Charles Schwab: On the MarketPosted: 5/24/2016 4:15 PM ET
Jump in Housing Supports Market Rally
U.S. stocks rallied, with technology issues leading the way, amid a rise in crude oil prices and the highest level in new home sales in more than eight years. News on the equity front was a mixed bag, headlined by Best Buy's disappointing guidance that overshadowed its upbeat 1Q results. Treasuries and gold were lower, while the U.S. dollar rose.
The Dow Jones Industrial Average (DJIA) jumped 213 points (1.2%) to 17,706, the S&P 500 Index rallied 28 points (1.4%) to 2,076, and the Nasdaq Composite surged 95 points (2.0%) to 4,861. In moderately-heavy volume, 874 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.54 to $48.62 per barrel, wholesale gasoline gained $0.01 to $1.66 per gallon, while the Bloomberg gold spot price tumbled $21.05 to $1,228.08 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 95.61.
Best Buy Co. Inc. (BBY $31) reported 1Q earnings-per-share (EPS) of $0.44, above the $0.35 FactSet estimate, as revenues declined 1.3% year-over-year (y/y) to $8.4 billion, above the projected $8.3 billion. 1Q same-store sales dipped 0.1% y/y, versus the expected 1.4% drop. BBY issued much softer-than-expected 2Q profit guidance, with the company noting a negative impact on inventory availability due to the April earthquake in Japan. BBY added that it is not raising its full-year outlook as 1Q represents less than 15.0% of full-year earnings and at this stage it has no new material information as it relates to product launches throughout the year. Shares were solidly lower.
Toll Brothers Inc. (TOL $29) posted fiscal 2Q earnings of $0.51 per share, north of the projected $0.46, with revenues rising 31.0% y/y to $1.1 billion, compared to the estimated $1.0 billion. The luxury home builder issued full-year revenue guidance with a midpoint slightly above expectations. Shares were nicely higher.
AutoZone Inc. (AZO $760) announced fiscal 3Q EPS of $10.77, below the forecasted $10.92, as revenues grew 4.0% y/y to $2.6 billion, south of the projected $2.7 billion. Same-store sales rose 2.0% y/y, compared to the expected 3.7% gain, though its gross margin improved y/y. AZO finished higher.
Monsanto Co. (MON $109) rejected Bayer AG's (BAYRY $98) near $62 billion takeover offer for the agriculture company. MON said it views the proposal as incomplete and financially inadequate, but is open to continued and constructive conversations to assess whether a transaction in the best interest of shareowners can be achieved. MON was higher after being halted briefly on the news.
New home sales jump to highest level in over eight years
New home sales (chart) jumped 16.6% month-over-month (m/m) in April to an annual rate of 619,000—the highest level since January 2008—from March's upwardly revised 531,000 pace, and compared to the Bloomberg forecast of 523,000. The median home price rose 9.7% y/y to $321,100. The supply of new home inventory fell 14.5% m/m to 4.7 months at the current sales pace as sales surged 52.8% m/m in the Northeast and rose solidly in South and West, while the Midwest fell. New home sales are based on contract signings instead of closings.
The Richmond Fed Manufacturing Activity Index fell back into contraction territory (a reading below zero), dropping to -1 in May from the 14 posted in April, while economists had expected a drop to 8.
Treasuries finished lower, as the yield on the 2-year note rose 2 basis points (bps) to 0.91%, while the yields on the 10-year note and the 30-year bond advanced 3 bps to 1.86% and 2.65%, respectively. Bond yields have jumped as of late amid resurfaced Fed rate hike expectations in the wake of stronger-than-expected data, some hawkish commentary from Central Bank officials and the April monetary policy meeting minutes which showed the possibility of a June rate hike has not been ruled out.
For our latest analysis on a potential rate hike, see our article, What If the Fed Raises Interest Rates?, at www.schwab.com/insights. Be sure to follow Schwab on Twitter: @schwabresearch. Also, Schwab's Chief Investment Strategist, Liz Ann Sonders discusses why the Fed appears itchier than ever to raise rates again in her article, Sympathy for the Devil in the Details of Wage Growth, at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.
Reports of note on tomorrow's domesticeconomic calendar include Markit's preliminary Services PMI Index for May, forecasted to tick higher to a level of 53.0 from the prior month's 52.8, as well as MBA Mortgage Applications.
Europe moves higher amid data and eased Brexit concerns, Asia lower
European equities traded higher, following upbeat reads on German 1Q GDP and French business sentiment, with oil & gas and basic materials issues rebounding. Also, the euro traded lower versus the U.S. dollar to help the mood in the region and the financial sector rallied as a jump in new home sales bolstered already heightened Fed rate hike expectations. Also, concerns continued to ease about the possibility of a U.K. exit from the EU, known as a Brexit, and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses the possible implications in his article, Brexit: 5 Things Investors Need to Know. The British pound jumped versus the U.S. dollar. Germany's 1Q GDP was unrevised at a 0.7% quarter-over-quarter rate of growth, matching expectations, but accelerating from the 0.3% pace of expansion posted in 4Q. Moreover, French business confidence unexpectedly improved for May. The reports may have helped overshadow a separate read on German investor confidence, which unexpectedly declined in May. Jeffrey Kleintop discusses Europe in his article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Read both articles at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop. Bond yields in the region were mostly lower, though U.K. rates moved higher.
Asian stocks finished mostly lower as the global markets remain skittish amid rising U.S. rate hike expectations, while the yen held onto Monday's rally to weigh on the Japanese markets, which was exacerbated by the lack of any agreements from the weekend's G-7 meeting of finance chiefs that centered on the action in the foreign exchange markets. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his latest article, Japan: Another Recession Coming?, although Japanese stocks may see some relief if the yen stabilizes or reverses recent strength, we see the hefty headwinds offsetting the potential positives. Disappointment may be in store for those hoping for a sharp rebound in Japan’s economic growth this year. Read more at www.schwab.com/oninternational. Mainland Chinese stocks declined amid soured sentiment toward commodity issues in the wake of the recent declines in raw materials prices that has come courtesy of dampened global growth expectations. However, those traded in Hong Kong ticked higher, aided by consumer services stocks. Australian securities traded lower on weakness in oil & gas stocks, and listings in South Korea also fell, while India's markets moved higher, snapping a four-session losing streak that had stemmed from the recent rise in U.S. Fed rate hike expectations.
Tomorrow, the international economic calendar will provide investors a look at consumer and business sentiment, as well as construction output from Germany, PPI from Spain, and industrial orders from Italy.
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