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.

Financial Review

Neutrality Matters

Sinclair Noe — February 26, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 10 = 18,214
SPX – 3 = 2110
NAS + 20 = 4987
10 YR YLD + .05 = 2.01%
OIL – 2.01 = 48.98
GOLD + 5.00 = 1210.20
SILV – .01 = 16.63

The Federal Communications Commission has voted to regulate broadband Internet service as a public utility. Tom Wheeler, the commission chairman, said the FCC was using “all the tools in our toolbox to protect innovators and consumers” and preserve the Internet’s role as a “core of free expression and democratic principles.”

The new rules, approved 3 to 2 along party lines, are intended to ensure that no content is blocked and that the Internet is not divided into pay-to-play fast lanes for Internet and media companies that can afford it and slow lanes for everyone else. Those prohibitions are hallmarks of the net neutrality concept.

Mobile data service for smartphones and tablets, in addition to wired lines, is being placed under the new rules. The order also includes provisions to protect consumer privacy and to ensure that Internet service is available for people with disabilities and in remote areas.

The FCC is taking this big regulatory step by reclassifying high-speed Internet service as a telecommunications service, instead of an information service, under Title II of the Telecommunications Act. The Title II classification comes from the phone company era, treating service as a public utility. But the new rules are an à la carte version of Title II, adopting some provisions and rejecting others. The FCC will not get involved in pricing decisions or the engineering decisions companies make in managing their networks.

The impact of the new rules will largely hinge partly on details that are not yet known. The rules will not be published for at least a couple of days, and will not take effect for probably at least a couple of months. Lawsuits to challenge the commission’s order are widely expected.

Also today, the FCC approved an order to pre-empt state laws that limit the build-out of municipal broadband Internet services. The order focuses on laws in two states, North Carolina and Tennessee, but it would create a policy framework for other states; about 21 states have laws that restrict the activities of community broadband services.

The FCC says state laws unfairly restrict municipal competition with cable and telecommunications broadband providers. This order, too, will surely be challenged in court.

What does net neutrality mean for you? Well, you will still get your internet service from your provider; they just won’t be able to charge you more for high bandwidth, they can’t discriminate, and they can’t just block or slow access to content on a whim – which has happened in the past. That means that some geek in a garage has the same access to the internet as a big company like Netflix or Hulu; and as we’ve learned over the years, geeks in garages sometimes come up with some brilliant stuff. And nothing in today’s FCC action will raise your taxes.

We’ve been hearing from certain pundits for years now about how high inflation was just around the corner; how the Federal Reserve’s low interest policy and massive monetary stimulus would inevitably lead prices to spike, undermining the economic recovery. The hyper-inflationistas were dead wrong. Consumer prices fell again in January and inflation turned negative year over year. The consumer price index dropped a seasonally adjusted 0.7% last month, marking the third decline in a row. Over the past year prices have actually declined by an unadjusted 0.1%, the first time consumer inflation has been negative since the fall of 2009. Energy prices slumped 9.7%, as the cost of most fuels including gas decreased. Food prices were unchanged. Excluding food and energy, so-called core consumer prices rose 0.2% in January. Core prices are also up 1.6% in the past year, mainly reflecting rising prices for housing. Deflationary pressure from the cost of energy and commodities falling has turned into deflation. Whether this is temporary or a longer-term trend remains to be seen.

As a reminder, the Federal Reserve has that 2.0% inflation target, which is nowhere in sight. Until inflation ticks back up, it is hard to imagine that Janet Yellen and her team will raise interest rates rapidly. Even if they start raising rates sooner than expected, it is hard to fathom that this interest rate hiking cycle will be anywhere as severe as what we saw during the 1990s and in other rate hike cycles. Still, the Fed doesn’t expect energy prices to stay low forever. There is little fear that it will lead to an insidious debt-deflation spiral.

For the moment, lower prices, especially lower energy prices are a good thing. Today, oil prices dropped to the lowest levels in a month; a combination of a stronger dollar and a report yesterday showing record high crude supplies in the US. And it’s not just lower prices at the pump and lower energy bills, the cost of inputs, from plastic bottles to detergent, are edging down. Some of the savings are being passed on: food, which is costly to transport and requires a lot of packaging, is cheapening. These are the hallmarks of a positive supply shock: cheap oil means economies can provide more goods at lower prices. In the services sector, which relies much less on energy, transport and oil-based inputs, prices are still rising.

For companies that sell durable goods deflation can be more of a concern, but so far it hasn’t been a problem.  Orders for durable goods rose a seasonally adjusted 2.8% in January, beating expectations. Orders minus transportation edged up 0.3%. Orders for core capital goods, a proxy for business investment, surged 9.5%.

For many industries, however, falling prices are not new, but a way of life; think about how prices have dropped for technology like phones, cameras, and computers. So deflation is unlikely to shock shoppers. Indeed, the boost in purchasing power from a short period of falling prices is welcome, especially for workers that have seen wages stagnate for decades.

Unemployment rates are now below pre-crisis levels and that should have triggered rising wages but we haven’t seen it yet. The number of people who applied for unemployment benefits jumped by 31,000 to 313,000 in the week ending Feb. 21. It was the biggest weekly increase since December 2013. Next week’s jobs report will likely show another solid gain, but there is still slack in the labor market. Jobs may be up but workers’ bargaining power is not.

Even if it is short-lived, this sort of deflation can dull an economy. Companies are sitting on mountains of cash, about $2 trillion more or less; A little inflation would serve as a prod to put that money more quickly to use. This raises a question about how to spark inflation. Over time, the answer is more jobs; more people with paychecks spend more money, creating more demand; and increased demand is the best incentive to invest.

If falling prices endure, then debts, fixed in nominal terms, are harder to pay. And the whiff of deflation is everywhere, not just in the US but around the globe. And we have seen central bankers responding: with Abenomics in Japan, stimulus in China, QE from the ECB, and negative interest rates across much of Europe. If these attempts fail, then the glee at cheap food and fuel will be short-lived, as debt-ridden economies find themselves using up all the savings from falling prices to keep creditors at bay. And the side effect of central bank stimulus is to devalue the local currency, which has resulted in a much stronger US dollar, which means our exports have to be priced competitively and imports are cheaper; which all means that deflation, even a little deflation can be a tricky thing. Enjoy it while you can.

Earnings season is winding down with reports from retailers. JC Penney reported sales rose 4.4%, topping estimates; that was not enough. JC Penney reported a loss of $59 million, or 19 cents a share.

Sears Holdings lost money for an 11th straight quarter. The company lost $1.50 per share, beating the expected loss of $1.89 per share. Sales dropped 24% to $8.1 billion, short of the $8.3 billion estimate.

Gap said profit rose nearly 4% to $319 million, or 75 cents a share, while sales increased nearly 3% to $4.7 billion. Gap offered a muted earnings forecast for the year, blaming the impact of the stronger dollar and shipping delays at West Coast ports. Separately, Gap said it is increasing its annual dividend and that it is setting aside $1 billion to buy back shares.

Google is making its largest bet yet on renewable energy, a $300 million investment to support at least 25,000 SolarCity rooftop power plants.  Google is contributing to a SolarCity fund valued at $750 million, the largest ever created for residential solar. Google has now committed more than $1.8 billion to renewable energy projects, including wind and solar farms on three continents. What really makes the deal interesting is that technology companies are now taking advantage of investment formats once reserved only for banks. The Google deal is structured as a tax-equity transaction, meaning Google gets tax breaks that flow from solar systems financed by the fund. Renewable-energy projects are entitled to various tax benefits, including a credit for 30% of the installed cost of a solar power system. Unprofitable companies, such as SolarCity, often can’t use the credits and provide them instead to tax-equity investors.

Just a week after apologizing for bundling computers with an encryption-breaking adware program known as Superfish, Lenovo said a cyberattack took down its website, although it was not clear who was behind the breach. Hacker group Lizard Squad, which has taken credit for several recent high-profile outages, including Sony’s PlayStation Network and Microsoft’s Xbox Live, has claimed responsibility for the attack.

(I guess we can file that one under “K” for karma, or maybe “P” for payback.)