Stocks Still Searching for a Catalyst

Charles Schwab: On the Market

Posted: 5/3/2017 4:15 PM ET

Stocks Still Searching for a Catalyst

U.S. equities were again mixed in today's session, showing little reaction to the expected Fed decision to keep monetary policy steady, while results on the earnings front varied. Treasury yields were mixed and the U.S. dollar gained modest ground following stronger-than-expected reads on the all-important services sector, while crude oil prices inched higher in the wake of a smaller-than-expected decline in the government's crude oil inventory report, and gold was lower.

The Dow Jones Industrial Average (DJIA) rose 8 points to 20,958, the S&P 500 Index declined 3 points (0.1%) to 2,388, and the Nasdaq Composite lost 23 points (0.4%) to 6,073. In moderately-heavy volume, 918 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.16 higher to $47.82 per barrel and wholesale gasoline added $0.02 to $1.53 per gallon. Elsewhere, the Bloomberg gold spot price tumbled $16.85 to $1,239.91 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 99.30.

Dow member Apple Inc. (APPL $147) reported fiscal Q2 earnings-per-share (EPS) of $2.10, compared to the $2.02 FactSet estimate, as revenues rose 4.5% year-over-year (y/y) to $52.9 billion, versus the projected $53.0 billion. iPhone shipments came in below forecasts, while those for iPad and Mac came in roughly in line with estimates. AAPL issued Q3 revenue and gross margin guidance that had midpoints below expectations. Separately, the company announced a $50 billion boost to its capital return program, which includes a $35 billion bump in share repurchases, while announcing a 10.5% increase in its quarterly dividend to $0.63 per share. Shares finished modestly lower.

Yum Brands Inc. (YUM $68) posted Q1 EPS of $0.77, or $0.65 ex-items, above the projected $0.59, with revenues declining 2.0% y/y to $1.4 billion, roughly in line with forecasts. The company noted that same-store sales growth of 8% y/y at its Taco Bell franchise and profit growth at KFC partially offset weakness at Pizza Hut. Shares were nicely higher.

Time Warner Inc. (TWX $99) announced Q1 earnings of $1.80 per share, or $1.66 ex-items, compared to the estimated $1.45, as revenues grew 6.0% y/y to $7.7 billion, roughly in line with expectations. TWX was lower.

Delphi Automotive PLC. (DLPH $87) reported Q1 earnings of $1.24 per share, or $1.59 per share ex-items, topping the projected $1.46, as revenues rose 6.0% y/y to $4.3 billion, above the expected $4.1 billion. The company reaffirmed its full-year guidance. Separately, DLPH announced plans to spin-off its powertrain systems segment. Shares rallied.

Fed stands pat, services sector activity tops forecasts

As widely expected, the Federal Open Market Committee (FOMC) made no change to its monetary policy stance following its two-day meeting, noting in its accompanying policy statement 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. No updated economic projections or post-meeting press conference by Chairwoman Janet Yellen were provided after the decision. Look for more insight into the Fed's decision later today from Senior Fixed Income Research Analyst, Collin Martin, CFA, on the Markets & Economy page at www.schwab.com.

The April Institute for Supply Management (ISM) non-Manufacturing Index (chart) improved more than expected to 57.5 from March's unrevised 55.2 level, and compared to the Bloomberg forecast of a gain to 55.8. A reading above 50 denotes expansion. New orders and business activity both rose month-over-month (m/m) to levels north of 60, while employment dipped but continued to signal growth. Prices rose 4.1 points to 57.6. The ISM said comments from respondents were mostly positive about business conditions and the overall economy.

The final Markit U.S. Services PMI Index was revised to 53.1 in April from the preliminary 52.5 level, where it was expected to remain, and compared to the 52.8 figure posted in March. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The ADP Employment Change Report showed private sector payrolls rose by 177,000 jobs in April, slightly above forecasts of a 175,000 gain, while March's increase of 263,000 jobs was revised to a gain of 255,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader April nonfarm payroll report, expected to show an increase of 190,000 jobs to the headline rate and to private sector payrolls. The unemployment rate is forecasted to tick higher to 4.6% from 4.5%, and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

The MBA Mortgage Application Index dipped 0.1% last week, following the previous week's 2.7% increase. The slip came as a 4.7% drop for the Refinance Index was met with a 4.2% increase for the Purchase Index. The average 30-year mortgage rate rose 3 basis points (bps) to 4.23%.

Treasuries finished mixed, as the yield on the 2-year note rose 3 bps to 1.29%, the yield on the 10-year note moved 4 bps higher to 2.32%, while the 30-year bond rate declined 1 bp to 2.96%. For more on 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, as well as our latest article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Finally, 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.

Europe mixed, Asia lower ahead of U.S. monetary policy decision

European equities finished mixed, with basic materials and industrials leading to the downside amid weakness in metals prices and the recent soft economic data out of the U.S. and China, while the markets appeared cautious ahead of today's monetary policy decision from the U.S. Federal Reserve. Meanwhile, U.K. Brexit negotiations continued to foster political uncertainty as the nation heads for a June vote, while a German election looms and France's second round of its Presidential election is set for this weekend. 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. Preliminary eurozone Q1 GDP growth came in at a 0.5% quarter-over-quarter pace, matching expectations and Q4's expansion. The euro and British pound dipped versus the U.S. dollar, while bond yields were mostly lower.

Stocks in Asia finished lower, with the markets grappling with festering political and geopolitical uncertainty, along with mixed results from Apple in the U.S., while awaiting today's monetary policy decision by the U.S. Federal Reserve. However, volume was lighter than usual with markets in Japan, Hong Kong and South Korea closed for holidays. Mainland Chinese equities declined in the wake of recent soft readings on the nation's manufacturing and services sector activity, while securities in India also dipped. Markets in Australia fell sharply, with financials leading to the downside amid some continued disappointing earnings reports from the banking sector. 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's international economic calendar will offer the Services PMI Indexes from abroad, as well as trade data from Australia, employment data from Spain, and retail sales from the Eurozone.

Stocks Manage Mild Gains as Fed Holds Steady

Charles Schwab: On the Market

Posted: 2/1/2017 4:15 PM ET

Stocks Manage Mild Gains as Fed Holds Steady

U.S. stocks managed to finish with mild gains amid some favorable earnings results from Dow component Apple and a host of upbeat manufacturing reports out of China, Europe and the U.S. Investors seemed cautious ahead of today's Fed monetary policy decision, which showed the Central Bank will hold its current target rate range. Crude oil prices and the U.S. dollar were higher, while Treasuries and gold were lower.

The Dow Jones Industrial Average (DJIA) increased 27 points (0.1%) to 19,891, the S&P 500 Index was nearly unchanged at 2,279, and the Nasdaq Composite advanced 28 points (0.5%) to 5,643. In moderately heavy volume, 903 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil ticked $1.07 higher to $53.88 per barrel and wholesale gasoline added $0.03 to $1.58 per gallon. Elsewhere, the Bloomberg gold spot price declined $6.47 to $1,212.17 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.2% to 99.51.

Dow member Apple Inc. (AAPL $129) reported fiscal 1Q earnings-per-share (EPS) of $3.36, above the $3.22 FactSet estimate, as revenues rose 3.3% year-over-year (y/y) to $78.4 billion, topping the projected $77.3 billion. The company said its holiday quarter results generated all-time revenue records for its iPhone, Services, Mac and Apple Watch units, with services revenue growing "strongly" y/y, led by record customer activity on the App Store. AAPL's 2Q revenue guidance came in just shy of expectations. Shares finished nicely higher.

Advanced Micro Devices Inc. (AMD $12) posted a fiscal 4Q loss of $0.01 per share, matching forecasts, with revenues rising 15.9% y/y to $1.1 billion, roughly in line with estimates. The graphic chipmaker's 1Q revenue forecast topped expectations and shares rallied.

The big three U.S. automakers reported January sales today, with General Motors Co's (GM $36) sales declining 3.8% y/y, compared to the projected 1.0% decline. Fiat Chrysler Automobiles NV's (FCAU $11) sales fell 11.2%, compared to the expected 14.9% drop. Ford Motor Co (F $12) reported a 0.6% dip in sales, versus the expected 3.2% decline. GM, F and FCAU declined.

Manufacturing growth accelerates in January, Fed holds steady

The Institute for Supply Management (ISM) Manufacturing Index (chart) for January moved farther into expansion territory (above 50) than expected after rising to 56.0—the highest since November 2014—from December's 54.5 level, and compared to the Bloomberg forecast of a modest rise to 55.0. Production and new orders both improved to levels north of 60, and growth in employment accelerated. Prices rose to 69.0 from 65.5, and inventories increased but remained in contraction territory. Amid the backdrop of the strong U.S. dollar, new export orders decreased but remained above 50. The ISM said comments from the survey were generally positive regarding demand levels and business conditions.

The final Markit U.S. Manufacturing PMI Index was revised slightly lower to 55.0 for January from the 55.1 preliminary level, where it was expected to remain. However, the index is up from the 54.3 level posted in December. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

The ADP Employment Change Report showed private sector payrolls rose by 246,000 jobs in January, well above the Bloomberg forecast of a 168,000 gain, while December's increase of 153,000 jobs was revised slightly lower to a 151,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader January  nonfarm payroll report, expected to show an increase of 175,000 jobs, while private sector payrolls are projected to rise by 170,000 (economic calendar). The unemployment rate is forecasted to remain at 4.7%, and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

Today's manufacturing and employment data adds credence to our view in the latest Schwab Market Perspective: A New World, that we believe the market's post-election gains were not solely related to optimism about the pro-business leanings of the new administration, but also reflected improving economic data and better corporate earnings. Continued solid economic data and a decent earnings reporting season bolster our confidence in the continuation of the bull market in stocks. However, rising inflation, possibly forcing the Fed to be more aggressive, could lead to bouts of volatility and more pullbacks. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, opting to keep the target range for the Fed funds rate unchanged at 0.50%-0.75%, as many had expected, after agreeing unanimously to raise the target rate range at its December meeting. It was revealed in the Federal Reserve's FOMC statement that "in view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate." There was no press conference or updated economic projections following the decision. Be sure to check out analysis of the Fed's decision from Schwab's Chief Investment Strategist Liz Ann Sonders later today at www.schwab.com/marketinsight.

Construction spending (chart) declined 0.2% m/m in December, versus projections of a 0.2% advance, and following November's unrevised 0.9% gain. Residential spending was 0.4% higher, and non-residential spending declined 0.7%.

The MBA Mortgage Application Index declined 3.2% last week, following the previous week's 4.0% gain. The decrease came as the Refinance Index fell 1.4%, while the Purchase Index dropped 5.6%. The average 30-year mortgage rate rose 4 basis points (bps) to 4.39%.

Treasuries were lower, with the yield on the 2-year note gaining 1 basis point (bp) to 1.22%, the yield on the 10-year note rising 3 bps to 2.48% and the 30-year bond rate advancing 2 bps to 3.08%.Treasury yields and the U.S. dollar remain in focus with the global markets grappling with the latest policy moves from President Donald Trump, and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, 5 Themes to Watch as the Trump Era Begins, at www.schwab.com/insights.

On the heels of the pullback in stocks from record highs, Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Rise Up: Dow 20k Fails to Thrill Individual Investors, individual sentiment has become less bullish, while other measures show highly elevated optimism. She adds that extremely low volatility isn't likely to persist, but the bull market is. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Tomorrow's U.S. economic calendar will bring reports on weekly jobless claims, expected to have declined to 250,000 from the prior week's 259,000 level, and preliminary 4Q nonfarm productivity and unit labor costs, with productivity anticipated to have increased 1.0% on an annualized basis and costs forecasted to have risen 1.9%.

Europe snaps losing streak, Asia mostly higher following data

European equities gained ground, snapping a string of losses, with some upbeat Chinese business activity reports being met with some favorable eurozone and U.K. manufacturing data. The currency markets were in focus ahead of today's monetary policy decision in the U.S. and amid festering Brexit uncertainty, while U.S. President Donald Trump criticized currency valuations in Japan, China and Germany. The euro traded lower and the British pound moved higher versus the U.S. dollar, while bond yields in the region traded to the upside. Earnings results in the region were mostly upbeat to help sentiment, and the global tech sector got a boost from results from Dow member Apple.

For more on the global markets, see Schwab's Jeffrey Kleintop's, CFA, latest article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Also, Jeff delivers his articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read all these articles at www.schwab.com/oninternational.

Stocks in Asia finished mostly higher ahead of the U.S. monetary policy decision and some continued volatility in the currency markets following comments from U.S. President Donald Trump that criticized the low valuation of currencies in Japan, China and Germany. For more on Trump's policies, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? at www.schwab.com/oninternational, where you can also find Schwab's Director of International Research, Michelle Gibley's, CFA, latest article, Currency Hedging: 5 Things You Need to Know. Some upbeat economic data in the region lent some support, with manufacturing and services sector reports out of China both showing growth accelerated in January, with the former topping estimates, while South Korea posted a larger-than-expected jump in exports for last month.

Stocks trading in Hong Kong declined, returning to action after the long Lunar New Year holiday break, while mainland Chinese markets remained closed. South Korean and Australian equities advanced, while Indian securities rallied as traders digested the nation's annual budget. For more on international investing, see Schwab's Michelle Gibley's, CFA, article, Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

The international economic docket for tomorrow will include consumer confidence from Japan and PPI from the eurozone, while in central bank action, the Bank of England will announce its rate decision.

Bulls Make First Appearance of 4Q

Charles Schwab: On the Market

Posted: 10/05/2016 4:15 PM ET

Bulls Make First Appearance of 4Q

U.S. stocks saw solid gains along with crude oil prices, which added to their recent string of gains in the wake of a bullish government oil inventory report, while activity in the domestic services sector accelerated nicely. Treasuries and gold were lower, while the U.S. dollar was nearly unchanged. In other developments, Constellation Brands and Micron Technology posted upbeat earnings and guidance, while ADP's private sector employment report missed estimates. Across the pond, European equities snapped a six-session winning streak amid focus on the global monetary policy landscape.

The Dow Jones Industrial Average (DJIA) increased 113 points (0.6%) to 18,281, the S&P 500 Index gained 9 points (0.4%) to 2,160, and the Nasdaq Composite advanced 26 points (0.5%) to 5,316. In moderate volume, 965 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rallied $1.14 to $49.83 per barrel, wholesale gasoline decreased $0.01 to $1.49 per gallon and the Bloomberg gold spot price shed $0.90 to $1,268.80 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.15.

Constellation Brands Inc. (STZ $169) reported fiscal 2Q earnings-per-share (EPS) ex-items of $1.77, above the FactSet estimate of $1.65, as revenues rose 17.0% year-over-year (y/y) to $2.0 billion, bolstered by recent acquisitions, roughly in line with forecasts. STZ raised its full-year EPS outlook. Separately, the company announced an agreement to acquire Utah-based High West Distillery. STZ gained ground.

Micron Technology Inc. (MU $18) posted a fiscal 4Q loss of $0.05 per share, compared to the $0.12 per share shortfall that was anticipated, with revenues falling 11.0% y/y to $3.2 billion, roughly in line with forecasts. MU issued full-year EPS guidance that topped expectations. Shares ticked slightly lower.

Services sector activity improves, while private sector payrolls miss

The Institute for Supply Management (ISM) non-Manufacturing Index (chart) rose to 57.1 in September—the highest since October 2015—from 51.4 in August and compared to the Bloomberg forecast of an improvement to 53.0. A reading above 50 denotes expansion. New orders and business activity both jumped back above the 60 mark. Inventories and employment both showed solid growth. The ISM said the majority of comments from respondents were mostly positive about business conditions and the overall economy.

The final Markit U.S. Services PMI Index was revised to 52.3 in September from the preliminary level of 51.9, where it was expected to remain, and above the 51.0 level registered in August. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently. A reading above 50 denotes expansion.

As noted in the Schwab Market Perspective: Crunch Time, economic data has been mixed over the past month. It started with soft ISM readings at the beginning of September and continued with some weaker-than-expected housing data. At this point we believe this is temporary softness brought on by a very quiet August when more folks than usual seemed to be on the sidelines; and are looking for a comeback in the fourth quarter. Continuing historically-low initial jobless claims reading (a key leading economic indicator), the low unemployment rate, rising wages and consumer confidence, and ongoing accommodative monetary policy lead us to believe that the economy will continue to muddle through into 2017. Read the whole perspective atwww.schwab.com/marketinsight.

Factory orders (chart) rose 0.2% month-over-month (m/m) in August, versus expectations of a 0.2% decline, while July's figure was adjusted lower to a 1.4% increase. August durable goods orders—preliminarily reported a week ago—were revised upward to a 0.1% rise, and orders of nondefense capital goods excluding aircraft—a proxy for business spending—was revised higher to a 0.9% increase from the initially reported 0.6% gain.

The ADP Employment Change Report showed private sector payrolls rose by 154,000 jobs in September, below forecasts of 165,000, while August's gain of 177,000 jobs was revised lower to a 175,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader September nonfarm payroll report, expected to show an increase of 174,000 jobs, while private sector payrolls are projected to rise by 170,000 (economic calendar). The unemployment rate is forecasted to remain at 4.9% and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

The trade balance (chart) showed that the deficit came in at $40.7 billion in August, compared to the $39.2 billion estimate. July's deficit was unrevised at $39.5 billion. Exports rose 0.8% m/m to $187.9 billion, and imports increased 1.2% m/m to $228.6 billion.

The MBA Mortgage Application Index rose 2.9% last week, after declining 0.7% in the previous week. The increase came as a 4.7% gain for the Refinance Index more than offset a 0.1% dip for the Purchase Index. The average 30-year mortgage rate fell 4 basis points (bps) to 3.62%.

Treasuries were lower, though the yield on the 2-year note was nearly unchanged at 0.83%, the yields on the 10-year note and the 30-year bond gained 3 bps to 1.71% and 2.43%, respectively. For more on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article,  With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will be light, offering the weekly initial jobless claims report, forecasted to have ticked slightly higher to a level of 256,000 from 254,000 the week prior.

Europe lower and Asia mixed as monetary policy focus remained
 
European equities traded mostly lower, snapping a six-session winning streak for the Stoxx Europe 600 Index. The decline followed yesterday's hawkish commentary from Fed officials in the U.S., while a report from Bloomberg late yesterday suggesting the possibility of a sooner-than-expected tapering of asset purchases from the European Central Bank (ECB) stymied sentiment. However, the ECB denied that it had discussed the subject. Also, lingering uncertainty about the timing of the U.K.'s Brexit weighed on conviction, while the upbeat U.S. economic data had little impact. The euro dipped and the British pound ticked higher versus the U.S. dollar, while bond yields in the region gained ground. However, Italian stocks bucked the downward trend bolstered by the banking sector as recently flared-up concerns eased somewhat. Losses were likely held in check as crude oil prices rebounded in the wake of a bullish U.S. government oil inventory report. In economic news, eurozone services sector activity for September was revised to a slightly higher rate of expansion than had originally been reported, while eurozone August retail sales came in at a smaller m/m decline than had been anticipated. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers a World Tour: An Around The World Look At the Economic Landscapeat www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed in dampened volume as mainland Chinese markets remained closed for the golden week holiday, while hawkish commentary from Fed officials in the U.S. and a flare-up in concerns about the European Central Bank potentially tapering its quantitative easing measures garnered attention. Japanese equities rose, aided by continued weakness in the yen as the U.S. dollar rose and Bank of Japan monetary policy uncertainty lingered. For our latest analysis of Japan's monetary policy, see Schwab's Jeffrey Kleintop's, CFA, article, Going Godzilla: What has the Bank of Japan Unleashed?, at www.schwab.com/oninternational. Stocks trading in Hong Kong gained ground, while South Korean shares pared early losses on the heels of some hotter-than-expected consumer price inflation data. Australian securities dropped as some weakness in oil & gas and basic materials issues overshadowed an upbeat read on the nation's retail sales for August. Indian stocks declined following yesterday's unexpected rate cut from the Reserve Bank of India.

Tomorrow, the international economic docket will be light, yielding the trade balance from Australia and manufacturing orders from Germany.

Low Energy Leads Decline

Charles Schwab: On the Market

Posted: 8/31/2016 4:15 PM ET

Low Energy Leads Decline

U.S. stocks traded lower, with the energy sector leading the decline as crude oil prices fell following a bearish government inventory report. Global caution remained heightened amid Fed rate hike concerns as traders await Friday's key August labor report. Treasuries ticked lower following reads on employment, regional manufacturing and housing. The U.S. dollar was flat and gold was lower.

The Dow Jones Industrial Average (DJIA) declined 53 points (0.3%) to 18,401, the S&P 500 Index shed 5 points (0.2%) to 2,171, and the Nasdaq Composite decreased 10 points (0.2%) to 5,213. In moderately-heavy volume, 1.1 billion shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.65 to $44.70 per barrel, wholesale gasoline declined $0.04 to $1.33 per gallon and the Bloomberg gold spot price decreased $2.47 to $1,308.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.04.

Palo Alto Networks Inc. (PANW $133) posted fiscal 4Q earnings-per-share (EPS) ex-items of $0.50, roughly in line with the FactSet estimate, as revenues grew 41.0% year-over-year (y/y) to $401 million, above the expected $390 million. The cybersecurity company issued stronger-than-expected full-year EPS guidance and announced a $500 million share repurchase program. However, the company offered 1Q earnings and revenue guidance that missed estimates and shares closed solidly lower.

H&R Block Inc. (HRB $22) reported a fiscal 1Q loss of $0.55 per share, wider than the estimated $0.53 per share shortfall, as revenues declined 9.4% y/y to $125 million, below the forecasted $133 million. The tax preparation services company said 1Q results typically represent less than 5.0% of annual revenues and less than 15.0% of annual expenses, due to the highly seasonal nature of its business. Shares of HRB fell.

ADP's private sector employment report roughly matches forecasts

The ADP Employment Change Report showed private sector payrolls rose by 177,000 jobs in August, modestly above forecasts of 175,000, while July's gain of 179,000 jobs was revised higher to a 194,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader August nonfarm payroll report, expected to show an increase of 180,000 jobs, while private sector payrolls are projected to rise by the same amount (economic calendar). The unemployment rate is forecasted to dip to 4.8% from 4.9% and average hourly earnings are projected to rise 0.2% month-over-month (m/m). Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her article, What Does Strong Job Growth Mean for Bond Investors?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

The Chicago Purchasing Managers Index (chart) fell more than expected but remained in expansion territory (above 50), after dropping to 51.5 in August from 55.8 in July and versus expectations of a decline to 54.0. New orders fell amid some widespread weakness, though the lone component that saw a rise was employment.

Pending home sales grew 1.3% m/m in July, versus projections of a 0.7% gain and following the downwardly revised 0.8% drop registered in June. Compared to last year, sales were 2.2% lower, versus forecasts of a 2.2% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which fell for the first time since February in July.

The MBA Mortgage Application Index rose 2.8% last week, after declining 2.1% in the previous week. The increase came as a 3.7% gain for the Refinance Index was accompanied by a 1.3% rise for the Purchase Index. The average 30-year mortgage rate remained at 3.67%.

Treasuries inched lower, with the yields on the 2-year and 10-year notes gaining 1 basis point to 0.81% and 1.58%, respectively, while the 30-year bond rate was flat at 2.23%.

For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Kathy Jones, titled Rate Hike on the Horizon—but When? at www.schwab.com/insights and follow Randy on Twitter: @randyafrederick. Also, for the latest on the subdued market action in the "dog days" of summer, Schwab's Chief Investment Strategist, Liz Ann Sonders offers her latest article, All Summer Long: Will the Extreme Lull in Volatility Persist? at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Tomorrow, the U.S. economic calendar will bring the tail end of a global look at August manufacturing activity, in the form of the ISM Manufacturing Index and the final Markit Manufacturing PMI Index. ISM's index is projected to dip to 52.0 from 52.6 in July, while Markit's report is expected to be unrevised at 52.1, down slightly from July's 52.9 reading. Readings above 50 for both indexes depict expansion in manufacturing output. As noted in the Schwab Market Perspective: The Calm Before the…., the latest batch of U.S. economic data doesn’t appear to presage an imminent recession, which would typically lead to a bear market. However, it will be difficult to get the U.S. economy rolling without an improvement in productivity, which is undoubtedly being constrained by ongoing tepid capital spending. Read the whole perspective at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Europe mostly lower, Asia mixed

European equities gave up early gains and finished mostly lower, led by oil & gas issues as crude oil prices extended a recent pullback on a bearish oil inventory report. Also, basic materials stocks continued to see pressure amid the recent weakness in metals prices. Global caution remained a drag on conviction amid heightened U.S. Fed rate hike expectations as Friday's key August nonfarm payroll report looms on the horizon. However, financials were the lone bright spot, continuing their recent rally on the Fed rate hike expectations and eased global growth uneasiness, bolstered by some M&A chatter toward the German banking sector. A much stronger-than-expected German retail sales report failed to boost stocks, with separate reports showing eurozone consumer price inflation came in cooler than expected in August and the region's unemployment rate remained at 10.1%, versus projections of a dip to 10.0%. The data comes ahead of tomorrow's manufacturing PMI reports for August.

The euro overcame early weakness and ticked higher and the British pound gained ground versus the U.S. dollar, while bond yields in the region finished higher. With the markets choppy and poised for increased volatility amid the diverging global monetary policy landscape and Brexit uncertainty, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed, with the global markets awaiting Friday's key August employment report in the U.S. as Fed rate hike expectations remain elevated, along with tonight's Chinese business activity reports. Japanese equities gained ground, with the yen extending its weakness to boost export-heavy issues on the U.S. rate hike expectations and as recent commentary from Bank of Japan officials continues to bolster optimism of further stimulus measures on the heels of a preliminary report showing the nation's industrial production came in flat m/m for July, compared to estimates of a 0.8% gain. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter money.

Mainland Chinese stocks rose, while those traded in Hong Kong declined amid some caution ahead of tonight's releases of the nation's Manufacturing and non-Manufacturing PMI Indexes and as some banking sector earnings were mostly favorable. Australian equities were bogged down by basic materials and oil & gas issues amid the pressure on metals and crude oil prices as of late, while South Korean listings also closed to the downside. Finally, Indian securities moved higher, buoyed by recent data showing foreign investment into the nation continued. After the closing bell, India reported 2Q GDP growth of 7.1% y/y, down from the 7.9% expansion seen in 1Q and below the expected growth of 7.6%. Schwab's Jeffrey Kleintop discusses Five ways investors can make the most of slower growth. Read both of Jeff's articles at www.schwab.com/oninternational.

In addition to the aforementioned Chinese reports, the international economic docket for tomorrow will include a plethora of manufacturing PMI reads from Japan, India, Germany, France, Italy, the Eurozone and the U.K. Japan will also release reports on capital spending, company profits and vehicle sales.

How to Successfully Rescue Residential Real Estate

There is a growing uneasiness amongst analysts, money managers, and pundits about the nonresponsive residential real estate market. Even the business media are lowering their cheerleading pom-poms to acknowledge the dismal data being reported. Something is amiss.

Sales of previously owned U.S. homes fell in January 7.2% following a December decline of 16.2%. The annualized rate of 5.05 million was at the lower end of estimates ranging from 5.04 to 6 million homes. Also, reported home prices for federal agency sponsored mortgages fell in December 1.6%.

New home sales were reported for January at a 309,000 annual rate. This was below the consensus low of 345,000. This followed a December drop of 7.2% to 342,000 annual home sales.

The Mortgage Bankers Association reported purchase applications dropped 7.3% for the week ending February 19 to the lowest level since 1997.

The S&P Case-Shiller HPI Composite 10 and Composite 20 each fell from 158.49 to 158.19 and 146.28 to 145.90, respectively.

These negative numbers were posted while first-time home buyers tax credits are still in force.

A year ago, last January, I wrote an article prescribing a simple bottoms-up solution to the housing crisis. The Obama administration chose a top-down big bank model, instead. Since the crisis is still with us here is my idea in a nutshell:

The federal government should self-refinance the original mortgages directly with homeowners at 4% fixed for 20 or 30 years, ultimately turning these mortgages into GNMAs.

The new mortgage then would be split in two, for the borrower. The lender would receive the entire mortgage amount due, thereby, eliminating one mortgage from existence. The home owner will now have a first mortgage for the current appraised value of the home. This mortgage becomes completely assumable with the home. The government recovers this portion when the GNMA is sold.

The difference between the original mortgage and currently appraised value, or the second mortgage, is applied to the borrower‘s income tax filing over 20 or 30 years. Each year, regardless of one‘s tax liability or credit, Uncle Sam is due 1/20th or 1/30th of this second mortgage. The borrower has the right to pay off the second at anytime, without penalty. This is the government’s only exposure in this transaction.

Investors and speculators are not eligible for this program. But, if they sell the property back to the family that was foreclosed upon and evicted, they could quote their total cost for the purchase of the property, plus any improvements made at cost, plus a nominal interest rate on their total outlay. Or, investors and speculators could ignore this program and keep these properties that do not have an assumable GNMA mortgage in a new real estate market place which does and is growing day by day.

This program could start with $20 billion. It’s cheap at twice the price. Fannie Mae (FNM) has borrowed $59.9 billion since last April. Fannie Mae will seek an additional $15.3 billion in aid from the Treasury after posting a ninth consecutive quarterly loss of $16.3 billion.

That’s the basic plan. Let’s tease it out some more. Fresh appraisals are needed. Many unemployed workers from the real estate industry could began earning money again as appraisers. Major home builders like Toll Brothers (TOL), DR Horton (DHI), Pulte Homes (PHM), or Lennar Corp. (LEN) could offer a recertification program like the luxury car brands. We have heard stories about homes being stripped and or vandalized before they were abandoned. Let the established homebuilders hire their laid off construction workers to make repairs or even upgrade houses - at the home owners’ expense. It may not be as lucrative as their old business but their old business isn’t coming back anytime soon and it puts people back to work, now.

For the home owner who refinances, he now has several hundred dollars extra each month to pay off other debts like bank credit cards (watch payment delinquencies fall), or make repairs to his home, or buy a new computer for the kids, or resume saving for retirement, or start saving for that vacation that’s been deferred again and again.

Primarily, what this would do is provide what is currently missing from real estate - a spark. Suggesting a real estate purchase in today’s climate is akin to kissing a beautiful stranger who is coughing with a “cold sore” on their lip. I insist, you go first.

Moreover, this plan does not require anyone to invalidate contract law, modify bankruptcy courts protocol, write off principal amounts on loans, antagonize CMO investors, and perform other unnatural acts in finance.

I could pose a half dozen philosophical or moral reasons not to intervene in this manner. As a practical matter, it’s possibly America’s last chance to save the larger middle class for the next generation.