Stocks Mixed, but Mostly Lower

Charles Schwab: On the Market

Posted: 5/12/2017 4:15 PM ET

Stocks Mixed, but Mostly Lower

U.S. stocks closed the regular trading session mixed as more disappointing retail earnings reports coupled with a lower-than-expected advance read for April retail sales to hamper the consumer discretionary sector. Financials led the laggards as Treasury yields dropped on the heels of a cooler-than-expected inflation report; however, tech issues outperformed their peers to deliver a positive finish to the Nasdaq. The U.S. dollar was lower and crude oil prices were mostly unchanged, while gold managed minor gains.

The Dow Jones Industrial Average (DJIA) declined 23 points (0.1%) to 20,897, the S&P 500 Index ticked 4 points (0.1%) lower to 2,391, and the Nasdaq Composite increased 5 points (0.1%) to 6,121. In moderate volume, 776 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.01 to $47.84 per barrel and wholesale gasoline added $0.02 to $1.58 per gallon. Elsewhere, the Bloomberg gold spot price moved $2.79 higher to $1,227.84 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 99.22. Markets were mixed for the week, as the DJIA declined 0.5%, the S&P 500 Index lost 0.4%, and the Nasdaq Composite increased 0.3%.

J.C. Penney Co. Inc. (JCP $5) reported a Q1 loss of $0.58 per share, or a profit of $0.06 per share ex-items, compared to FactSet's estimate of a $0.21 per share shortfall, as revenues declined 3.6% year-over-year (y/y) to $2.7 billion, below the projected $2.8 billion. Q1 same-store sales declined 3.5% y/y, versus the expected 0.7% decrease. The company noted that February was "very challenging," but it was pleased with its same-store sales for the combined March and April period, which improved significantly versus February. JCP reaffirmed its full-year guidance. Shares traded solidly lower.

Nordstrom Inc. (JWN $41) posted Q1 earnings of $0.37 per share, including several items that may be impacting comparability to the estimated profit of $0.28 per share, with revenues increasing 2.7% y/y to $3.3 billion, roughly in line with forecasts. Q1 same-store sales decreased 0.8% y/y, compared to the expected 0.6% decline. JWN reaffirmed its full-year guidance. Shares were under heavy pressure.

Retail sales and consumer price inflation slightly miss forecasts

Advance retail sales (chart) for April rose 0.4% month-over-month (m/m), below the Bloomberg forecast of a 0.6% gain, and compared to March's upwardly revised 0.1% gain. Also, last month's sales ex-autos were up by 0.3% m/m, south of expectations of a 0.5% gain, and following the positive revision to a 0.3% rise from the flat reading seen in the previous month. Sales ex-autos and gas were higher by 0.3% m/m, missing estimates of a 0.4% rise, and versus March's favorably revised 0.4% gain. The retail sales control group, a figure used to help calculate GDP, rose 0.2%, compared to the projected 0.4% rise, and the prior month's figure was revised higher to a 0.7% increase from the previously reported 0.5% increase.

Sales of building materials, electronics & appliances, and autos were higher for the month, while furniture, food & beverage, clothing and general merchandise sales declined. The bright spot was nonstore retail sales—which include online activity—as they rose 1.4% m/m and jumped 11.9% y/y. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses in his article, Consumer Discretionary Sector Rating: Marketperform, that the status of the U.S. consumer looks to us to be quite solid and is showing signs of improving, but the performance of the discretionary sector doesn't always mirror the health of the consumer environment. Brad cites a shift in the spending mix, with online sales rising while traditional department store sales have been relatively tepid. Also, consumers seem to be somewhat reticent to spend on traditional retail items and underemployment is still a concern. Read more on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

The Consumer Price Index (CPI) (chart) was up 0.2% m/m in April, in line with estimates, while March's 0.3% decrease was unrevised. The core rate, which strips out food and energy, rose 0.1% m/m, below expectations of a 0.2% increase and compared to March's unrevised 0.1% dip. Y/Y, prices were 2.2% higher for the headline rate, south of forecasts of a 2.3% rise, while the core rate was up 1.9%, below projections of a 2.0% gain. March y/y figures showed an unrevised 2.4% rise and an unadjusted 2.0% increase for the headline and core rates respectively.

The preliminary University of Michigan Consumer Sentiment Index (chart) surprisingly improved this month to 97.7, from the prior month's 97.0 level, where it was expected to remain. The current economic conditions component was unchanged m/m, while the outlook portion improved. The 1-year inflation forecast ticked higher to 2.6% from 2.5%, while the 5-10 year inflation outlook dipped to 2.3% from 2.4%.

Business inventories (chart) rose 0.2% m/m in March, matching forecasts, and versus February's downwardly revised 0.2% increase.

Treasuries traded nicely higher following the data, with the yield on the 2-year note declining 5 basis points (bps) to 1.29%, the yield on the 10-year note falling 6 bps to 2.33%, and the 30-year bond rate decreasing 3 bps 2.99%.

For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch. Also, Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Fixed Income Strategist, Kathy Jones offer the video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at www.schwab.com. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Schwab's Chief Investment Strategist Liz Ann Sonders offers a look at the low volatility market action as of late in her article, Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com. Liz Ann notes that volatility has been plumbing historical depths, but it may not be reflecting investor complacency, while the Fed's plans for its balance sheet, more than rate hikes, could bring on spikes in volatility. Follow Liz Ann on Twitter: @lizannsonders.

Finally, with political uncertainty festering, exacerbated by this week's ousting of FBI Director James Comey, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, see the video from Schwab's Randy Frederick and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend titled, Washington Overview: Budget Deals, Tax Reform, and Trump's 100-Day Mark, on the Insights & Ideas page at www.schwab.com.

Europe higher following earnings and economic data, Asia mixed to close out the week

European equities mostly nudged to the upside, with the markets digesting some mixed earnings reports on both sides of the pond, along with a plethora of economic data. Germany reported Q1 GDP growth of 0.6% quarter-over-quarter, matching forecasts and a slight acceleration from the 0.4% expansion posted in Q4. France reported stronger-than-expected Q1 wages and nonfarm payroll growth, while eurozone industrial production unexpectedly dipped in March. The euro gained ground on the U.S. dollar, while the British pound modestly extended yesterday's decline that came in the wake of the Bank of England's expected unchanged monetary policy decision. Bond yields in the region were mostly lower. Political uncertainties remained in focus, amid Brexit negotiations, and ahead of elections in the U.K., Germany and Italy later this year. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick offer analysis in the video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?.

Stocks in Asia finished mixed on the heels of the lackluster session in the U.S. yesterday as retail sector earnings reports disappointed, while the yen rebounded somewhat to weigh on Japanese markets, with some mixed earnings reports stymieing sentiment. Australian securities traded lower, South Korean shares decreased and Indian listings moved to the downside. However, Chinese stocks recovered from recent selling pressure that has come courtesy of softer-than-expected economic data and festering concerns about regulatory crackdowns. After the closing bell, China reported stronger-than-expected new yuan loans and aggregate financing—a gauge of total credit issued—for April, while Hong Kong's Q1 GDP growth topped forecasts with a 4.3% rate of expansion. For our latest analysis of the global markets, see Schwab's Director of International Research, Michelle Gibley's CFA, article, Different Drivers: Why Emerging Market Stocks Aren't All the Same on the Insights & Ideas page at www.schwab.com, as well as 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.

Stocks mixed as retail data and politics hamper conviction

Stocks followed up a three-week winning streak with divergent performance as a waning earnings season provided a downside catalyst, while global conviction remained constrained by festering political uncertainty. Q1 earnings season is wrapping up with the retail sector putting on the final stamp, though disappointing sales results from Macy's Inc. (M $24) and Kohl's Corp. (KSS $36) fostered concerns, while Dow member Walt Disney Co's (DIS $110) results showed continued struggles at ESPN to exacerbate uneasiness toward the traditional media industry. However, of the 452 companies that have reported Q1 results, about 64% have exceeded sales forecasts and 78% have topped earnings estimates, per data compiled by Bloomberg. Global political uncertainty remained as elections loom in Europe and as U.S. President Trump's abrupt firing of FBI Director Comey appeared to cause concerns to flare up about the timing and possibility of promised business-friendly policy implementation.

Chinese economic data continued to pare global economic optimism and facilitate continued volatility in the commodity sector. However, technology issues continued to rally and crude oil prices rebounded to help lift the energy sector. For analysis of the tech and energy sectors, see Schwab's Brad Sorensen's, CFA, latest Schwab Sector Views: Is Energy an Opportunity or a Trap? on the Markets & Economy page at www.schwab.com. Treasury yields reversed to the downside late in the week on Friday's softer-than-expected inflation and retail sales reports, causing financials to extend weekly losses. The U.S. dollar ticked higher as June Fed rate hike expectations remained elevated.

Next week's economic calendar will bring a plethora of data giving us a look at activity after the soft patch in Q1, with a focus on the housing sector in the form of the May NAHB Housing Market Index and April housing starts and building permits. Also, the week will end with April Leading Indicators, which will be preceded by last month's industrial production and capacity utilization report.

As noted in the latest Schwab Market Perspective: Sell in May…or Settle In?, U.S. stocks are again trading near record highs and despite entering a traditionally soft seasonal time of the year, the investing landscape remains healthy. Economic data has improved since the seasonally-weak first quarter; on track for a June rate hike by the Fed (and at least one more after that this year). Meanwhile, earnings season has bested even elevated expectations and the fiscal stimulus remains on the horizon to the cheers of business leaders. Chinese economic indicators are showing signs of slowing, which could lead to a near-term retrenchment in emerging market equities. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next week include: Australia—employment change. China—retail sales, fixed asset investment, industrial production and property prices. India—trade balance. Japan—machine orders and Q1 GDP. Eurozone—new car registrations, trade balance, Q1 GDP and consumer price inflation, along with German investor confidence. U.K.—inflation statistics, employment change and retail sales.