Stocks Return to Action in Positive Fashion

Charles Schwab: On the Market

Posted: 12/27/2016 4:15 PM ET

Stocks Return to Action in Positive Fashion

U.S. stocks managed to gain ground on light trading volume following the extended Christmas holiday weekend. The advance for stocks was supported by a 15-year high read for consumer confidence and stronger-than-expected reports on regional manufacturing activity and home prices. Treasury yields, gold and crude oil prices were higher and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) increased 11 points (0.1%) to 19,945, the S&P 500 Index added 5 points (0.2%) to 2,269 and the Nasdaq Composite gained 31 points (0.6%) to 5,487. In light volume, 487 million shares were traded on the NYSE and 1.2 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.88 higher to $53.90 per barrel and wholesale gasoline was $0.02 higher at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price added $5.86 to $1,139.17 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% higher at 103.04.

Biogen Inc. (BIIB $291) and Ionis Pharmaceuticals Inc. (IONS $55) gained solid ground after their treatment for spinal muscular atrophy, known as Spinraza, received approval late Friday from the U.S. Food and Drug Administration (FDA).

Consumer Confidence jumps to 15-year high

The Consumer Confidence Index (chart) hit the highest level since August 2001after jumping to 113.7 in December from the upwardly revised 109.4 level in November, and compared to the Bloomberg estimate of 109.0. Sentiment toward the present situation declined but expectations of business conditions for the next six months rose solidly to the highest level since December 2003. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—decreased to 4.4 from the 6.6 posted in November.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.1% gain in home prices year-over-year (y/y) in October, versus expectations of a 5.0% increase. Month/month (m/m), home prices were up 0.6% on a seasonally adjusted basis for October, north of forecasts calling for a 0.5% gain.

The Richmond Fed Manufacturing Activity Index moved further into expansion territory (a reading above zero), rising to 8 for December from the 4 posted in November, and versus expectations of a 5 reading.

Tomorrow, the lone release from the U.S. economic calendar will give us a look at pending home sales from November, expected to have increased 0.5% m/m after rising 0.1% in October.

Treasuries were lower, with the yield on the 2-year note gaining 3 basis points (bps) to 1.23%, while the yields on the 10-year note and the 30-year bond rose 2 bps to 2.56% and 3.13%, respectively.

Bond yields have surged as of late as some upbeat economic data has accompanied high expectations for fiscal stimulus, tax reform and regulatory rollbacks following the surprise November Presidential election. Also, the rally in rates was bolstered in early December as the Fed's highly expected 25 bp increase to its target for the fed funds rate was delivered along with a forecast for three rate hikes in 2017, up from two in its September projection. Schwab’s Chief Investment Strategist Liz Ann Sonders details the Fed's monetary policy decision in her latest article, Fed Shocks No One and Raises Rates. Read more at www.schwab.com/marketinsight, and be sure to check out Liz Ann's video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled Fed Raises Rates: What Should the Markets Expect? at www.schwab.com/insights. Follow Liz Ann, Randy and Schwab on Twitter: @lizannsonders, @randyafrederick and @schwabresearch.

Moreover, Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? at www.schwab.com/insights, where you can also find her latest, Changing Conditions: A Bond Market FAQ. Follow Kathy on Twitter: @kathyjones.

Signs of rising inflation have also pressured bond prices and Schwab's Fixed Income Director, Collin Martin, CFA, discusses in his article, Inflation Is Rising: Time to Consider Treasury-Inflation Protected Securities? at www.schwab.com/onbonds.

European stocks tick higher, Asia mixed in light holiday trading 

European equities nudged higher, with volume remaining light amid the holiday period and U.K. markets continuing to be on a break. Financials remained hamstrung as the troubled Italian banking sector continued to be in focus after the European Central Bank said struggling lender Banca Monte dei Paschi di Siena SpA (BMDPD $7) needs about twice the amount the company had sought in its recently failed capital increase, per Bloomberg. The ECB's estimate comes as the government approved a bank bailout decree that will allow it to increase its public borrowing by 20 billion euros to help fund bank bailouts. Heatlhcare and technology issues helped push stocks slightly higher, along with another dose of U.S. economic data. The euro was little changed and the British pound was lower versus the U.S. dollar, while bond yields in the region finished mixed. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed with continued light volume amid the holiday season, while markets in Hong Kong and Australia remained closed. Japanese equities finished flat, with the yen losing ground in the wake of economic data showing the nation's core consumer price inflation declined more than expected and household spending unexpectedly fell in November. Mainland Chinese stocks declined despite a solid acceleration in the country's industrial profits y/y for last month. The data adds to a recent string of upbeat reports suggesting stabilization in the world's second-largest economy, but these have been met with festering currency/liquidity concerns in the wake of the U.S. dollar's recent jump, uncertainty following government crackdowns—notably on the real estate and insurance sectors—and lingering uneasiness regarding trade relations with the U.S. For analysis of the impact on the global markets of the U.S. election, see Schwab's Jeffrey Kleintop's, CFA, latest article, President Trump and Global Trade: How Will Campaign Promises Play Out?.

South Korean securities advanced despite a disappointing read on the nation's consumer confidence in December, while Indian listings rallied. India's index rebounded from a recent selloff that has taken the index to a five-week low, courtesy of festering earnings and economic concerns, along with government reform uncertainty and monetary policy divergence. Schwab's Director of International Research, Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read both articles at www.schwab.com/oninternational.

The international economic docket for tomorrow will include industrial production, retail sales and vehicle production from Japan, retail sales from Germany and consumer confidence from Italy.

Financial Review

Easy to Spot Winners

Sinclair Noe — October 22, 2015

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

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DOW + 320 = 17,489
SPX + 33 = 2052
NAS + 79 = 4920
10 YR YLD un = 2.03%
OIL + .18 = 45.38
GOLD – .80 = 1166.90
SILV + .16 = 15.94

European Central Bank policymakers are meeting today in Malta. ECB President Mario Draghi announced no change to interest rates or asset purchases, but he warned that emerging markets are hurting Eurozone growth prospects, and he hinted the central bank may lower the deposit rate further or expand its quantitative easing at its December meeting. Markets just love an accommodative central bank.

The European Economics Commission says “Greece has done a certain number of reforms, and we are going to give them money, €3 billion-euro in all,” and in the course of November, December, the commission will deal with the issue of the recapitalization of Greek banks and Greek debt.”

Chinese stocks recovered today as the People’s Bank of China added liquidity to the market. After the close on Wednesday, the PBOC injected $16.6 billion into 11 financial institutions via medium-term lending facilities. Meanwhile, the government’s anti-corruption campaign continues with a crackdown on golf, considered a lavish extravagance. Or in my case, cruel punishment.

New applications for U.S. unemployment benefits inched up by 3,000 to 259,000 in the week ended Oct. 17. This is the first gain after two straight large declines. Claims had fallen by 20,000 in the prior two weeks.

Existing home sales rose 4.7% to a seasonally adjusted annual rate of 5.55 million, the second-highest monthly level since Feb. 2007 and an 8.8% rise from the same month of 2014. The National Association of Realtors attributed the improvement in the housing market to low mortgage rates, an improving jobs environment and a slight thawing in credit availability. There were 2.21 million available homes for sale, down 3% from August. The number of listed properties in August was the second-lowest for that month since 2002.

The White House is making a push to solve the debt crisis in Puerto Rico, pressing Congress to amend bankruptcy code, instate a financial control board and extend tax credits as the commonwealth struggles with $72 billion in debt. On Wednesday, the Government Development Bank, the island’s de facto fiscal authority, ended talks with a group of its bondholders and their advisers after failing to reach a deal on restructuring the debt.

The U.S. Treasury said it will postpone the two-year note auction previously scheduled for Tuesday, as an impasse over the debt limit constrains the nation’s borrowing and inflicts the first ceiling-related auction delay in a decade. The Treasury sent an e-mail saying: “Due to debt ceiling constraints, there is a risk that Treasury would not be able to settle the two-year note” on Nov. 2. The five-year note auction on Oct. 28 and the seven-year note auction on Oct. 29 will proceed as planned.

The yield on the two-year Treasury note slid after the announcement, as it means less supply than had been expected in this sector. Treasury Secretary Jacob Lew said he is concerned that “last-minute brinkmanship” in Congress could lead to a legislative “accident” in which lawmakers would fail to raise the debt ceiling before a Nov. 3 deadline. With $12.9 trillion in marketable securities, the U.S. is considered the world’s most reliable debt issuer. The last time an auction was delayed due to the borrowing limit was in November 2004.

And part of the reason why this is noteworthy is because the Treasury markets are supposed to be boring, incredibly boring and completely predictable, regular, and consistent. This consistency has allowed the government, and by extension the US dollar, to become the safe harbor for investors. Predictability translates into decreased borrowing costs for the US, roughly $27 billion in savings over the past 17 years, simply attributed to the predictable, consistent bond market schedule.

Remember the debt ceiling fight of 2011 was behind the credit rating downgrade that stripped the US of AAA rating. And now we are preparing for another fight over the debt ceiling, and the clock is ticking, and the most boring part of the markets just got important.

The median stock in the US has been flat for 2015. That is actually a big improvement from about one month ago when the median stock was down 8%, so we’ve seen a nice rally, but at the current pace we are on track for the worst performance since 2008. And it doesn’t look like stocks are going to rally on earnings news; third quarter reports are coming in and we are on track for a two consecutive quarters of declining earnings, or an earnings recession.

The bad news is that when we have an earnings recession we tend to get a real recession. This is a statistic not lost on the Fed. Historically there has been a very high correlation between changes in the Fed Funds rate and the profit cycle. The Fed traditionally begins a tightening cycle when profits are moving higher and begins easing when profits decelerated. The notion that the Fed would raise rates in a profits recession, well, it has never happened before.

United Auto Workers members have ratified a new 4-year labor contract with Fiat-Chrysler. UAW members sacrificed gains in a 2011 contract and two years earlier made concessions to allow the former Chrysler to go through bankruptcy. The new contract, effective as of next Monday, provides a clearer path to top pay for so-called “second-tier” workers in a two-tier wage system established in 2007, which pays newer workers less than those hired before 2007. The new contract allows newer workers to earn wages more in line with veteran employees. Next up, negotiations with Ford and GM.

A swift plunge in the stock price of Valeant Pharmaceuticals cost some of Wall Street’s top names billions of dollars on Wednesday but Pershing Square’s Bill Ackman took the meltdown as a buying opportunity. Ackman bought 2.1 million additional shares as the company plummeted as much as 40% on a report from Citron Research that alleged it fraudulently inflated revenues. The report goes so far as to call Valeant the “pharmaceutical Enron.” Today, the stock dropped 10% more.

Let’s take a look at earnings reports:
McDonald’s reported quarterly earnings and revenue that topped estimates. Global sales at established restaurants were up a much better-than-expected 4 percent in the third quarter, ending six straight quarters of flat or falling results. McDonald’s share hit an all-time high on the report.

American Express posted quarterly earnings and revenue that missed analysts’ expectations on Wednesday, citing continued headwinds from a stronger U.S. dollar and a rise in marketing spending.

3M, the maker of Scotch tape and Post-it notes, reported disappointing net sales for the third quarter and said it would cut about 1,500 jobs next year, hurt by a strong dollar and a global economic slowdown.

Caterpillar delivered quarterly earnings and revenue that fell short of expectations on Thursday. The company also lower its earnings outlook for this year and sharply increased its estimates on restructuring costs for 2015.

Southwest Airlines posted an 83% jump in third-quarter profit, boosted by lower fuel prices and cost controls.

Daimler, the owner of Mercedes-Benz, reported a net income of $2.7 billion, a 13% drop compared with a year earlier, but Mercedes car sales rose by 18% in the period.

Hyundai reported a 23% fall in net profit to $1.1 billion on falling China sales, missing estimates.

Freeport-McMoRan will further cut copper and molybdenum output as it posted a bigger-than-expected quarterly loss. The Phoenix-based company said it remains confident in the longer-term outlook for copper, but will halve operating rates at its Sierrita mine in Arizona as prices continue to drop. Freeport reported an adjusted loss of $156 million, or 15 cents a share, lagging analysts’ expectation for an 8 cent loss.

Three big earnings reports came out after the closing bell: Microsoft, Amazon, and Google parent Alphabet.

Microsoft reported a profit of $4.6 billion, or 57 cents a share, up from $4.5 billion, or 54 cents a share, a year earlier. Profit beat estimates, despite a decline in earnings. For the first time, Microsoft broke out financial results based on three operating division, including its mobile and cloud business.

Amazon posted a profit, always a bit surprising, a profit of $79 million, or 17 cents a share, compared with a loss of $437 million, or 95 cents, a year earlier. You’ll remember that last year’s results included a big whiff with the Fire phone. In the most recent quarter revenue gained 23 percent to $25.4 billion, pushed by Amazon Prime Day, which was even better than Black Friday.

As Amazon has been transformed from an online bookstore into a vast conglomerate, its video-streaming service competes with Netflix Inc. and its third-party logistics business rivals UPS. Its cloud business, with revenue growing 78%, competes with Google and Microsoft to rent storage and computing power. Meanwhile its core e-commerce business challenges brick-and-mortar chains such as Wal-Mart and Target. It has all worked well for CEO Jeff Bezos; with today’s gains Bezos saw his net worth climb to $55 billion, making him the third richest man in America.

Google parent Alphabet reported better-than-projected sales and profit in the latest quarter. Revenue was up 15% to $15.1 billion. Third-quarter net income was $2.74 billion. Total clicks on ads up 23 percent, even as the average price for an ad fell 16 percent. But Alphabet is now more than an online search engine.  Other initiatives range from computers and fast-Internet services, to projects such as like product-delivering drones, life sciences products, airborne wind turbines and self-driving cars. While the new areas have yet to bring in sales to rival Google’s core operations, they’re being given room to operate as distinct units under a new operating structure.