Stocks Off Lows, But Still Down on Close

Charles Schwab: On the Market

Posted: 6/29/2017 4:15 PM ET

Stocks Off Lows, But Still Down on Close

U.S. stocks came off the lows of the day, but still saw significant declines as yesterday's upbeat stress-test results that fueled gains for some big banks were overshadowed by another steep sell-off for the Nasdaq with tech listings nearly doubling the decline of most other depressed sectors. Treasury yields were higher following some mostly lackluster economic data, while gold and the U.S. dollar were lower and crude oil prices were mixed. In equity M&A news, Rite Aid and Walgreens terminated their previously announced merger agreement and Staples inked a deal to be acquired by private equity firm Sycamore Partners.

The Dow Jones Industrial Average (DJIA) fell 168 points (0.8%) to 21,287, the S&P 500 Index dropped 21 points (0.9%) to 2,420, and the Nasdaq Composite plummeted 90 points (1.4%) to 6,144. In moderately-heavy volume, 946 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.19 to $44.93 per barrel and wholesale gasoline was $0.01 higher at $1.48 per gallon. Elsewhere, the Bloomberg gold spot price decreased $4.82 to $1,244.45 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.55.

Financials extended a recent run on the heels of late-yesterday's release of the banking stress test results by the Federal Reserve, which showed that it did not object to the capital plans of all 34 bank holding companies participating in the review. However, the Fed said it is requiring one firm, Capital One Financial Corp. (COF $81), to address weakness in its capital planning process and resubmit its capital plan by the end of 2017. COF traded lower.

The approval of capital plans opened the door to a plethora of share buybacks and increased dividend plans in the sector, headlined by Dow member  JPMorgan Chase & Co. (JPM $91), which announced plans to increase its quarterly dividend by 12% to $0.56 per share and repurchase up to $19.4 billion of its stock. Citigroup Inc's (C $67) plan was also a standout as it intends to increase its quarterly dividend by 100% to $0.32 per share and common stock repurchases of up to $15.6 billion. Morgan Stanley (MS $45) said it plans to raise its dividend by 25% to $0.25 per share and buyback up to $5.0 billion in stock, while Bank of America Corp. (BAC $24) announced intentions to raise its dividend by 60% to $0.12 per share and repurchase up to $12.0 billion in its stock. All four of these companies gained ground.

The results and subsequent capital actions add credence to Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, outperform rating on the financial sector that has been in place for some time as discussed in his latest Schwab Sector Views: From the Top Down on the Markets & Economy page at www.schwab.com.

Rite Aid Corp. (RAD $3) and Walgreens Boots Alliance Inc. (WBA $78) announced that they have terminated their merger agreement, replacing it with a new agreement in which WBA will purchase 2,186 RAD stores, including three distribution centers and related inventory for about $5.2 billion in cash. RAD will receive a $325 million merger termination fee and the new agreement also replaces RAD's deal to divest certain stores to Fred's Inc. (FRED $10), which fell sharply on the news. RAD tumbled over 25% as the news also accompanied its quarterly earnings report that missed expectations. WBA was nicely higher as it posted quarterly results that topped forecasts, while it also raised its guidance and announced a $5.0 billion share repurchase program.

Dow member Cisco Systems Inc. (CSCO $31) lowered its long-term revenue growth target following its analyst day as it shifts to software and recurring revenue models. CSCO traded lower. The tech sector remained in focus due to the recent flare-up in volatility amid valuation concerns as discussed in our article, Tech's Rough Ride: Is There More Turmoil Ahead? on the Insights & Ideas page at www.schwab.com and Schwab's Chief Investment Strategist Liz Ann Sonders' latest commentary, The Space Between … Tech Today Doesn't Resemble Tech Circa 2000, on the Markets & Economy page at www.schwab.com. Be sure to follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

Staples Inc. (SPLS $10) announced an agreement to be acquired by private equity firm Sycamore Partners for $10.25 per share in cash, valuing the company at about $6.9 billion. SPLS gained ground.

Constellation Brands Inc. (STZ $194) reported fiscal Q1 earnings-per-share (EPS) of $2.00, or $2.34 ex-items, compared to the FactSet estimate of $1.98, as revenues rose 3.4% year-over-year (y/y) to $1.9 billion, roughly in line with projections. The beer, wine and spirits maker raised its full-year EPS outlook and shares rallied.

Jobless claims unexpectedly tick higher, final read on Q1 GDP surprisingly revised up

Weekly initial jobless claims (chart) rose by 2,000 to 244,000 last week, above the Bloomberg forecast of 240,000, with the prior week’s figure being upwardly revised by 1,000 to 242,000. The four-week moving average declined by 2,750 to 242,250, while continuing claims increased by 6,000 to 1,948,000, north of estimates of 1,935,000.

The final look (of three) at Q1 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.4%, adjusted up from the 1.2% expansion posted in the second and first reports, where it was expected to remain. Q4 GDP expanded by an unrevised 2.1% rate. Personal consumption came in at a 1.1% gain for Q1, above the preliminary estimate of a 0.6% increase, where it was expected to remain. Personal consumption grew by an unrevised 3.5% in Q4.

On inflation, the GDP Price Index was adjusted to a 1.9% gain, versus forecasts of an unrevised 2.2% increase, while the core PCE Index, which excludes food and energy, was adjusted to a 2.0% rise, compared to expectations of an unrevised 2.1% gain.

Treasuries traded lower, with the yield on the 2-year note rising 2 basis points (bps) to 1.37%, while the yield on the 10-year note advanced 4 bps to 2.27%, and the 30-year bond rate rose 3 bps to 2.82%. Bond yields continued a rebound from depressed levels and 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. We expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read more, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Finally, the political front remained in focus with the Senate delaying a vote on its healthcare replacement bill until after the July 4th holiday which exacerbated uncertainty, while the debt ceiling debate continues and the markets are looking for any developments on tax and regulatory reforms, as well as other reflationary policy implementation. As such, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Tomorrow, the U.S. economic calendar will finish off the week with reports expected to include personal income and spending, with economists predicting a 0.3% m/m increase in income and a 0.1% rise in spending in May, shy of the 0.4% respective advances seen the month prior, and the Chicago Purchasing Managers Index for June, expected to show activity in the Midwest declined to 58.0 from the 59.4 posted in May, though a reading above 50.0 represents expansion. The last release for the day will be the final University of Michigan Consumer Sentiment Index for June, forecasted to remain at the preliminary level of 94.5, but below May's final reading of 97.1.

Europe lower, Asia gains ground

European equities finished lower as the markets appeared to get weary in the midst of a rising hawkish tone among global central banks, though the financials sector was the lone group in the green. Banking stocks eked out a gain on the heels of the upbeat stress test results and actions in the U.S. and as bond yields in the region moved higher. Stocks found pressure as the euro extended a recent run that has come on the heels of this week comments from European Central Bank (ECB) President Mario Draghi, which fostered a hawkish takeaway despite yesterday's reports that ECB members said the markets misjudged his remarks. Draghi pointed out a strengthening and broadening recovery, while saying that pressures on inflation are temporary and that "the threat of deflation is gone and reflationary forces are at play." The British pound added to a recent jump to weigh on the U.K. markets in the wake of Bank of England Governor Mark Carney saying yesterday that policy makers may need to begin the removal of stimulus if the trade-off between growth and inflation continues to lessen and the central bank will discuss this in the coming months. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com.

In economic news, German consumer price inflation unexpectedly rose and the nation's consumer confidence surprisingly ticked higher. Also, eurozone economic confidence improved more than expected. Political uncertainty remained in focus ahead of key elections in the eurozone and as U.K. Brexit negotiations are set to ramp up. Jeff and Vice President of Trading and Derivatives, Randy Frederick offer 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?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished higher on the heels of yesterday's rebound in the U.S., with banking stocks leading the way on optimism ahead of the favorable stress test results and as bond yields rose amid apparent hawkish global central bank commentary most recently out of the Bank of England. Japanese equities advanced with the yen slipping somewhat and despite a softer-than-expected read on the nation's retail sales. Australian securities rose with financials moving higher and commodity-related issues gaining ground, bolstered by the recovery in crude oil prices. Indian stocks ticked higher to snap a string of losses, though action was choppy amid derivative expirations. South Korean markets moved to the upside. Mainland Chinese shares increased and those traded in Hong Kong jumped, boosted by banking stocks. China is expected to report some key data on manufacturing and services sector activity tonight. For a look at the global landscape, see Schwab's Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.

The international economic docket for tomorrow will be busy, beginning with employment data, CPI, industrial production, vehicle production, housing starts and construction orders from Japan, private sector credit from Australia and manufacturing and non-manufacturing PMIs from China. Releases from across the pond will include consumer confidence, current account balance, Index of Services and GDP from the U.K., CPI, PPI and consumer spending from France and retail sales and unemployment data from Germany.

Stocks Down for Day, but Gain Ground for Week

Charles Schwab: On the Market

Posted: 4/28/2017 4:15 PM ET

Stocks Down for Day, but Gain Ground for Week

Despite being solidly higher for the week, U.S. stocks closed Friday's trading session lower amid a plethora of earnings and economic data. Investors processed quarterly results from some tech titans, headlined by releases from Amazon and Alphabet. The first look at Q1 GDP came in below analysts' expectations, a read on consumer sentiment dipped and regional manufacturing activity unexpectedly accelerated. Treasuries were mostly higher, the U.S. dollar was little changed and gold and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) decreased 41 points (0.2%) to 20,941, the S&P 500 Index declined 5 points (0.2%) to 2,384, and the Nasdaq Composite was 1 point lower at 6,048. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.36 to $49.33 per barrel and wholesale gasoline was unchanged at $1.55 per gallon. Elsewhere, the Bloomberg gold spot price ticked $4.12 higher to $1,268.42 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 99.05. Markets were solidly higher for the week, as the DJIA advanced 1.9%, the S&P 500 Index gained 1.5%, and the Nasdaq Composite rallied 2.3%.

Amazon.com Inc. (AMZN $925) reported Q1 earnings-per-share (EPS) of $1.48, above the FactSet estimate of $1.08, as revenues rose 23.0% year-over-year (y/y) to $35.7 billion, topping the projected $35.3 billion. AMZN issued Q2 revenue guidance that had a midpoint that was below the Street's expectations, while its margin outlook for the quarter was a bit shy of forecasts. Shares traded nicely higher.

General Motors Co. (GM $35) posted Q1 EPS of $1.70, exceeding the estimated $1.47, with revenues growing 10.6% y/y to $41.2 billion, versus the expected $40.6 billion. Shares closed little changed.

Alphabet Inc. (GOOGL $925) announced Q1 earnings of $7.73 per share, north of the estimated $7.38, as revenues excluding traffic acquisition costs (TAC) at the parent of Google rose 22.2% y/y to $20.1 billion, topping the projected $19.8 billion. Shares finished solidly to the upside.

Dow member Microsoft Corp. (MSFT $68) achieved fiscal Q3 EPS of $0.61, or $0.73 ex-items, versus the expected $0.70, as revenues increased 6.0% y/y to $23.6 billion, compared to the forecasted $23.7 billion. MSFT dipped.

Dow component Intel Corp. (INTC $36) reported Q1 profits of $0.61 per share, or $0.66 ex-items, compared to the projected $0.65, as revenues grew 8.0% y/y to $14.8 billion, roughly in line with expectations. INTC issued Q2 guidance with midpoints exceeding estimates, while raising its full-year outlook. However, shares saw pressure amid disappointment among analysts about the company's softer-than-expected operating margin and revenues out of its data center business that missed expectations again.

With a plethora of major earnings reports out of the tech sector, see the rationale behind our outperform rating for the group in Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Is Retail Really Dead?, on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

Starbucks Corp. (SBUX $60) posted fiscal Q2 EPS of $0.45, in line with estimates, as revenues rose 6.0% y/y to $5.3 billion, below the expected $5.4 billion. Q2 same-store sales increased 3.0% y/y, slightly missing the forecasted 3.1% gain. Shares traded lower.

Dow member Exxon Mobil Corp. (XOM $82) announced Q1 EPS of $0.95, above the anticipated $0.85, as revenues rose 29.9% y/y to $63.3 billion, below the estimated $66.4 billion. Shares of XOM advanced.

Dow component Chevron Corp. (CVX $107) reported Q1 EPS of $1.41, including an asset sale gain, which may be impacting comparability to the Street's expected $0.86, with revenues rising 41.9% y/y to $33.4 billion, below the forecasted $34.9 billion. CVX traded in positive territory.

Qualcomm Inc. (QCOM $54) cut its Q3 guidance as Dow component Apple Inc. (AAPL $144) informed the chipmaker that it is withholding payments to its contract manufacturers for the royalties those contract manufacturers owe under their licenses with Qualcomm for sales during the quarter ended March 31, 2017. QCOM said "Apple is improperly interfering with Qualcomm's long-standing agreements with Qualcomm's licensees." QCOM said it will continue vigorously to defend its business model, and pursue its right to protect and receive fair value for its technological contributions to the industry. QCOM shares overcame heavy losses and finished modestly higher.

First read on Q1 GDP misses estimates

The first look (of three) at Q1 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 0.7%, from the unrevised 2.1% expansion in Q4, and below the 1.0% growth forecasted by Bloomberg. Personal consumption gained 0.3%, south of the forecasted 0.9% rise and following the unadjusted 3.5% increase recorded in Q4. The sharp slowdown in GDP growth came as the deceleration in personal consumption was met with downturns in private inventory investment and government spending, which were partly offset by an upturn in exports and accelerations in both nonresidential and residential fixed investment.

On inflation, the GDP Price Index came in at a 2.3% rise, above expectations of a 2.0% gain and the unrevised 2.1% increase seen in Q4, while the core PCE Index, which excludes food and energy, moved 2.0% higher, matching expectations and following the unrevised 1.3% advance in Q4.

The deceleration in Q1 GDP growth was expected as that has been the trend for several years, with subsequent quarters accelerating, something Schwab’s Chief Investment Strategist Liz Ann Sonders expects to happen again as discussed in her latest article, ½ Full: Seeing Through a Weak Q1. Liz Ann notes that leading indicators say a lot more about the economy prospectively than backward-looking measures like GDP, and they remain quite healthy. Liz Ann concludes that we are likely just experiencing yet another "soft patch" in an ongoing expansion; so for now, "I am seeing the glass as half full." Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

The final April University of Michigan Consumer Sentiment Index (chart) was revised to 97.0 from the preliminary level of 98.0, where it was expected to remain. However, the index was up slightly compared to March's level of 96.9. Compared to last month, the expectations component improved, while the current conditions component declined. The 1-year and 5-10 year inflation outlooks remained at March's levels of 2.5% and 2.4%, respectively.

The Chicago Purchasing Managers Index (chart) unexpectedly moved further into a level depicting expansion (above 50), after rising to 58.3 in April—the highest level since January 2015—from 57.7 in March, and versus expectations of a decline to 56.2.

The Q1 Employment Cost Index (chart) increased by 0.8% quarter-over-quarter (q/q), north of forecasts of a 0.6% rise, and compared to the 0.5% gain seen in Q4.

Treasuries were mostly higher, with the yield on the 2-year note flat at 1.26%, and the yields on the 10-year note and the 30-year bond ticking 1 basis point lower to 2.28% and 2.95%, respectively. 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. Also, 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. Follow Randy on Twitter: @randyafrederick.

The markets continue to grapple with this week's rough framework of President Trump's tax-reform plan and Congress Facing Possible Government Shutdown—Again as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend on the  Insights & Ideas page at www.schwab.com.

European and Asian stocks mixed on earnings and politics

European equities finished mixed, with the markets digesting a plethora of global earnings reports. Moreover, political and geopolitical uncertainty continued to fester despite Sunday's French Presidential election that eased political risk concerns, with comments and actions from U.S. President Trump being eyed, along with his tax-reform details released this week amid the backdrop of the U.S. government trying to avoid a shutdown. Also, Brexit negotiations continue and the nation heads for a vote in June, while a German election looms later this year. For analysis of the political uncertainty on both sides of the pond, see Schwab's Chief Global Investment Strategist 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?, 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. German retail sales surprisingly ticked higher and Spain's Q1 GDP growth topped forecasts, while U.K. Q1 GDP expansion came in a bit shy of estimates. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region were mostly higher.

Stocks in Asia finished mixed following a flood of mixed global earnings data, while U.S. trade uncertainty and geopolitical concerns remain following comments and actions from President Trump. Schwab's Jeffrey Kleintop, CFA, offers timely commentary in his article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, while he also delivers a look at the global landscape in his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com. Japanese equities declined as the yen continued to claw back some early week softness, while earnings in the region disappointed and economic data showed industrial production fell more than expected, vehicle production slowed and headline consumer price inflation came in cooler than expected. However, the nation's retail sales unexpectedly rose. Chinese stocks continued to be hamstrung by regulatory concerns, with shares trading in Hong Kong declining, though mainland listings ticked higher. Australian securities finished flat, while equities in South Korea and India traded lower.

Earnings and eased French political risk concerns spark rally

U.S. stocks posted a back-to-back weekly gain that has pushed April into positive territory as the first round of the French Presidential election eased political risk concerns to kick the week off in rally mode. The jump was extended with Dow members Caterpillar Inc. (CAT $103) and McDonald's Corp. (MCD $140) setting a positive tone for the busiest week of earnings season. For the 287 companies in the S&P 500 that have reported earnings thus far, about 65% have topped revenue expectations and roughly 81% have bested earnings projections, per data compiled by Bloomberg. Technology stocks were among the best performers, along with health care and consumer discretionary issues. Financials were also solidly higher, with Treasury yields recovering from a recent bout of pressure. The energy sector eked out a gain, amid some improved earnings results and even as crude oil prices were choppy, with bullish oil inventory data being met with festering supply concerns.

However, the divergence between "hard" and confidence/survey-based "soft" data continued, with March durable goods orders and Q1 GDP missing forecasts, while consumer sentiment figures remained elevated. As such, the U.S. dollar extended a recent soft patch. The markets demonstrated some relative resilience in the face of U.S. political/trade uncertainty, with President Trump offering his tax-reform framework, making comments and taking some action regarding trade relations, while the government approved to extend the deadline to avoid a shutdown by a week. Finally, the markets shrugged of exacerbated geopolitical tensions with North Korea.

This brings us to next week, with earnings continuing to pour in and the economic calendar setting up to deliver looks at activity on the heels of the sluggish Q1, with April readings on the ISM Manufacturing and non-Manufacturing Indexes, and domestic auto sales, followed by Friday's key nonfarm payroll report. The headlining event will likely be Wednesday's Federal Open Market Committee's (FOMC) monetary policy decision, expected not to deliver another rate hike and be sans updated economic projections and press conference by Chairwoman Janet Yellen. However, the statement could be highly scrutinized for clues to the timing of future rate hikes.

As noted in the latest Schwab Market Perspective: Should Sharp Sentiment Shifts Mean a Change in Strategy?, U.S. equities turned around 180 degrees on a reduction in investor fear that had been building. We believe this is a positive shift, but underlying fundamentals haven't changed. Recent soft economic data contributed to the earlier stock market slump, but economic growth continues to muddle through, and a recession doesn't appear imminent. Putting too much emphasis on political risk globally could be one of the bigger risks facing investors in the current environment. Read more on the Markets & Economy page at www.schwab.com.

Along with a plethora of global manufacturing and services PMI reports, headlined by the eurozone, China and Japan, next week's international economic calendar will also bring the Reserve Bank of Australia's monetary policy decision, along with preliminary eurozone CPI and Q1 GDP.