Stocks Close Red with Continued Focus on Fed

Charles Schwab: On the Market

Posted: 5/19/2016 4:15 PM ET

Stocks Close Red with Continued Focus on Fed

U.S. equities closed the trading session lower amid heightened expectations of a possible June rate hike, which transpired following yesterday's release of the Central Bank's April monetary policy meeting minutes. The decline for stocks ensued despite some stronger-than-expected earnings releases from Dow members Wal-Mart and Cisco and domestic reports that showed a drop in jobless claims and a nice rise for the Leading Index. Treasuries and the U.S. dollar were higher, while gold and crude oil prices were lower.

The Dow Jones Industrial Average (DJIA) declined 91 points (0.5%) to 17,435, the S&P 500 Index was 8 points (0.4%) lower at 2,040, and the Nasdaq Composite shed 27 points (0.6%) to 4,713. In moderately-heavy volume, 934 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil dipped $0.11 to $48.67 per barrel, wholesale gasoline decreased $0.02 to $1.63 per gallon, and the Bloomberg gold spot price lost $4.03 to $1,254.47 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 95.32.

Dow member Wal-Mart Stores Inc. (WMT $69) reported 1Q earnings-per-share (EPS) of $0.98, above the $0.88 FactSet estimate, as revenues rose 0.9% year-over-year (y/y) to $115.9 billion, topping the expected $113.2 billion. U.S. same-store sales grew 1.0% y/y, compared to the projected 0.5% rise. The world's largest retailer said it is off to a good start to the year, with strong performance outside the U.S. and improved inventory position that contributed to strong cash flow performance. WMT issued mostly stronger-than-projected 2Q EPS and same-store sales guidance, based on its views of the global operating environment. The company said there is momentum in many parts of its business. Shares rallied.

For our latest analysis of the all-important U.S. consumer, see the video by Schwab's Chief Investment Strategist, Liz Ann Sonders and Managing Director of Trading and Derivatives, Randy Frederick, titled Could the Consumer Help Stocks Break Out?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

Dow component Cisco Systems Inc. (CSCO $28) posted fiscal 3Q earnings ex-items of $0.57 per share, north of the projected $0.55, with revenues growing 3.0% y/y to $12.0 billion, roughly in line with forecasts. The internet networking company's gross margin and operating margin figures exceeded forecasts and it noted that it executed well despite the challenging environment, as it transitions to a more software and subscription focus. CSCO issued 4Q EPS guidance that topped expectations, while its revenue outlook had a midpoint that was slightly above estimates. Shares finished nicely higher.

Monsanto Co. (MON $101) confirmed the receipt of an unsolicited takeover offer from Bayer AG (BAYRY $100), and it is reviewing the proposal. MON added that there is no assurance that any transaction will be entered into or consummated, or on what terms. Monsanto gained solid ground, while Bayer closed lower.

Salesforce.com Inc. (CRM $81) reported 1Q profits ex-items of $0.24, one penny above estimates, as revenues rose 26.8% y/y to $1.9 billion, roughly in line with expectations. CRM raised its full-year EPS and revenues outlooks. CRM was noticeably higher. 

Jobless claims pullback, while Leading Index improves

Weekly initial jobless claims (chart) fell by 16,000 to 278,000 last week, versus the Bloomberg estimate calling for claims to decrease to 275,000, as the prior week's jump was unrevised at 294,000. The four-week moving average rose by 7,500 to 275,750, while continuing claims dropped 13,000 to 2,152,000, slightly south of the estimated level of 2,158,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) rose 0.6% month-over-month (m/m) in April, versus the projected 0.4% increase, and compared to March's downwardly revised flat reading. Support was widespread, led by the yield curve, building permits and jobless claims, while consumer expectations was the lone component to weigh on the index.

The Philly Fed Manufacturing Index (chart) in May remained at a level depicting contraction (a reading below zero) dipping to -1.8 from -1.6 in April, and compared to estimates calling for an improvement to 3.0.

Treasuries ticked higher, with the yields on the 2-year and 10-year notes declining 1 basis point (bp) to 0.88% and 1.85%, respectively, while the yield on the 30-year bond dipped 2 bps to 2.64%. Bond yields gave back some of yesterday's jump that followed the release of the Federal Reserve's April meeting minutes, which showed the Central Bank hadn't ruled out the possibility of a June rate hike. For our latest analysis on the bond markets see the video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Managing Director of Trading and Derivatives, Randy Frederick, titled Is the Market Underestimating the Fed?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out Kathy Jones' article, Mixed Signals From the Bond Market: Something's Got to Give, at www.schwab.com/marketinsight.

Tomorrow, the lone report on the U.S. economic calendar will be the key release of existing home sales, projected to rise 1.3% m/m in April to an annualized rate of 5.4 million units. Existing home sales are based on contract closings and make up the largest portion of the domestic housing sales market. The recovery in housing has been a bright spot for the economy and National Association of Realtors' Chief Economist Lawrence Yun noted in last month's existing home sales report that with rents steadily rising and average fixed rates well below 4 percent, qualified first-time buyers should be more active participants than what they are right now. This suggests the housing recovery still has room to grow, but as noted in our article, What Will It Take to Get Stocks to New Highs?, increased capital investments from businesses is what we think is needed to push the S&P 500 past its all-time high, a level that it has failed to breach three times in the last year. Read more at www.schwab.com/insights. Be sure to follow Schwab on Twitter: @schwabresearch.

Europe and Asia mostly lower on Fed rate hike expectations

European equities finished broadly lower, with commodity issues seeing pressure as the U.S. dollar continued its rally in the wake of yesterday's release of the U.S. Fed's April monetary policy meeting minutes. The report bolstered recently heightened expectations that the Central Bank may still raise rates for a second time as early as its June meeting. Travel-related issues saw some pressure amid uncertainty regarding the disappearance of an EgyptAir flight between Paris and Cairo.

In economic news, U.K. retail sales rose more than expected in April. The data comes as the British pound has jumped recently versus the U.S. dollar amid recent polls that have suggested growing support for the U.K. to stay in the European Union (EU). Concerns have grown about the possibility of a U.K. exit from the EU, known as a Brexit, and last week, the Bank of England cut its economic growth forecast and warned that a vote for a Brexit would hamper economic activity. The British pound was little changed versus the U.S. dollar. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses the possible implications in his article, Brexit: 5 Things Investors Need to Know. Also, for our latest analysis on Europe, see Jeff's, article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Also, check out Schwab's Fixed Income Director Collin Martin's, CFA, latest article, The ECB's Latest Plan: What Does It Mean for U.S. Corporate Bonds?. Read all articles at www.schwab.com/marketinsight, and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. The euro dipped versus the U.S. dollar and bond yields in the region finished mixed.

Stocks in Asia finished mostly to the downside, though financials gained ground, as yesterday's April policy meeting minutes out of the U.S. bolstered already resurfacing rate hike concerns. Indian equities were lower, even as election results showed Prime Minister Modi's main national opponents lost control of two states, per Bloomberg. Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global political landscape in her article, Performing Reformers: How Political Change Can Affect Stocks.

Stocks in mainland China finished flat, while those trading in Hong Kong, Australia and South Korea declined. Japanese securities were nearly unchanged, aided by some weakness in the yen as the U.S. dollar rallied in the wake of the increased Fed rate hike expectations, while a report showed the nation's March machine orders—a gauge of capital investment—unexpectedly rose. The data follows yesterday's stronger-than-expected 1Q GDP report and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his latest article, Japan: Another Recession Coming?, Japan’s economy struggled in the first quarter and the second quarter is not shaping up to be much better. Yet economists expect a sharp rebound in economic growth this year. We see hefty headwinds offsetting the potential positives for Japan. Read both articles at www.schwab.com/oninternational.

The international economic docket for tomorrow will be light, offering department store sales from Japan, PPI from German and the current account for the Eurozone.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.