Stocks Mostly Flat amid Earnings and Political Uncertainty

Charles Schwab: On the Market

Posted: 7/20/2017 4:15 PM ET

Stocks Mostly Flat amid Earnings and Political Uncertainty

U.S. stocks finished mixed and near the flatline with health care listings the standout winners, though some disappointing earnings results from a couple of Dow constituents weighed on the blue chip index. Treasuries were higher amid some mixed domestic economic results, while in global central bank action, both the European Central Bank and the Bank of Japan kept their monetary policy stances unchanged as expected. Crude oil prices and the U.S. dollar were lower and gold saw minor gains.

The Dow Jones Industrial Average (DJIA) lost 29 points (0.1%) to 21,612, the S&P 500 Index was flat at 2,473, and the Nasdaq Composite increased 5 points (0.1%) to 6,390. In moderate volume, 752 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.40 to $46.92 per barrel and wholesale gasoline was $0.01 lower at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price increased $2.56 to $1,243.81 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 94.31.

Dow member Travelers Companies Inc. (TRV $125) reported Q2 earnings-per-share (EPS) of $2.11, or $1.92 ex-items, versus the $2.11 FactSet estimate, as net written premiums rose 5.0% year-over-year (y/y) to $6.6 billion, roughly in line with forecasts. The insurer said profits were impacted by high levels of catastrophe and non-catastrophe weather-related losses caused by significant U.S. tornado and hail activity. TRV traded lower.

Dow component American Express Co. (AXP $85) posted Q2 EPS of $1.47, above the projected $1.43, as revenues increased 1.0% y/y to $8.3 billion, topping the estimated $8.2 billion. AXP maintained its full-year profit outlook and shares finished lower.

Qualcomm Inc. (QCOM $54) announced fiscal Q3 earnings of $0.83 per share, in line with forecasts, with revenues decreasing 11.0% y/y to $5.4 billion, exceeding the $5.3 billion estimate. The chipmaker issued Q4 EPS guidance that came in below expectations. Shares were under pressure.

Sears Holdings Corp. (SHLD $10) rallied after the company announced the launch of Kenmore products on Amazon.com (AMZN $1,029), including Alexa-enabled smart appliances.

Jobless claims fall, Leading Indicators continue gains

Weekly initial jobless claims (chart) fell by 15,000 to 233,000 last week, below the Bloomberg forecast of 245,000, with the prior week’s figure being revised higher by 1,000 to 248,000. The four-week moving average declined by 2,250 to 243,750, while continuing claims rose 28,000 to 1,977,000, north of estimates of 1,949,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for June rose 0.6% month-over-month (m/m), above projections of a 0.4% gain, and compared to last month's downwardly adjusted 0.2% increase. This was the tenth-straight monthly gain for the index, bolstered by building permits, ISM new orders and the yield curve.

The Philly Fed Manufacturing Index (chart) in July fell to 19.5 from 27.6 in June, though a reading above zero indicates expansionary activity, and compared to estimates of a decline to 23.0.

Treasuries traded mostly higher, with the yield on the 2-year note nearly unchanged at 1.35%, the yield on the 10-year note declining 1 basis point (bp) to 2.26% and the 30-year bond rate decreasing 2 bps to 2.83%.

Bond yields and the U.S. dollar have stumbled as of late amid the backdrop of mixed economic data and subdued inflation, exacerbated by Fed Chair Janet Yellen dovish semi-annual monetary policy testimony last week. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. Read more on the Fixed Income page at www.schwab.com, where Kathy also discusses, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

The political front remains in focus as the markets grapple with the fallout from the Senate healthcare bill failure, and what the implications may be on other business-friendly policy implementation. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's Washington Midyear Update: 4 Key Issues for Investors to Watch, where he points out dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There's growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back—or that they may not happen at all. Read more on the Insights & Ideas page at www.schwab.com.

The U.S. economic calendar will be void of any major releases tomorrow.

Europe turns lower as ECB causes volatility, Asia mostly higher after BoJ decision

European equities turned to the downside, with the European Central Bank (ECB) leaving its monetary policy stance unchanged as expected. The euro reversed early losses and rallied to weigh on the markets as the customary press conference by ECB President Mario Draghi following the decision appeared to cause some confusion. The ECB President said its highly accommodative policy remains necessary and there are no signs that inflation is picking up—though he reiterated that he is confident that inflation will return and added that the reasons for a 2.0% target were still valid. Draghi also said the central bank did not discuss tapering its stimulus measures but he did note for the first time that this topic will be discussed in the fall. On the economy, he pointed out that there was "unquestionable improvement" in the growth outlook. Bond yields finished mixed in volatile action, notably in Germany, following the comments, which came as Draghi jolted the markets a few weeks ago by appearing to offer a more hawkish view.

The British pound was lower versus the greenback as Brexit negotiations roll on and despite a stronger-than-expected read on the nation's retail sales. Political uncertainty remained and for analysis see Schwab's Chief Global Investment Strategist 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?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mostly to the upside, with Japanese equities rising as the yen weakened after the Bank of Japan (BoJ) kept its monetary policy stance unchanged as expected but lowered its inflation forecast again. The markets digested ramped up Q2 earnings season and awaited the monetary policy decision from the European Central Bank. Shares trading in mainland China and Hong Kong finished higher. Australian securities advanced as strength in oil & gas issues and financials more than offset a slide in technology stocks and a dip in the basic materials sector. South Korean stocks extended a record high run, while Indian listings declined amid some choppiness as the index remains near all-time highs. For a look at the global markets, see Schwab's Jeffrey Kleintop's CFA, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com, where you can also find his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page.

The international economic docket will be light tomorrow, offering department store sales from Japan, trade data from South Korea and public sector borrowing from the U.K.

Stocks Reclaim Part of Previous Decline

Charles Schwab: On the Market

Posted: 5/18/2017 4:15 PM ET

Stocks Reclaim Part of Previous Decline

U.S. stocks finished broadly to the upside, though only able to recover a fraction of yesterday's selloff as shares were led higher by technology and consumer discretionary listings with investors weighing whether the Trump administration will be successful in implementing its promised pro-growth policies. In earnings news, Wal-Mart topped estimates, while fellow Dow component Cisco was under pressure after announcing its results. Treasury yields were mixed and the U.S. dollar was higher, while reports on jobless claims and regional manufacturing surprised to the upside and leading indicators rose. Gold was lower and crude oil prices were higher. Overseas, stocks in Asia and Europe were widely lower.

The Dow Jones Industrial Average (DJIA) increased 56 points (0.3%) to 20,663, the S&P 500 Index added 9 points (0.4%) to 2,366, and the Nasdaq Composite jumped 44 points (0.7%) to 6,055. In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.28 to $49.35 per barrel and wholesale gasoline was $0.01 higher at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price declined $12.43 to $1,248.93 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 97.83.

Dow member Wal-Mart Stores Inc. (WMT $78) reported Q1 earning-per-share (EPS) of $1.00, versus the $0.96 FactSet estimate, as revenues grew 1.4% year-over-year (y/y) to $117.5 billion, slightly below the projected $117.7 billion. Q1 U.S. same-store sales rose 1.4% y/y, in line with forecasts. WMT issued Q2 EPS guidance that was roughly in line with expectations and domestic same-store sales growth that was modestly north of projections. Shares finished nicely higher.

Dow component Cisco Systems Inc. (CSCO $31) posted fiscal Q3 profits of $0.50 per share, or $0.60 ex-items, compared to the estimated $0.58, with revenues dipping 1.0% y/y to $11.9 billion, roughly in line with expectations. CSCO issued Q4 guidance that came in a bit shy of the Street's forecasts. Separately, the company announced that it will reduce its workforce by an additional 1,100 employees as an extension of its restructuring plan. Shares were solidly lower.

L Brands Inc. (LB $50) announced Q1 EPS of $0.33, versus the forecasted $0.29, on previously announced revenues of $2.4 billion, with same-store sales decreasing 9.0% y/y, compared to the projected 8.7% decline. LB raised its full-year profit guidance. Shares gained ground.

Jobless claims and regional manufacturing activity favorably surprise, LEI gains ground

Weekly initial jobless claims (chart) declined by 4,000 to 232,000 last week, below the Bloomberg forecast of 240,000, with the prior week’s figure unrevised at 236,000. The four-week moving average decreased by 2,750 to 240,750, while continuing claims fell by 22,000 to 1,898,000, south of estimates of 1,950,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for April rose 0.3% month-over-month (m/m), versus projections of a 0.4% increase. Support came from the components pertaining to the yield curve, jobless claims, consumer expectations and average workweek, while building permits weighed on the index.

The Philly Fed Manufacturing Index (chart) in May jumped further into a level depicting expansion (a reading above zero) after rising to 38.8 from 22.0 in April, and compared to estimates of a decline to 18.5.

Treasuries were mixed, with the yield on the 2-year note rising 2 basis points (bps) to 1.26%, while the yield on the 10-year note was nearly unchanged at 2.23% and the 30-year bond rate decreased 1 bp to 2.90%. For analysis of the bond markets, see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at www.schwab.com, where Randy and Chief Investment Strategist Liz Ann Sonders also offer the video, June Rate-Hike Highly Likely? Follow Randy, Kathy and Liz Ann on Twitter: @randyafrederick, @kathyjones and @lizannsonders.

For a look at the action in the stock markets after yesterday's spike in volatility, see the latest articles, Is The Stock Market Just Quiet Or Is It Too Quiet? from Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Liz Ann Sonders', Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com. Follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch.

Tomorrow, the U.S. economic calendar will be void of any major releases.

Europe extends selloff on political concerns, Asia pressured lower

European equities extended yesterday's broad-based selloff, with the U.S. political turmoil taking center stage and exacerbating concerns about President Trump's pro-growth policy implementation. The heightened political uncertainty in the U.S. comes as elections loom in the U.K., Germany and Italy, while Brexit negotiations continue. For analysis of the political uncertainty see Schwab's Jeffrey Kleintop's, CFA, and 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?. Oil & gas and financials were lower amid the recent drop in global bond yields and choppy action in crude oil prices. Automakers led the markets lower, with shares of Fiat Chrysler Automobiles NV (FCAU $10) lower amid reports that the European Commission launched an investigation of Italy over the nation's handling of accusations of emission test cheating and a report that the U.S. Department of Justice is preparing a lawsuit against the company if talks fail to resolve alleged violations of clean-air rules by diesel vehicles, per Bloomberg. In economic news, U.K. retail sales rose much more than expected. The euro was lower and the British pound gained ground on the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished broadly lower following yesterday's drop in the U.S. and Europe yesterday as U.S. political risk concerns ramped up to foster uncertainty about President Trump's pro-growth policy implementation. Japanese equities fell, with the yen strengthening amid the uneasy sentiment. The political concerns overshadowed a report that showed Japan's Q1 GDP grew at an annualized 2.2%, topping expectations of a 1.7% gain and accelerating from Q4's 1.4% expansion. Stocks traded in mainland China and Hong Kong declined with the dampened global mood being met with reports showing the country's home prices moderated further amid stepped up government restrictions on home purchases, while a late-day read on foreign direct investment fell. Australian securities traded lower, with the banking sector continuing to see pressure and healthcare issues falling, while South Korean shares also declined. Finally, Indian equities joined the regional trend, retreating from record high territory. As noted in the latest Schwab Market Perspective: Sell in May…or Settle In?, another potential concern for the market is coming in the form of a potential Chinese slowdown, which could lead to a near-term retrenchment in emerging market equities. Read more on the Markets & Economy page at www.schwab.com.

Tomorrow, the international economic docket will be light, offering PPI from Germany and the current account for the Eurozone.

Financial Review

When Others Are Greedy

Sinclair Noe — February 16, 2017

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

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DOW + 7 = 20,619
SPX – 2 = 2347
NAS – 4 = 5814
RUT – 5 = 1399
10 Y – .05 = 2.45%
OIL + .19 = 53.79
GOLD + 5.40 = 1239.60

Asian markets moved higher this morning but European exchanges were slightly lower. World stocks hit an all-time high this morning, as the MSCI’s All Country World index, which spans 46 countries, notched a record. The Dow Jones industrial average, S&P 500 and Nasdaq have all closed at record highs for five consecutive days, something investors haven’t seen since 1992. And today the Dow, pulled out another record high close but couldn’t drag the other indices higher.

Yesterday, Fed Chair Janet Yellen was delivering her Humphrey-Hawkins testimony before the House Finance Committee and she answered a question about the market’s melt-up. She said: “I think market participants likely are anticipating shifts in fiscal policy that will stimulate growth and perhaps raise earnings.”

Federal Reserve Vice Chairman Stanley Fischer confirmed Fed chief Janet Yellen’s message to the markets this week that the central bank sees signs of strengthening in the economy and “is a little more confident about where we’re going and how soon we’ll get to full employment with stable prices.”

Yellen delivered 2 days of testimony before Congress this week and made the case for continued interest rate hikes this year. Stronger than expected inflation data combined with comments from Fed Chair Janet Yellen to Congress helped push the Fed funds futures market-implied chance of a rate hike in March to 44%, up from 34% the day before.

The odds, per overnight index swaps pricing, have jumped to 52% for March. The dollar hasn’t had a very good week despite the prospect of tighter US policy.

Promises of massive and phenomenal tax reforms have certainly been a driving force in the recent rally; the reality is that we don’t yet know the details, and so the cart seems a bit ahead of the horse. According to a new Bank of America Merrill Lynch Global Fund Manager Survey just 23 percent of respondents, for instance, expect tax cuts to happen before Congress takes its August recess, and 30 percent believe they won’t get enacted until 2018.

Another gauge of emotion, the Investors Intelligence Advisors Sentiment survey, shows bullishness on the stock market at 62.7 percent, the highest reading in more than 12 years. Bearish sentiment, or a belief that the market is heading lower, dropped to 16.2 percent, the lowest since August 2015. Of course, this is a contrarian indicator. You don’t want to buy when everyone is bullish. Or as Warren Buffett famously said, “be greedy when others are fearful and be fearful when others are greedy.”

Normally, the Fed taking a hawkish stance would wipe out giddy optimism but it hasn’t slowed this market hopped up on Trumponomics. What is especially peculiar, is that Trump is calling the economy a disaster.

At a press conference today, to announce his new nominee for Labor Secretary (Alexander Acosta, a former Justice Department official and current dean of Florida International University) Trump claimed: “It’s a mess. At home and abroad. A mess. Jobs are pouring out of the country. You see what’s going on with all the companies leaving our country. Going to Mexico and other places. Low pay, low wages… I inherited a mess.”

When it comes to the U.S economy, though, that “mess” isn’t borne out by most measures. The stock market is at all-time highs. Though growth in the gross domestic product is slow by historical standards, the economy is in the tenth year of one of the longest sustained expansions in history.

And the U.S. job market, which is creating jobs faster than employers can fill them, appears to be stronger than it’s been in nearly a decade; 227,000 new jobs last month and the unemployment rate at 4.8%, which is close to full employment.

The Philadelphia Fed said its manufacturing index soared in February to a reading of 43.3 from 23.6 in January. That’s the highest level since early 1984. Manufacturing activity in the Philadelphia region has been improving since the middle of last year. The new orders index rose 12 points to 39, and the shipments index rose 8.1 points to 28.6.

Initial claims for state unemployment benefits rose 5,000 to a seasonally adjusted 239,000 for the week ended Feb. 11. Claims have been below 300,000, a threshold associated with a strong labor market, for 102 consecutive weeks.

Construction on new houses fell 2.6% in January, but another increase in permits points to builders breaking ground on more units in the months ahead. Housing starts took place at an annual rate of 1.25 million last month. The decline in new construction last month was centered entirely on the category of multi-dwelling units that are usually rented.

Construction on apartment, condos and buildings with five or more units shrank nearly 8%. Yet work on new single-family homes rose almost 2%. Permits to build new homes, climbed 4.6% in January to a 1.29 million pace, and are up 8.2% in the past year.

On Monday, February 20, all US banks and financial markets will be closed in observance of the Presidents Day, perhaps giving investors a chance to catch their collective breath and contemplate the madness of the markets this year.

Cisco sees softness in its core business. The company beat on the top and bottom lines but said revenue from its key “NGN Routing, Switching and Data Center product revenue decreased by 10%, 5% and 4%, respectively.” Shares fell by more than 1% in after-hours trade.

Waste Management said revenue for the latest quarter climbed, driven by increased volumes and yield in the company’s collection and disposal business, though earnings on a per-share basis missed Wall Street expectations. Waste Management confirmed guidance for the current fiscal year.

Snapchat has reportedly set the value of its IPO. The company has set a valuation of $16.2 billion to $18.5 billion for its initial public offering, below the lower end of its range.

America’s largest banks are to propose a complete overhaul of how financial institutions investigate and report potential criminal activity, arguing that rules imposed in the years after the Sept. 11, 2001 attacks are onerous and ineffective. To keep drug traffickers and terrorists from laundering money through the US financial system, federal law mandates that bank employees file a Suspicious Activity Report (SAR) with authorities if they suspect transactions could be part of a crime.

Oil prices are moving higher after OPEC sources said the group could extend its oil supply-reduction pact with non-members and might even apply deeper cuts if global crude inventories failed to drop to a targeted level. OPEC and other exporters agreed last year to cut output by 1.8 million barrels per day to reduce a price-sapping glut. The deal took effect on Jan. 1 and lasts six months. Most producers appear to be sticking to the deal so far but it is unclear how much impact the supply reductions are having on world oil inventories that are close to record highs.

US oil producers sent a record 7 million barrels of crude out into the world market last week. The 1 million barrels a day is nearly double the week-earlier level. The Energy Information Administration’s weekly inventory data also showed that US oil stockpiles swelled to a record 518.2 million barrels last week, and gasoline inventories also hit a record 259.1 million barrels, gaining 2.8 million barrels.

At 2.25 gigawatts, Arizona’s Navajo Generating Station is the biggest coal-burning power plant in the Western US. The plant, and the nearby Kayenta coal mine that feeds it, are located on the Navajo Indian Reservation, and the Navajo and Hopi peoples have had a conflicted relationship with coal since the plant opened in the 1970s. Almost all the 900-plus jobs at the mine and plant are held by Native Americans, and the tribes receive royalties to account for large portions of their budget.

Negotiations were underway to improve the tribes’ lease terms, which expire in 2019. But on Monday, the four utilities that own most of the plant voted to close it at the end of 2019. They decided that the plant’s coal-powered electricity just can’t compete with plants burning natural gas.

Lease negotiations included consideration of a plan to close one of the plant’s three turbines and replace the generation with renewable energy. But the economically vulnerable tribes will be hard-pressed to immediately replace the critical jobs and revenue associated with coal should the plant close three years from now. The flip-side, of course, is that closing the plant (as well as the mine) would eliminate a significant amount of pollution and water use.

Staff at the Environmental Protection Agency have been told that President Trump is preparing a handful of executive orders to reshape the agency, to be signed once a new administrator is confirmed.