Stocks Move Up, Down and Around the Flatline

Charles Schwab; On the Market

Posted: 7/15/2016 4:15 PM ET

Stocks Move Up, Down and Around the Flatline

U.S. stocks oscillated near the unchanged mark for most of Friday's session, before ultimately finishing mixed. The pause from the recent equity run developed despite a plethora of upbeat domestic economic data, which was highlighted by an upbeat June retail sales report. Treasuries and gold were lower, while the U.S. dollar and crude oil prices were higher. In earnings news, results from Citigroup and Wells Fargo fostered some mixed reactions and the FTC settled its multi-year investigation into Herbalife.

The Dow Jones Industrial Average (DJIA) rose 10 points (0.1%) to 18,516, the S&P 500 Index decreased 2 points (0.1%) to 2,162, and the Nasdaq Composite shed 4 points (0.1%) to 5,030. In moderate volume, 843 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.27 higher at $45.95 per barrel, wholesale gasoline gained $0.01 to $1.42 per gallon and the Bloomberg gold spot price decreased $6.27 to $1,328.96 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 96.50. Markets were higher for the week, as the DJIA gained 2.0%, while the S&P 500 Index and the Nasdaq Composite gained 1.5%.

Citigroup Inc. (C $44) reported 2Q earnings-per-share (EPS) of $1.24, above the $1.10 FactSet estimate, with revenues declining 10.0% year-over-year (y/y) to $17.6 billion, just above the forecasted $17.5 billion. Fixed income trading rebounded and the amount of money set aside for loan loss provisions was favorable. Shares gave up early gains and finished slightly lower.

Wells Fargo & Co. (WFC $48) posted 2Q profits of $1.01 per share, roughly in line with expectations, as revenues rose 4.0% y/y to $22.2 billion, mostly matching projections. Shares closed lower as analysts expressed concerns about its revenue growth and its smaller-than-expected net interest margin.

Herbalife Ltd. (HLF $65) rallied after the company and the Federal Trade Commission (FTC) reached a $200 million settlement, resolving the FTC's multi-year investigation of the company. HLF will have to prove its retail sales, but the company said the settlement does not change its business model as a direct selling company.

Retail sales top forecasts to headline heavy docket of data

Advance retail sales (chart) for June rose 0.6% month-over-month (m/m), versus the Bloomberg forecast of a 0.1% gain, and May's downwardly revised 0.2% rise. Also, last month's sales ex-autos were higher by 0.7% m/m, above expectations of a 0.4% increase, and compared to the unrevised 0.4% rise in the previous month. Sales ex-autos and gas grew 0.7% m/m, topping estimates of a 0.3% rise, while May's 0.3% increase was unadjusted. Finally, the retail sales control group, a figure used to help calculate GDP, increased 0.5%, compared to the projected 0.3% rise, and the prior month's upwardly revised 0.5% increase.

The Consumer Price Index (CPI) (chart) was up 0.2% m/m in June, below forecasts of a 0.3% increase, while May's 0.2% rise was unrevised. The core rate, which strips out food and energy, gained 0.2% m/m, in line with expectations and May's unrevised increase. Y/Y, prices were 1.0% higher for the headline rate, below forecasts of a 1.1% rise, while the core rate was up 2.3%, exceeding projections of a 2.2% increase. May y/y figures showed an unrevised 1.0% rise and an unadjusted 2.2% increase for the headline and core rates respectively.

The preliminary University of Michigan Consumer Sentiment Index (chart) dropped to 89.5 this month from June's 93.5 level, where economists had expected it to remain. Both the economic conditions and outlook portions components of the survey deteriorated. The 1-year inflation outlook rose to 2.8% from 2.6%, while the 5-10 year inflation estimate remained at 2.6%. The survey's Director Richard Curtin noted that the Brexit vote's outcome was cited by a number of consumers, especially high-income consumers.

Industrial production (chart) rose 0.6% m/m in June versus estimates of a 0.3% increase, and following May's upwardly revised 0.3% decrease. Manufacturing and mining production rose, while utilities output jumped. Capacity utilization rose to 75.4% from May's unrevised 74.9%, and compared to projections for a 75.1% rate. Capacity utilization is 4.6 percentage points below its long-run average.

The Empire Manufacturing Index showed output from the New York region fell but slightly held onto expansion territory (a reading above zero) for July. The index dropped to 0.6 from June's unrevised 6.0 level, with forecasts calling for a dip to 5.0.

Business inventories (chart) increased 0.2% m/m in May, above forecasts of a 0.1% rise, and versus April's unrevised 0.1% gain. Sales rose 0.2% m/m, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—remained at 1.40 months pace.

Today's plethora of stronger-than-expected economic data adds credence to our view in the recent Schwab Market Perspective: Looking Beyond Britain, that volatility will continue to elevated but at this point we believe the U.S. economy should continue to show modest growth, helping to support similarly modest gains for equities. Read the whole article at www.schwab.com/marketinsight.

Treasuries were lower, with the yield on the 2-year note rising 2 basis points (bps) to 0.70%, the yield on the 10-year note gaining 5 bps to 1.58%, and the 30-year bond rate advancing 4 bps to 2.29%. Bond yields have shown some volatility recently rebounding from record lows in the wake of last week's stronger-than-expected U.S. labor report, as well as quicker-than-forecasted political clarity and eased Brexit concerns in the U.K. Against this backdrop, read our article, Uncharted Waters: What Record-Low Yields Mean for Investors, at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Europe mostly lower but sees solid weekly gains, Asia widely higher

European equities traded mostly lower amid a somber mood in the aftermath of the deadly attack in France, which the nation said was undeniably of a terrorist nature. Travel and leisure issues saw some pressure to weigh on the markets, though the Stoxx Europe 600 Index held onto a solid weekly gain as U.K. Brexit concerns subsided and political uncertainty was cleared up by the appointment of the nation's new prime minister. The upbeat U.S. and Chinese economic data today may have helped limit losses, while the euro and British pound fell versus the U.S. dollar and bond yields traded mostly higher. With volatility remaining elevated, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides Three Reasons Why Now is Not the Time to Retreat from Global Diversificationat www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly to the upside, with the U.S. markets posting all-time highs yesterday, capping off a weekly jump in the region, while the markets digested a plethora of Chinese economic data. An advance for Japanese equities was aided by the continued drop in the yen. Stocks trading on the island nation surged over 9.0% this week, with the weakness in the yen and increased conviction being fostered by expectations that the nation could be close to announcing coordinated fiscal and monetary stimulus measures. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money. China reported stronger-than-expected June retail sales, industrial production, new yuan loans and aggregate financing---a measure of total credit issued. However, the highlight was China's 2Q GDP report, which showed y/y growth remained at 1Q's 6.7% pace, compared to forecasts calling for a dip to a 6.6% rate. For more on China, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016. Read both articles at www.schwab.com/oninternational. Meanwhile, stocks in Australia and South Korea moved higher, while securities trading in India declined.

Stocks ride late last week's momentum

The Dow and S&P 500 rallied back to all-time highs this week as the momentum from last Friday's stronger-than-expected labor report carried over courtesy of a plethora of upbeat U.S. economic reports that suggested the economy may be picking up steam. The global markets also rallied on the week, led by a surge in Japan on hopes the nation's government will deploy more aggressive stimulus measures, while eased Brexit concerns and a sooner-than-expected new prime minster in the U.K. aided conviction. Earnings season kicked off, with some key results from the financial sector mostly topping forecasts, highlighted by Dow member JPMorgan Chase & Co's(JPM $64) much better-than-expected report. The global markets shrugged off the surprising decision to not cut rates from the Bank of England, though the central bank signaled it may make a move in August. The markets have showed some heightened volatility as of late and Schwab's Director of Income Planning, Rob Williams, provides investment analysis in his latest article, Market Stress: How Emotions Can Hurt and Help Your Portfolio at www.schwab.com/marketinsight.

Earnings and housing data set to come into focus

The ramp-up of 2Q earnings season is likely to garner attention next week, particularly guidance and commentary surrounding the impact of the Brexit vote in the U.K., while the U.S. economic calendar will be tilted toward the housing sector. The NAHB Housing Market Index will get the ball rolling and will be followed by housing starts and building permits and existing home sales. Other reports worth noting on next week's economic docket include: the Leading Index and Markit's preliminary Manufacturing PMI Index.

For some timely insight into the stock market as earnings season is set to heat up, see the latest Schwab Sector Views: Sector Impact of Brexit from Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA. Brad adds that healthy mortgage demand could be bolstered by the continued low interest rate environment and high rental rates in some areas that provide incentive for home buying. These are some of the factors that lead us to our outperform rating for the financial sector. Read more at www.schwab.com/marktetinsight.

International reports due out next week include: Australia—Reserve Bank of Australia July meeting minutes. China—property prices. Eurozone—European Central Bank monetary policy decision, trade balance, CPI, Markit's business activity reports, and German investor confidence. U.K.—inflation figures, employment change, retail sales, and Markit's business activity reports.

Tuesday, May 27, 2014 - Currently Trending Here

Financial Review with Sinclair Noe

DOW + 69 = 16,675
SPX + 11 = 1911
NAS + 51 = 4237
10 YR YLD - .02 = 2.52%
OIL - .24 – 104.11
GOLD – 29.20 = 1264.30
SILV - .40 = 19.14

The S&P 500 Index closed at another record high. The Dow Industrial Average is just a little below the May 13 record of 16,715. The Russell 2000 index of small and mid-caps confirmed the uptrend. The Russell had been lagging and there was a concern that small caps might drag the blue chips lower. While the Russell is still down about 2% year to date, on Friday it moved above its 200 day moving average.

Any time the market is trending, it makes sense to look for divergences, or any indicator that might signal a change in trend, but the most important thing to watch is still the trend itself; in other words the market scorecard is measured in price. And right now the trend is up.

Let’s start with some economic news. The S&P/Case-Shiller Home Price Indices continued to show gains in prices for existing home sales; the 10-city composite was up 0.8% and the 20-city composite was up 0.9% month over month; and respective year over year gains of 12.6% and 12.4%. Nineteen of the 20 cities showed positive returns in March; New York was the only city to decline. As of March 2014, average home prices across the United States are back to their mid-2004 levels. Measured from the 2006 peaks, home prices are down 19%.

Mortgage rates started rising in May 2013 as the market speculated about when the Federal Reserve would start pulling back on its large scale asset purchase program, at the same time inventories of new and existing homes dropped, pushing prices higher and affordability was pushed down. One positive for home sales is that mortgage rates have recently dropped with the average 30 year fixed at 4.14% and the average 15 year fixed mortgage at 3.25% the lowest levels since last October.

The Conference Board said its consumer-confidence index rose to 83 in May from a downwardly revised 81.7 in April. The survey shows 20% of respondents expect their incomes will improve in the next 6 months; that doesn’t sound like much but it’s the highest reading since 2007. Other key elements of the survey: A net 18.2% said jobs were hard to get vs. being plentiful, compared with 19.8% in April and 26.5% in May 2013. Those who plan to buy a home within six months fell to 4.9% in May, the lowest since July 2012; that compares with a percentage of 5.6% in April. Those who plan to buy major appliances within six months fell to 45.1%, the lowest since September 2011.

Durable goods orders increased 0.8% in April. Durable goods are products designed to last 3 years or longer; so this is a broad category that includes everything from toasters to cars to nuclear submarines. In April, the Navy inked a $17.6 billion contract for 10 nuclear-powered attack submarines; and while that will be money that will circulate through the economy over several years, it skewed the report. Non-defense capital goods orders fell 1.2%. Business are placing fewer orders while working through a stockpile of goods amassed in the second half of 2013. Last month, durable goods inventories rose 0.1% after increasing 0.2% in March.

The Memorial Day holiday signals the unofficial start of summer and the summer driving season, and that usually equates to higher gasoline prices at the pump. Usually, but not always. According to the Energy Information Administration, prices at the pump are going to fall from today’s levels. This forecast is based on increased crude-oil production and declining global demand.  Rising oil production has boosted US crude-oil inventories to some 398 million barrels. That’s the highest level since way back in 1931. Demand is down, in large part because of better fuel efficiency forced by government MPG mandates. Demand has been declining since 2007. In many areas, gas prices are the lowest since 2011. Each penny decline in gasoline puts $1 billion back into people’s pockets.

Speaking in Portugal today, European Central Bank President Mario Draghi warned that prices in the countries in the euro zone's stressed periphery were falling too sharply, due to the combination of belt-tightening and a high exchange rate. He also cited evidence of a debt trap in stressed countries: the cost of finance for many companies has risen since the crisis, while falling prices mean they can't generate the profits to service their debts. Draghi said that the share of viable small businesses that can't get a loan is only around 1% in Germany or Austria, but around 25% in Spain and 33% in Portugal; Draghi called this imbalance a “credit gap” and blames it for up to a third of the economic slack in the crisis economies and acting as a brake on economic recovery. And so Draghi says the ECB will take action June 5th to ward off deflation and support economic recovery; what precisely will be done is still a matter of speculation.

It is widely anticipated the ECB will cut interest rates combined with an attempt to boost credit to small and medium sized businesses by providing long-term funding to banks provided they deploy that capital to expand business credit. The main lending rate will likely be cut from 0.25% to 0.1% or so. Meanwhile, the deposit rate paid to banks on overnight deposits will likely be cut from zero to a negative 0.1% or so, in effect charging the banks for funds they leave with the central bank.

The Federal Trade Commission has issued a report on the data brokerage industry. The nine data brokers examined in the FTC report were Acxiom, CoreLogic, Datalogix, eBureau, ID Analytics, Intelius, PeekYou, Rapleaf and Recorded Future. Data brokers analyze data collected about consumers to make automated assumptions about them. Consumers are placed in data-driven social and demographic groups for marketing purposes. The commission says that the same data that identifies a motorcycle enthusiast could both get him a discount on a biking magazine and make it easier to charge him more for car insurance. Another way to look at this is that the consumer is not the customer, rather the consumer is the product.

And yes, the data brokers know whether you drive a motorcycle, or smoke cigarettes, or if you are overweight, and how many bathrooms you have in your home, and if you travel or just like to read magazines about travel; that’s all in addition to the basics like name, address, social security number, age, and the bluntly termed “ability to afford products”.

According to the FTC, the firms have done a great job of finding data to crunch. One firm has information on 1.4 billion consumer transactions; another one adds 3 billion new records to its databases each month. While the report doesn’t address credit scores, the framework of the debate is much the same. What really worries the FTC is the impossibly opaque way the data is collected and managed. The data brokers gather their data from other data brokers rather than directly from an original source.

This is where the commission thinks the government should get involved. It suggests a law that would mandate the creation of a centralized portal where data brokers explain themselves, disclose their sources, and give people the opportunity to opt out; or for more sensitive data, require consumers to opt in before data could be sold. The commission hints it might call for some version of the idea that people have a right to have some things be forgotten, but they don’t actually recommend that data brokers cull their data, even when that data may be very old and inaccurate. And there is talk, but nothing concrete, about giving consumers access to their own data, and the ability to call for some of that data to be corrected or deleted.

President Obama today outlined a plan to withdraw all but 9,800 American troops from Afghanistan by the end of the year and withdraw the rest by the end of 2016. Under his plan, 9,800 US troops would remain behind into next year. By the end of 2015, that number would be reduced by roughly half. By the end of 2016, the U.S. presence would be cut to a normal embassy presence. The United States now has about 32,000 troops in Afghanistan.

At some point in the next week, President Obama is expected to announce Environmental Protection Agency mandated cuts intended to reduce carbon pollution by regulating carbon dioxide emissions from about 600 existing coal fired power plants. Obama could not get Congress to take action to address climate change during his first term, so he changed his tack and is using his executive authority under the 1970 Clean Air Act to issue the EPA regulation.

As currently drafted, the rule would cut greenhouse-gas emissions from the utility sector by 25%, the individuals said, but the baseline for that reduction has not been finalized. The EPA plan resembles proposals made by the Natural Resources Defense Council, which would allow states and companies to employ a variety of measures, including new renewable-energy and energy efficiency projects “outside the fence,” or away from the power plant site, to meet their carbon- reduction target.

Usually when the EPA regulates pollutants under the Clean Air Act, the agency sets an emission limit for each facility. By contrast, under a “mass-based system,” which the EPA is poised to adopt, states would have to meet an overall target for greenhouse-gas emissions and ensure that power plants either make those reductions at their facilities or finance efforts to achieve them in other ways, such as conservation or “green” generation or possibly through some variation of the cap and trade system.