Stocks Flat as Oil Touches Five-Month Low

Charles Schwab: On the Market

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

Stocks Flat as Oil Touches Five-Month Low

U.S. stocks finished mostly flat with energy issues leading the decliners as crude oil prices fell to a five month low, while Facebook, Tesla and Viacom were under pressure following earnings reports. Health care stocks finished higher as the House of Representatives passed the GOP health bill aimed at repealing and replacing the Affordable Care Act. Treasury yields were higher and the U.S. dollar was lower amid some mixed economic data and ahead of tomorrow's key labor report. Gold traded lower.

The Dow Jones Industrial Average (DJIA) declined 6 points to 20,951, the S&P 500 Index added 1 point (0.1%) to 2,390, and the Nasdaq Composite ticked 3 points higher to 6,075. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil dropped $2.30 to $45.52 per barrel and wholesale gasoline fell $0.05 to $1.48 per gallon. Elsewhere, the Bloomberg gold spot price lost $9.61 to $1,228.56 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 98.74.

Facebook Inc. (FB $151) reported Q1 earnings-per-share (EPS) of $1.04, or $1.30 ex-items, versus the $1.12 FactSet estimate, as revenues grew 49.0% year-over-year (y/y) to $8.0 billion, above the projected $7.8 billion. The social network's monthly and daily active users modestly topped expectations. However, shares were under pressure as the company warned about slowing ad revenue growth for the year.

Tesla Inc. (TSLA $295) posted a Q1 loss of $2.04 per share, or a loss of $1.33 per share ex-items, compared to the shortfall of $0.82 that was projected, as revenues rose 18.0% quarter-over-quarter (q/q) to $2.7 billion, above the forecasted $2.6 billion. TSLA maintained its first-half outlook for vehicle deliveries and said its Model 3 is on track for initial production in July. Shares were solidly lower.

Kraft Heinz Co. (KHC $90) announced Q1 EPS of $0.73, or $0.84 ex-items, versus the forecasted $0.86, as revenues declined 3.1% y/y to $6.4 billion, compared to the expected $6.5 billion. The company noted a slow start to the year, with lower y/y consumption in North America being offset by significant gains from cost savings. Shares traded higher.

Viacom Inc. (VIA $38) reported fiscal Q2 earnings of $0.30 per share, or $0.79 ex-items, versus the projected $0.59, as revenues rose 8.0% y/y to $3.3 billion, versus the forecasted $3.0 billion. Shares moved noticeably to the downside as the company reported a drop in ad revenue at its TV network unit, exacerbating industry uneasiness regarding "cord-cutting" cable subscribers.

Oracle Corp. (ORCL $45) advanced after announcing a strategic agreement with AT&T Inc. (T $38), which will move thousands of its large scale internal databases to Oracle's Cloud Infrastructure as a Service (IaaS) and Platform as a Service (PaaS). T lost ground. 

Trade deficit dips, productivity and jobless claims drop

The trade balance (chart) showed that the deficit came in at $43.7 billion in March, compared to the Bloomberg estimate of $44.5 billion. February's deficit was revised higher to $43.8 billion. Exports dipped 0.9% month-over-month (m/m) to $191.0 billion, while imports declined 0.7% to $234.7 billion.

Preliminary Q1 nonfarm productivity (chart) fell 0.6% on an annualized basis, versus expectations of a 0.1% dip, following the upwardly revised 1.8% increase seen in Q4. Also, unit labor costs increased 3.0%, versus the forecast calling for a 2.7% gain. Unit labor costs were revised lower to a rise of 1.3% in Q4.

Weekly initial jobless claims (chart) fell by 19,000 to 238,000 last week, below forecasts of 248,000, with the prior week’s figure unrevised at 257,000. The four-week moving average rose by 750 to 243,000, while continuing claims dropped by 23,000 to 1,964,000, south of estimates of 1,990,000.

Factory orders (chart) rose 0.2% m/m in March, below the expected 0.4% gain and February's upwardly revised 1.2% increase. March durable goods orders—preliminarily reported last week—were adjusted higher to a 0.9% increase, from a 0.7% gain, and versus expectations of no revision. Orders of nondefense capital goods excluding aircraft—a proxy for business spending—were adjusted higher to a 0.5% increase.

Tomorrow, the economic calendar will culminate with the release of the April nonfarm payroll report, projected to show employment grew by 190,000 jobs, rebounding from the prior month's disappointing 98,000 gain. Private sector payrolls are forecasted to increase by 188,000 jobs, following March's 89,000 rise. The unemployment rate is expected to tick higher to 4.6% from 4.5% and average hourly earnings are anticipated to rise 0.3% m/m and be 2.7% higher y/y. Average hourly earnings could post a fifth-straight monthly gain and the figure is likely to garner scrutiny, given its impact on the consumer, which drives the majority of economic growth, and amid the backdrop of recent soft readings on inflation.

As noted in the latest Schwab Market Perspective: Should Sharp Sentiment Shifts Mean a Change in Strategy?, we don't believe that trend growth is as low as the 0.7% real gross domestic product (GDP) print posted for this year's first quarter, but neither do we believe the economy has accelerated markedly. We continue to believe the bull market will continue due to decent economic growth and a good profits picture, but there will likely be sentiment-driven dips and surges to come. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Is Retail Really Dead?, the American consumer remains relatively healthy in our view, with increasing wages, low unemployment and high confidence. Read more on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Treasuries traded lower, with the yield on the 2-year note rising 1 basis point (bp) to 1.31%, while the yields on the 10-year note and the 30-year bond advanced 3 bps to 2.35% and 2.99%, respectively. Bond yields finished mixed yesterday after the widely expected unchanged monetary policy stance from the Federal Open Market Committee (FOMC), which noted that "the slowing in growth during the first quarter is likely to be transitory," and that "near-term risks to the economic outlook appear roughly balanced." In their unanimous decision, the Committee provided little direction of any change to its current outlook for future rate increases, which beforehand showed that members have penciled-in two additional rate hikes this year.

For analysis of the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Markets & Economy page at www.schwab.com. Follow Kathy on Twitter: @kathyjones. Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, offer the video What's Driving the Ongoing Drop in Long-Term Bond Yields? on the Insights & Ideas page at www.schwab.com, where you can also find our latest article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?. Follow Randy on Twitter: @randyafrederick.

The U.S. political front continues to command attention, and 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, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Randy Frederick offer the article, Trump's First 100 Days: Key Observations, on the Insights & Ideas page at www.schwab.com.

Also, consumer credit will be released tomorrow afternoon to round out the economic docket for the week. Economists are forecasting that consumer borrowing expanded by $14.0 billion in March after increasing by $15.2 billion in February.

Europe higher on data, Asia mixed following Fed decision

European equities finished higher, with financials rising following some solid earnings results. The markets digested the unchanged monetary policy stance in the U.S. yesterday. Moreover, French political concerns remained subdued following yesterday's Presidential debate, after which polls suggested mainstream candidate Emmanuel Macron is poised to defeat anti-EU Marine Le Pen in the final vote this weekend. Meanwhile, U.K. Brexit negotiations continued as the nation heads for a June vote, while a German election looms. For analysis of the political uncertainty on both sides of the pond, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives Randy Frederick's 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?, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. Eurozone and U.K. business activity showed growth accelerated in April, and eurozone retail sales rose slightly more than expected. The euro and British pound moved higher versus the U.S. dollar and bond yields in the region traded mixed.

Stocks in Asia finished mixed on the heels of the highly-expected unchanged monetary policy decision in the U.S., while basic materials continued to slide. Geopolitical and political uncertainty lingered, while volume continued to be lighter than usual as markets in Japan remained closed for a holiday. Australian securities declined, with weakness in financials continuing following recent earnings reports in the banking sector, while the drop in basic materials also weighed on the markets. Chinese shares decreased amid lingering economic concerns in the wake of soft manufacturing and services sector reports as of late, along with festering regulatory crackdown concerns. However, stocks in India rose on strength in the financial sector following reports of new rules for the banking sector, while South Korean equities also gained ground after returning to action following yesterday's holiday break. For analysis of the global landscape, see 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, as well as his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Tomorrow the international economic calendar will be light, offering construction data from Australia and retail PMI reads from Germany, France, Italy and the Eurozone. Meanwhile, in central bank action, the Reserve Bank of Australia will release its monetary policy statement.

Financial Review

Big Stuff

Sinclair Noe — April 24, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 216 = 20,763
SPX + 25 = 2374
NAS + 73 = 5983
RUT + 18 = 1397
10 Y + .03 = 2.27%
OIL + .06 = 49.29
GOLD – 7.90 = 1277.00

Last Friday we spent some extra time talking about the French election; thinking it might be a significant event for the markets. Results in France’s election on Sunday saw centrist Emmanuel Macron and far-right nationalist Marine Le Pen emerge as the top two candidates for a run-off in two weeks’ time.

Early polling shows that Macron is expected to win by a wide margin, with one poll showing the 39-year-old is expected to get 62% of the vote. Le Pen is considered a risk to markets for a variety of reasons, including her vow to hold a referendum on France leaving the EU were she to win election as president. That is early polling and anything can happen in the next couple of weeks, and even if Macron wins, he will need to forge a parliamentary majority.

But for now, nervous investors and traders flipped the switch from safe haven bets to “risk on”. European shares surged to a 17-month high. The euro scaled back gains after its best open on record. The major Wall Street indexes posted their best one-day advance since March 1. The Nasdaq Composite closed at a new record high.

This should be a very interesting week. President Trump tweeted on Saturday that he plans to announce a “big” tax reform and reduction plan on April 26. Trump has ordered White House aides to accelerate efforts to draft a tax plan slashing the corporate rate to 15% and prioritizing cuts in tax rates over an attempt to not increase the deficit, according to Marketwatch.

Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn are scheduled to meet Tuesday to discuss Trump’s tax proposals with Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan, Senate Finance Chairman Orrin Hatch and House Ways and Means Chairman Kevin Brady of Texas. The meeting comes in advance of a Wednesday announcement by Trump; although you might think these leaders should already know the plan.

Mick Mulvaney, the director of the Office of Management and Budget, has said it is unlikely the administration will release a full plan until June at the earliest. So, it sounds like the Wednesday announcement might be long on concept and short on detail.

The Trump administration is preparing to brief all 100 senators Wednesday on the situation in North Korea. Today, Trump said the UN Security Council must be prepared to impose new sanctions on North Korea as concerns mount that it may test a sixth nuclear bomb as early as tomorrow, which marks the 85^th anniversary of the foundation of North Korea’s army.

US officials told Reuters tougher sanctions under consideration include an oil embargo, banning North Korea’s airline, intercepting cargo ships and punishing Chinese banks and other companies doing business with North Korea.

The State Department said Secretary of State Rex Tillerson would chair a special ministerial meeting of the Security Council on North Korea on Friday that would give members the opportunity to discuss ways to maximize the impact of existing sanctions and “show their resolve to respond to further provocations with appropriate new measures”. Two Japanese destroyers have joined the U.S. carrier group for exercises in the western Pacific, and South Korea said it was in talks about holding joint naval exercises.

Also on Wednesday, Federal Communications Commission Chairman Ajit Pai is expected to unveil his plan to replace the agency’s hotly contested net neutrality rules.

Meanwhile, a government shutdown is possible on April 29 if Congress doesn’t approve a spending bill to fund the government. Trump’s biggest demand is a Democratic deal-breaker: money for his long-promised border wall with Mexico. Democrats hope he’ll blink to avoid partial shutdown which would start on Saturday, Trump’s 100th day in office.

Trump insists that Mexico will pay for the wall eventually, later, in some form. Until then, he wants American taxpayers to foot the bill. There is an out for both sides – a short-term spending plan that would provide another week or so for negotiations after the deadline early Saturday.

US investors are also gearing up for the busiest earnings week of the earnings reporting season, with over 190 S&P 500 members. Earnings are coming in better than expected. Of the 100 S&P 500 companies that have reported results so far, 77 percent have beaten profit expectations, according to Thomson Reuters I/B/E/S.

This has helped lift profit growth estimates to 11 percent from 10 percent forecast at the start of the earnings season. Alphabet, the parent company for Google, just passed $600 billion in market capitalization – they report earnings Thursday. Also on the earnings calendar this week: Microsoft, Amazon, Twitter, Intel, Credit Suisse, Barclays, Daimler and Total.

On Friday, we’ll get a look at first quarter gross domestic product.  GDP is forecast to grow by 1%, maybe as high as 1.5%. But the earnings per share for S&P 500 corporations is expected to do much better, up by 11% year-on-year, maybe a bit higher, depending on the forecaster. Ultimately, this divergence is a reminder that what affects the stock market does not necessarily have a run-off effect on the economy.

Outside of recessions, S&P EPS can vary from negative to double-digit growth rates when US GDP is anywhere between 2-4%. Outside of recessions, it is global growth, investment spending, US exports/global trade, commodity prices, FX rates, loan growth, and non-operating factors like taxes, acquisitions, buybacks, and other reinvestment that drives S&P EPS growth.

The economy certainly matters very much to earnings, especially for companies that earn most of their revenue in the US. And financial markets, reflecting confidence levels and expectations for future earnings, tend to lead economic growth and downturns. But ultimately it is a mistake to think that success on Wall Street equates to success on Main Street.

The number of bank branches in the United States will shrink by as much as 20 percent in five years, according to a report from commercial real estate firm JLL. This reduction comes as banks are looking for ways to cut costs and to encourage their customers to embrace mobile banking technology rather than completing basic transactions within a physical branch.

The U.S. banking industry could save as much as $8.3 billion annually if it trimmed the number of branches and downsized the average bank branch from 5,000 to 3,000 square feet, JLL found. U.S. banks have reduced their footprint by around 8 percent since the financial crisis, from 97,000 branches to roughly 90,000.

PPG Industries, an American paint and chemicals giant, again raised its takeover bid for Akzo Nobel, the Dutch maker of Dulux paint, hoping to persuade its rival’s management to engage in merger talks. Akzo Nobel has rejected two previous offers. PPG’s latest offer would value Akzo Nobel at about $26.4 billion.

Supermarket operator Albertsons is exploring a takeover of Whole Foods, according to the Financial Times. Albertsons is owned by private-equity firm Cerberus Capital Management, which has held preliminary talks with bankers on a bid for Whole Foods.

The news comes just weeks after hedge fund Jana Partners LLC said it had amassed a 9% stake in Whole Foods, and was urging it to look at a possible sale, change its management board and revise contracts with suppliers and others.

iHeartMedia, the biggest operator of radio stations in the US, plans to include language in its next quarterly report warning investors that it may not survive another year. iHeartMedia expects cash flow to be negative and is uncertain as to whether it will be able to refinance or extend the maturities of some of its borrowings, according to a regulatory filing.

The company has almost $350 million of debt coming due this year, part of a massive $20 billion debt load it took on as part of a $24 billion leveraged buyout of then Clear Channel Communications

T-Mobile beat earnings estimates but missed on revenue. T-Mobile said it added 914,000 branded postpaid subscribers, who pay bills monthly – that was better than expected. Shares moved higher.

 Alcoa rose more than 2 percent in extended trading on Monday after the aluminum company reported an earnings beat. However, the company also reported a revenue miss.

Steve Ballmer is the former Chief Executive Officer of Microsoft and the current owner of the Los Angeles Clippers NBA basketball franchise. In his spare time, Ballmer has been trying to figure out what the government does with our money, taxpayer money.

Tomorrow, Ballmer plans to make public a database and a report that he and a small army of economists, professors and other professionals have been assembling as part of a stealth start-up over the last three years called USAFacts. The database is perhaps the first nonpartisan effort to create a fully integrated look at revenue and spending across federal, state and local governments.

Want to know how many police officers are employed in various parts of the country and compare that against crime rates? Want to know how much revenue is brought in from parking tickets and the cost to collect? Want to know what percentage of Americans suffer from diagnosed depression and how much the government spends on it? That’s in there. You can slice the numbers in all sorts of ways.

In an age of fake news and questions about how politicians and others manipulate data to fit their biases,  Ballmer’s project may serve as a powerful antidote. Using his website, USAFacts.org, a person could look up just about anything: How much revenue do airports take in and spend? What percentage of overall tax revenue is paid by corporations? At the very least, it could settle a lot of bets made during public policy debates at the dinner table.