expectations. Month-over-month (m/m), home prices were up by 0.5% on a seasonally adjusted basis for April, slightly below forecasts of a 0.6% increase.

Treasuries finished slightly lower, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, all rose 1 basis point to 0.61%, 1.46% and 2.27%, respectively. For the latest analysis on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. And follow Kathy on Twitter: @kathyjones.

Tomorrow's economic calendar will begin with a report on personal income and spending, forecasted to show income rose 0.3% m/m during May and that spending increased 0.4%, followed by pending home sales, with economists expecting a 1.1% m/m decline, as well as MBA Mortgage Applications.

Europe bounces after two-day rout, Asia higher too

European equities finished solidly to the upside, snapping their worst two-day losing streak since 2008, following the U.K.'s vote to exit the European Union (EU), known as 'Brexit', with the pound advancing as investors may have regained a bit of their appetite for risk assets. EU leaders met in Brussels for the start of a two-day summit to discuss Britain's decision to leave the group, while the bloc's lawmakers have said the U.K. should trigger the process for seceding from the EU as soon as possible, a process that may be difficult to achieve due to the complexity of the British political system. For deeper analysis of the current global landscape, see the Schwab Center for Financial Research's recent article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and be sure to follow Schwab on Twitter: @schwabresearch. In economic news in the region, import prices for Germany increased more than expected m/m, rising 0.9% versus the forecasted 0.6% gain, while France and Italy reported a m/m decline in consumer confidence as the latter also reported an improvement in manufacturing confidence but a decline in economic sentiment for June.

Stocks in Asia finished mostly to the upside as global investors continued to look for signs that central banks and governments may help to ease the recent market turmoil in the wake of the U.K.'s vote in favor of leaving the European Union. Japanese equities ticked slightly higher, with construction companies, warehouse stocks and food producers leading gains, while exporters mostly fell. Prime Minister Abe noted they would continue to monitor the markets closely and the island nation's Finance Minister said he's watching currency moves with a sense of urgency and will take action as needed. Mainland Chinese stocks advanced amid speculation of whether or not the People's Bank of China (PBoC) may step in to slow the yuan depreciation that has occurred since the Brexit announcement, posing challenges to the PBoC in terms of its policy direction, while listings in Hong Kong pared a sharp morning decline to finish slightly lower, with speculation about a long-awaited Shenzhen-Hong Kong link increasing trading volumes in the region. Indian's markets gained ground, as investors looked to invest in companies that would benefit from Prime Minister Modi's growth-boosting policies and have no business links with Europe. Finally, stocks in South Korea increased, while those traded in Australia declined.

The international economic calendar for tomorrow will hold retail sales and trade data from Japan, consumer confidence from Germany and the Eurozone, and CPI from Spain.

Thursday, June 26, 2014 - Buffers and Filibusters

Financial Review with Sinclair Noe

DOW – 21 = 16,846
SPX – 2 = 1957
NAS – 0.71 = 4379
10 YR YLD - .03 = 2.52%
OIL - .80 = 105.70
GOLD  - .70 = 1317.90
SILV + .10 = 21.22

 

Yesterday, the Commerce Department downgraded the first quarter gross domestic product to a negative 2.9%, meaning the economy shrank by 2.9%. Today, St. Louis Federal Reserve president James Bullard says it’s likely an aberration; the weak report for the first quarter was likely distorted by inventories, weather, and by the challenges of accounting for health-care spending under the new law. Bullard says he isn’t worried, “the market’s right to shake this off. Looking forward over the next four quarter, most forecasters have 3% growth.”

Well, that’s good. No worries. Nothing to see hear, move along, move along.

It’s just that the fall was so nasty, it’s hard not to look and linger over the carnage. It really was ugly. And while we can blame it on the weather, that doesn’t seem right. We always have weather. Minneapolis is underwater today. Bad weather is a fairly constant aberration. We should be past the point of excuses; we are 5 years into a recovery; granted it has been a stealth recovery.

I wonder if Mr. Bullard is confusing the stock market with the economy. A down day in the bull market would just be a blip on the tape, but the stock market is not the economy. And the economy is not bouncing back, which would be the expected move after a seasonal aberration. Most importantly, we haven’t seen a surge in hiring. It looks more like we’ve gone through a very long period where everybody who was going to be fired was fired, and companies are running as lean as they can. So, the jobless claims have leveled off, but there’s a big difference between no more fat to cut and an economy that produces lots of well-paying jobs.

If you want new jobs, and the consumer spending that flows from new jobs, you look for new businesses, and you can just keep looking. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 (the most recent year of data) compared with the annual average rate for the 1980s. The decline affected nearly all business sectors. The fact that the economy has been weak since 2007 suggests that new business activity has also declined in existing companies.

New businesses are critical for economic growth because a small fraction of today's startups will become tomorrow's economic heavyweights. Most of today's workers are employed at older, established businesses, but the country cannot rely on existing companies to boost the economy.

Businesses have a life cycle, in which even the largest and most successful reach a stage at which they stop expanding. Also, most of today’s workers are working at smaller businesses, companies with less than 100 employees, and we just aren’t making enough of these smaller businesses.

The Federal Reserve’s monetary policy has been a boon for Wall Street, so we’ve seen record highs even as the economy contracts. The Fed policy was to elevate asset prices in the hope it would trickle down to the rest of the economy; the trickle down part has been a terrible failure but the higher prices have been nifty for a small group of financial companies and some of the largest corporations. The problem is that it is hard to maintain corporate profits in a recession. Also, it’s hard to have sustainable growth from big corporations; they’re like trees; once they reach a certain height, they stop growing. Look back to the Fortune 500 list from 1995; less than half the firms on that list are still on the list today.

And businesses aren’t investing for the future. A major factor in the first quarter contraction was lower gross private domestic investment; a smaller increase in inventories accounted for most of that, but we also saw a drop in investment in non-residential structures, investment in equipment, investment in information processing equipment; countered by a slight increase in investment in intellectual property; that’s tricky to measure because it could be money spent on research and development or it might be money spent on movies. Lower investment accounted for about 2% of the 2.9% drop.

For the last few decades, every boom has depended on housing; same strategy today. The problem is that boomers will not start upgrading now in their 60s. And the young ones expected to pick up the baton are full of debt. And the housing numbers seem to back it up. We did see a big jump in new home sales for May, but that was mainly confined to the South, meanwhile existing home sales barely inched forward, and it appears the big run in home sales has happened and now we’re leveling out. Any boost from housing has already hit.

And this is the recurring theme of the recovery, it’s just around the corner.

No, not that corner, the next corner.

The Supreme Court is still dishing out decisions; two more today, but not the big one on Hobby Lobby; that will probably come on Monday. Today we heard about buffer zones and recess appointments.

The Supreme Court ruled on McCullen v. Coakley, striking down a Massachusetts law requiring protesters to stay at least 35 feet from an abortion clinic's entrance and walkways. In a unanimous opinion, the court held that such buffer zones violate First Amendment free speech rights.

Only three other states, Colorado, Montana and New Hampshire, have buffer zone laws on the books, but the Massachusetts zone was the largest. The Massachusetts law was passed after 2 clinic workers were shot and killed by a gunman outside a clinic in 1994. In 2000, the Supreme Court upheld Colorado's 8-foot "floating" buffer zones around individuals as they walk into and exit an abortion clinic.

Chief Justice Roberts delivered the opinion of the court. "It is no accident that public streets and sidewalks have developed as venues for the exchange of ideas." Roberts said: “Even today, they remain one of the few places where a speaker can be confident that he is not simply preaching to the choir. With respect to other means of communication, an individual confronted with an uncomfortable message can always turn the page, change the channel, or leave the Web site."

The court was silent on the free speech rights of protesters confined to “free speech pens” around political conventions, and buffer zones around churches, and funeral services, and for that matter, the buffer around the Supreme Court building in Washington DC.

Also today, the Supremes ruled unanimously in NLRB v Noel Canning that President Obama had violated the Constitution in 2012 by appointing officials to the National Labor Relations Board during a short break in the Senate’s work when the chamber was convening every three days in short pro forma sessions when no business was conducted. Those breaks were too short, Justice Stephen G. Breyer wrote in a majority opinion joined by the court’s four more liberal members.

A ruling could cast a cloud over the appointment of Richard Cordray as director of the Consumer Financial Protection Bureau. Justice Breyer added that recess appointments remain permissible so long as they are made during a break of 10 or more days. But many experts say that if either house of Congress is controlled by the party opposed to the president, lawmakers can effectively block such appointments by requiring pro forma sessions every three days. Each house must get the approval of the other chamber for recesses of more than three days. Somebody shows up, claims the Senate is in session, and they hold a fake session and that’s that.

The decision affirmed a broad ruling last year from a federal appeals court in Washington that had called into question the constitutionality of many recess appointments by presidents of both parties. The appeals court last year said that presidents may bypass the Senate only during the recesses between formal sessions of Congress. Two of the three appellate judges went further, saying that presidents may fill only vacancies that arose during that same recess. The Constitution’s recess-appointments clause says, “The president shall have power to fill up all vacancies that may happen during the recess of the Senate.”

And while today’s ruling is being hailed as a major blow to executive power, in practical terms, today’s ruling no longer really matters. That’s because the Senate majority has since eliminated the filibuster on executive and judicial appointments that was the cause of this whole mess to begin with.

After the DC Circuit Court of Appeals ruled last year that the NLRB appointments were illegal, President Obama renominated appointees to fill those slots and submitted them to the Senate. What happened? Senate Republicans filibustered them forever, of course. Eventually, Senate majority leader Harry Reid got fed up and triggered the “nuclear option”: a Senate rules change that would require only 50 votes, instead of 60, to invoke cloture on executive and judicial nominations. The NLRB nominees, and several others that had been held up, made their way through.

Yesterday, the Supremes ruled that law enforcement can’t search your smartphone without a warrant or a really, really good reason why they don’t need a warrant.  Of course, police can search all sorts of things without a warrant, and the solicitor general had argued that cell phones were not that different than briefcases or purses that are regularly searched when you enter a federal building or an airport.

Chief Justice Roberts said: “Cellphones differ in both a quantitative and a qualitative sense from other objects that might be kept on an arrestee’s person.” He went on at length to describe the differences, noting that a cellphone can reveal more private information than the search of an entire house. The phone contains “the sum of an individual’s private life” he said; searching it without a warrant is constitutionally unreasonable. The chief justice’s response to the government’s warning that a warrant requirement would impede law enforcement was basically a shrug: “Privacy comes at a cost.”

What we learned is that Supreme Court justices now have and use smart phones.

The best line yesterday came on the NBC Nightly News when Brian Williams, followed the report by asking the reporter if this will have any effect on the NSA’s ability to electronically dig into our cell phone records without warrants.

That Brian Williams is a real comedian.