Stocks Decline in Lackluster Session

Charles Schwab: On the Market

Posted: 10/17/2016 4:15 PM ET

Stocks Decline in Lackluster Session

U.S. equities finished lower to start the week, with energy issues seeing pressure amid a drop in crude oil prices, while Fed rate hike expectations continued to linger, sapping sentiment. On the equity front, Bank of America and Hasbro posted better-than-expected earnings, while Dow member Caterpillar announced the retirement of its CEO. Treasuries were higher following a much softer-than-expected regional manufacturing report, as was gold, while the U.S. dollar lost ground.

The Dow Jones Industrial Average (DJIA) fell 52 points (0.3%) to 18,086, the S&P 500 Index lost 7 points (0.3%) to 2,127 and the Nasdaq Composite declined 14 points (0.3%) to 5,200. In light-to-moderate volume, 691 million shares were traded on the NYSE and 1.4 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.41 to $49.94 per barrel, wholesale gasoline was unchanged at $1.49 per gallon and the Bloomberg gold spot price rose $3.66 to $1,254.69 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 97.87.

Bank of America Corp. (BAC $16) reported 3Q earnings-per-share (EPS) of $0.41, above the $0.34 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $21.6 billion, compared to the projected $20.8 billion. The company benefitted from its fixed income trading activity and reduced expenses. Shares gave up early gains and were little changed.

Hasbro Inc. (HAS $82) posted 3Q profits of $2.03 per share, north of the expected $1.75, with revenues increasing 14.0% y/y to $1.7 billion, above the estimated $1.6 billion. The toy company said growth in boys, games and girls categories helped it deliver the "greatest revenue and earnings quarter" in its history, adding that it is well positioned for what it believes will be a good holiday season. HAS rallied.

Dow member Caterpillar Inc. (CAT $87) announced that Chairman and Chief Executive Officer (CEO), Doug Oberhelman, has elected to retire, effective March 31, 2017. CAT said its board has elected Caterpillar Group President, Jim Umpleby, to succeed Oberhelman as CEO. Shares finished lower.

Industrial production ticks higher, NY manufacturing output unexpectedly shrinks

Industrial production (chart) ticked 0.1% higher month-over-month (m/m) in September, in line with the Bloomberg estimate, and following August's downwardly revised 0.5% decrease. Manufacturing and mining production improved modestly, while utilities output fell. Capacity utilization rose to 75.4% from August's downwardly revised 75.3%, and compared to projections for a 75.6% rate. Capacity utilization is 4.6 percentage points below its long-run average.

The Empire Manufacturing Index showed output from the New York region surprisingly fell further into contraction territory (a reading below zero) for October. The index dropped to -6.8 from September's unrevised -2.0 level, with forecasts calling for an improvement to 1.0.

Treasuries finished higher, as the yield on the 2-year note declined 3 basis points (bps) to 0.81%, while the yields on the 10-year note and the 30-year bond dropped 4 bps to 1.76% and 2.52%, respectively. Bond yields have given back some of a recent rally that has come courtesy of upbeat economic data, hawkish Fedspeak, and the rise in crude oil prices. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her latest article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

While the ramp up in earnings season will likely garner heavy attention, today's data kicks off this week's domestic economic calendar that will yield a plethora of data to digest as the markets grapple with Fed rate hike expectations. Tomorrow, the docket will bring the Consumer Price Index, forecasted to have risen 0.3% m/m during September following the 0.2% increase the month prior, while ex-food and energy, the core rate is expected to be 0.2% higher m/m, down slightly from the 0.3% posted in August. As well, October's NAHB Housing Market Index will be reported, with economists expecting a reading of 63, down slightly from the 65 recorded in September, but well above the demarcation point of 50 that separated homebuilders' assessment of conditions in the housing market as good versus poor. Also, the Presidential election will remain a source of focus for the markets leading up to Wednesday's final debate. As part of our election 2016 commentary, Schwab's Vice President, Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Where Do the Candidates Stand? Key Issues for Investors, at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles.

As noted in the recent Schwab Market Perspective: Spinning Our Wheels, U.S. equity indexes are within the summer’s range and we believe a bullish rotation within equities may be taking place. The important third quarter earnings season is just gearing up, with expectations having been downgraded over the past couple of months, setting up the likelihood of a good quarter relative to expectations. However, some improvement in economic data and higher inflation readings leaves the possibility of tighter monetary policy from the Fed and even other central banks. Read more at www.schwab.com/marketinsight.

Europe lower ahead of data and amid central bank focus, Asia mixed

European equities finished mostly lower, led by oil & gas issues as crude oil prices moved to the downside, while the markets awaited a plethora of global earnings and economic data this week and central bank caution remained ahead of Thursday's monetary policy decision from the European Central Bank. Ahead of the decision, eurozone consumer price inflation rose 0.4% m/m in September, matching expectations, and an acceleration from the 0.1% gain posted in August. The euro was higher and the British pound finished little changed versus the U.S. dollar, while bond yields in the region closed mixed. Italian stocks outperformed amid a reprieve from the recent pressure on the nation's banking sector. Ahead of a busy week and amid ongoing choppiness in the global markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, 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 these articles, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed as the recent weakness in the yen helped lift Japanese equities, though a plethora of Chinese data slated for this week likely kept caution elevated. Schwab's Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscape, at www.schwab.com/oninternational. Casino-related stocks were a drag on the markets in the region as Chinese authorities detained employees from Australia's Crown Resorts Ltd. (CWLDY $21) with China's Foreign Ministry saying that Australian nationals were under criminal detention for their suspected involvements in gambling crimes, per CNBC. Mainland Chinese securities and those traded in Hong Kong dropped 0.8%, while Australia's markets saw marked pressure with the weakness in gaming stocks being met with solid declines in technology and oil & gas issues. Meanwhile stocks in India declined amid concerns on the lackluster start to earnings season and on the heels of Friday's mixed September trade report, but listings in South Korea ticked modestly higher.

Tomorrow, the international economic calendar will be dominated by reports out of the U.K., including the Retail Price Index, CPI, PPI, and housing prices.

Stocks Move Up, Down and Around the Flatline

Charles Schwab; On the Market

Posted: 7/15/2016 4:15 PM ET

Stocks Move Up, Down and Around the Flatline

U.S. stocks oscillated near the unchanged mark for most of Friday's session, before ultimately finishing mixed. The pause from the recent equity run developed despite a plethora of upbeat domestic economic data, which was highlighted by an upbeat June retail sales report. Treasuries and gold were lower, while the U.S. dollar and crude oil prices were higher. In earnings news, results from Citigroup and Wells Fargo fostered some mixed reactions and the FTC settled its multi-year investigation into Herbalife.

The Dow Jones Industrial Average (DJIA) rose 10 points (0.1%) to 18,516, the S&P 500 Index decreased 2 points (0.1%) to 2,162, and the Nasdaq Composite shed 4 points (0.1%) to 5,030. In moderate volume, 843 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.27 higher at $45.95 per barrel, wholesale gasoline gained $0.01 to $1.42 per gallon and the Bloomberg gold spot price decreased $6.27 to $1,328.96 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 96.50. Markets were higher for the week, as the DJIA gained 2.0%, while the S&P 500 Index and the Nasdaq Composite gained 1.5%.

Citigroup Inc. (C $44) reported 2Q earnings-per-share (EPS) of $1.24, above the $1.10 FactSet estimate, with revenues declining 10.0% year-over-year (y/y) to $17.6 billion, just above the forecasted $17.5 billion. Fixed income trading rebounded and the amount of money set aside for loan loss provisions was favorable. Shares gave up early gains and finished slightly lower.

Wells Fargo & Co. (WFC $48) posted 2Q profits of $1.01 per share, roughly in line with expectations, as revenues rose 4.0% y/y to $22.2 billion, mostly matching projections. Shares closed lower as analysts expressed concerns about its revenue growth and its smaller-than-expected net interest margin.

Herbalife Ltd. (HLF $65) rallied after the company and the Federal Trade Commission (FTC) reached a $200 million settlement, resolving the FTC's multi-year investigation of the company. HLF will have to prove its retail sales, but the company said the settlement does not change its business model as a direct selling company.

Retail sales top forecasts to headline heavy docket of data

Advance retail sales (chart) for June rose 0.6% month-over-month (m/m), versus the Bloomberg forecast of a 0.1% gain, and May's downwardly revised 0.2% rise. Also, last month's sales ex-autos were higher by 0.7% m/m, above expectations of a 0.4% increase, and compared to the unrevised 0.4% rise in the previous month. Sales ex-autos and gas grew 0.7% m/m, topping estimates of a 0.3% rise, while May's 0.3% increase was unadjusted. Finally, the retail sales control group, a figure used to help calculate GDP, increased 0.5%, compared to the projected 0.3% rise, and the prior month's upwardly revised 0.5% increase.

The Consumer Price Index (CPI) (chart) was up 0.2% m/m in June, below forecasts of a 0.3% increase, while May's 0.2% rise was unrevised. The core rate, which strips out food and energy, gained 0.2% m/m, in line with expectations and May's unrevised increase. Y/Y, prices were 1.0% higher for the headline rate, below forecasts of a 1.1% rise, while the core rate was up 2.3%, exceeding projections of a 2.2% increase. May y/y figures showed an unrevised 1.0% rise and an unadjusted 2.2% increase for the headline and core rates respectively.

The preliminary University of Michigan Consumer Sentiment Index (chart) dropped to 89.5 this month from June's 93.5 level, where economists had expected it to remain. Both the economic conditions and outlook portions components of the survey deteriorated. The 1-year inflation outlook rose to 2.8% from 2.6%, while the 5-10 year inflation estimate remained at 2.6%. The survey's Director Richard Curtin noted that the Brexit vote's outcome was cited by a number of consumers, especially high-income consumers.

Industrial production (chart) rose 0.6% m/m in June versus estimates of a 0.3% increase, and following May's upwardly revised 0.3% decrease. Manufacturing and mining production rose, while utilities output jumped. Capacity utilization rose to 75.4% from May's unrevised 74.9%, and compared to projections for a 75.1% rate. Capacity utilization is 4.6 percentage points below its long-run average.

The Empire Manufacturing Index showed output from the New York region fell but slightly held onto expansion territory (a reading above zero) for July. The index dropped to 0.6 from June's unrevised 6.0 level, with forecasts calling for a dip to 5.0.

Business inventories (chart) increased 0.2% m/m in May, above forecasts of a 0.1% rise, and versus April's unrevised 0.1% gain. Sales rose 0.2% m/m, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—remained at 1.40 months pace.

Today's plethora of stronger-than-expected economic data adds credence to our view in the recent Schwab Market Perspective: Looking Beyond Britain, that volatility will continue to elevated but at this point we believe the U.S. economy should continue to show modest growth, helping to support similarly modest gains for equities. Read the whole article at www.schwab.com/marketinsight.

Treasuries were lower, with the yield on the 2-year note rising 2 basis points (bps) to 0.70%, the yield on the 10-year note gaining 5 bps to 1.58%, and the 30-year bond rate advancing 4 bps to 2.29%. Bond yields have shown some volatility recently rebounding from record lows in the wake of last week's stronger-than-expected U.S. labor report, as well as quicker-than-forecasted political clarity and eased Brexit concerns in the U.K. Against this backdrop, read our article, Uncharted Waters: What Record-Low Yields Mean for Investors, at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Europe mostly lower but sees solid weekly gains, Asia widely higher

European equities traded mostly lower amid a somber mood in the aftermath of the deadly attack in France, which the nation said was undeniably of a terrorist nature. Travel and leisure issues saw some pressure to weigh on the markets, though the Stoxx Europe 600 Index held onto a solid weekly gain as U.K. Brexit concerns subsided and political uncertainty was cleared up by the appointment of the nation's new prime minister. The upbeat U.S. and Chinese economic data today may have helped limit losses, while the euro and British pound fell versus the U.S. dollar and bond yields traded mostly higher. With volatility remaining elevated, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides Three Reasons Why Now is Not the Time to Retreat from Global Diversificationat www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly to the upside, with the U.S. markets posting all-time highs yesterday, capping off a weekly jump in the region, while the markets digested a plethora of Chinese economic data. An advance for Japanese equities was aided by the continued drop in the yen. Stocks trading on the island nation surged over 9.0% this week, with the weakness in the yen and increased conviction being fostered by expectations that the nation could be close to announcing coordinated fiscal and monetary stimulus measures. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money. China reported stronger-than-expected June retail sales, industrial production, new yuan loans and aggregate financing---a measure of total credit issued. However, the highlight was China's 2Q GDP report, which showed y/y growth remained at 1Q's 6.7% pace, compared to forecasts calling for a dip to a 6.6% rate. For more on China, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016. Read both articles at www.schwab.com/oninternational. Meanwhile, stocks in Australia and South Korea moved higher, while securities trading in India declined.

Stocks ride late last week's momentum

The Dow and S&P 500 rallied back to all-time highs this week as the momentum from last Friday's stronger-than-expected labor report carried over courtesy of a plethora of upbeat U.S. economic reports that suggested the economy may be picking up steam. The global markets also rallied on the week, led by a surge in Japan on hopes the nation's government will deploy more aggressive stimulus measures, while eased Brexit concerns and a sooner-than-expected new prime minster in the U.K. aided conviction. Earnings season kicked off, with some key results from the financial sector mostly topping forecasts, highlighted by Dow member JPMorgan Chase & Co's(JPM $64) much better-than-expected report. The global markets shrugged off the surprising decision to not cut rates from the Bank of England, though the central bank signaled it may make a move in August. The markets have showed some heightened volatility as of late and Schwab's Director of Income Planning, Rob Williams, provides investment analysis in his latest article, Market Stress: How Emotions Can Hurt and Help Your Portfolio at www.schwab.com/marketinsight.

Earnings and housing data set to come into focus

The ramp-up of 2Q earnings season is likely to garner attention next week, particularly guidance and commentary surrounding the impact of the Brexit vote in the U.K., while the U.S. economic calendar will be tilted toward the housing sector. The NAHB Housing Market Index will get the ball rolling and will be followed by housing starts and building permits and existing home sales. Other reports worth noting on next week's economic docket include: the Leading Index and Markit's preliminary Manufacturing PMI Index.

For some timely insight into the stock market as earnings season is set to heat up, see the latest Schwab Sector Views: Sector Impact of Brexit from Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA. Brad adds that healthy mortgage demand could be bolstered by the continued low interest rate environment and high rental rates in some areas that provide incentive for home buying. These are some of the factors that lead us to our outperform rating for the financial sector. Read more at www.schwab.com/marktetinsight.

International reports due out next week include: Australia—Reserve Bank of Australia July meeting minutes. China—property prices. Eurozone—European Central Bank monetary policy decision, trade balance, CPI, Markit's business activity reports, and German investor confidence. U.K.—inflation figures, employment change, retail sales, and Markit's business activity reports.