Oil, Fed and Politics Pressure Markets

Charles Schwab: On the Market

Posted: 3/14/2017 4:15 PM ET

Oil, Fed and Politics Pressure Markets

U.S. equities finished lower ahead of tomorrow's highly-anticipated monetary policy decision from the Fed, with expectations high for a 25 basis point rate hike, while political uncertainty across the pond continued to fester. Energy issues came under pressure amid a drop in crude oil prices in the wake of a bearish OPEC report showing a jump in production from Saudi Arabia. Treasury yields declined despite a hotter-than-expected producer price inflation report, while the U.S. dollar was higher and gold lost ground.

The Dow Jones Industrial Average (DJIA) declined 44 points (0.2%) to 20,837, the S&P 500 Index lost 8 points (0.3%) to 2,365, and the Nasdaq Composite decreased 19 points (0.3%) to 5,857. In moderate volume, 748 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.48 to $47.72 per barrel and wholesale gasoline was unchanged at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price declined $5.16 to $1,199.14 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 101.69.

HD Supply Holdings Inc. (HDS $41) reported 4Q earnings-per-share (EPS) of $0.26, or $0.44 ex-items, compared to the FactSet estimate of $0.43, as revenues rose 3.2% year-over-year (y/y) to $1.6 billion, roughly in line with forecasts. The industrial distributor issued 1Q EPS guidance that missed expectations and shares were solidly lower.

Shares of MoneyGram International Inc. (MGI $16) surged after the company received a takeover proposal from Euronet Worldwide Inc. (EEFT $83) for $15.20 per share in cash, valuing it at more than $1 billion. EEFT said the offer represents a 15% premium over MGI's previously agreed upon takeover by Ant Financial Services Group. MGI has not commented on EEFT's offer.

Producer price inflation hotter than expected, small business optimism dips slightly

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in February were up 0.3% month-over-month (m/m), above the Bloomberg expectation calling for a 0.1% gain and compared to January's unrevised 0.6% rise. The core rate, which excludes food and energy, rose 0.3%, versus forecasts of a 0.2% advance and January's unrevised 0.4% increase. Y/Y, the headline rate was 2.2% higher, north of projections of a 1.9% increase, and the core PPI rose 1.5% last month, matching estimates. In January, producer prices were 1.6% higher and up 1.2% for the headline and core rates, respectively.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for February dipped to 105.3 from January's 105.9 level, compared to forecasts calling for a decline to 105.6.

Treasuries finished higher, as the yield on the 2-year note was flat at 1.37%, while the yield on the 10-year note declined 3 basis points (bps) to 2.59%, and the 30-year bond rate decreased 4 bps to 3.17%.

The markets are awaiting tomorrow's conclusion of two-day monetary policy meeting from the Federal Open Market Committee (FOMC), expected to deliver a 25 bp hike to the target for the fed funds rate. The statement and accompanying updated economic projections are poised to also garner heavy attention, with the markets looking to see if the pace of rate hikes is expected to accelerate beyond current expectations. This will be followed by the customary press conference by Fed Chairwoman Janet Yellen, which typically garners scrutiny. Schwab's Chief Fixed Income Strategist, Kathy Jones offers a look at the Fed meeting and the impact on bond investing in her article, Will the Fed Hike Rates This Week? at www.schwab.com/insights. Follow Kathy on Twitter: @kathyjones.

The FOMC decision will be preceded by a plethora of economic reports such as MBA mortgage applications, the Empire Manufacturing Index, the Consumer Price Index (CPI), retail sales, the NAHB Housing Markets Index and business inventories. The read on consumer inflation will likely garner the heaviest attention. Core CPI is estimated to come in at 2.2% y/y for last month, a slight deceleration from the 2.3% gain in January, but the FOMC's favored core PCE Index remains slightly below its longer-run objective of 2.0%. Earlier this month, FOMC Chairwoman Janet Yellen bolstered rate hike expectations by noting that the economy is close to meeting the Fed's goals of maximum employment and price stability and that gradual increases in the fed funds rate will likely be appropriate in the months and years ahead to keep the economy from significantly overheating.

As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations, the economic picture continues to look good, but inflation is heating up, and we are watching to see if this could force the Fed's hand. History compiled by Strategas Research Partners shows that the best stock market performance during a rate hiking cycle comes when the Fed moves slowly in the first year, but quicker in the second year. That pattern appears to be panning out in this cycle. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Finally, for a look at the break in the rally in the stock markets and possibility of increased volatility, see our article, End of an Era: Why Volatility May Return to the Stock Market and video from Schwab’s Chief Investment Strategist Liz Ann Sonders and Vice President of Trading and Derivatives, Randy Frederick titled, Stock Rally Continues, but Is It Time for Markets to Take a Breather?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick. And for analysis of the political front, see Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights.

Europe dips as political uncertainty festers, Asia mixed 

European equities finished lower, with oil & gas and financial stocks leading to the downside amid some caution ahead of tomorrow's highly expected rate hike in the U.S., while crude oil prices fell on an OPEC report showing a jump in production from Saudi Arabia. Political uncertainty in the region also garnered heavy attention to likely hamstring sentiment, with U.K. Brexit uneasiness continuing to flare-up as Prime Minister May was granted the right to trigger Article 50, which will begin the formal process of negotiating the nation's exit from the European Union, following Scottish First Minister Sturgeon's news yesterday that she will start the legal process of preparing for a second independence referendum. Also, the markets are paying attention to tomorrow's Dutch election, which will set the stage for next month's key French Presidential election as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, be sure to check out Jeff's articles, Five Reasons to Stay Invested Despite Heightened Uncertainty and The future of Europe: EU 2.0 and its impact on the markets at www.schwab.com/oninternational, where you can also find Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU?.

In economic news, eurozone industrial production rose by a smaller amount than expected for January, while German investor confidence improved by a smaller amount than forecasted for this month. The euro dipped and British pound fell compared to the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed, with the markets digesting some diverging Chinese economic data and as the markets appear to be treading cautiously ahead of tomorrow's highly expected rate hike in the U.S. Moreover, European political uncertainty continues to ramp up, likely weighing on conviction. Japanese equities dipped, despite some weakness in the yen, while those traded in Australia finished flat. South Korean securities rose, extending a run that has ensued in the wake of last week's court ruling to uphold a parliamentary vote to impeach President Park, and markets in India jumped in a return to action following yesterday's holiday and following the weekend's state elections that showed Prime Minister Modi's party won by a larger amount than expected. Stocks in mainland China ticked higher and those traded in Hong Kong were little changed following reports that showed the nation's industrial production and fixed asset investment topped expectations, though retail sales missed forecasts for last month. Schwab's Michelle Gibley, CFA, provides timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and 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.

Tomorrow, the international economic calendar will offer employment data from South Korea, India's trade balance, industrial production and retail sales from Japan, CPI from France and Italy, and employment figures from the U.K.

Stocks Settle Lower amid Heightened Rate Hike Expectations

Charles Schwab: On the Market

Posted: 3/7/2017 4:15 PM ET

Stocks Settle Lower amid Heightened Rate Hike Expectations

U.S. stocks continued to pull back from last week's record highs as the global markets grapple with heightened expectations the Fed may raise rates after next week's meeting. Treasuries and gold were lower, while crude oil prices were little changed and the U.S. dollar ticked higher. In economic news, the trade balance matched forecasts, while consumer credit was well shy of expectations. In M&A action, Hewlett Packard Enterprise agreed to acquire Nimble Storage.

The Dow Jones Industrial Average (DJIA) lost 30 points (0.1%) to 20,925, the S&P 500 Index declined 7 points (0.3%) to 2,368, and the Nasdaq Composite decreased 15 points (0.3%) to 5,834. In moderate volume, 793 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.06 lower to $53.14 per barrel and wholesale gasoline added $0.01 to $1.68 per gallon. Elsewhere, the Bloomberg gold spot price ticked $9.49 lower to $1,215.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 101.78.

Hewlett Packard Enterprise Co. (HPE $23) announced an agreement to acquire flash storage solutions provider Nimble Storage Inc. (NMBL $13) for $12.50 per share in cash, or about $1.0 billion. HPE dipped and NMBL rallied sharply. For more on the tech sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Can the Tech Rally Continue? at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Dick's Sporting Goods Inc. (DKS $48) reported 4Q earnings-per-share (EPS) of $0.81, or $1.32 ex-items, versus the $1.29 FactSet estimate, as revenues increased 10.9% year-over-year (y/y) to $2.5 billion, roughly in line with expectations. 4Q same-store sales rose 5.0% y/y, above the projected 4.5% increase. DKS issued 1Q and full-year EPS and same-store sales guidance that came in below the Street's forecasts. Shares saw heavy pressure.

Thor Industries Inc. (THO $104) fell sharply after the recreational vehicle maker posted fiscal 2Q gross margin that decelerated for the second-straight quarter and missed the Street's expectations. The disappointing margin figure appeared to overshadow its better-than-expected EPS and revenue results.

Trade deficit widens as expected

The trade balance (chart) showed that the deficit came in at $48.5 billion in January, matching the Bloomberg estimate. December's deficit was unrevised at $44.3 billion. Exports rose 0.6% month-over-month (m/m) to $192.1 billion, while imports gained 2.3% to $240.6 billion.

Consumer credit, released in the final hour of trading, showed consumer borrowing advanced by $8.8 billion during January, well shy of the $17.3 billion forecast of economists polled by Bloomberg, while December's figure was adjusted slightly higher to an increase of $14.8 billion from the originally reported $14.2 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, climbed by $12.6 billion, while revolving debt, which includes credit cards, fell by $3.8 billion.

Treasuries were lower, with the yield on the 2-year note ticking 2 basis points (bps) higher to 1.33%, while the yields on the 10-year note and the 30-year bond increased 1 bp to 2.51% and 3.11%, respectively.

The markets remain focused on the timing and details of President Donald Trump's policy plans, while expectations of a Fed rate hike next week have jumped in the wake of continued solid economic data. Amid this backdrop, see our latest article, End of an Era: Why Volatility May Return to the Stock Market at www.schwab.com/insights.

As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations, higher inflation and stronger economic data—and perhaps the stock market's rip higher—have led to more "hawkish" commentary from the Fed recently. March Fed hike expectations have risen considerably, now well over 80. History compiled by Strategas Research Partners shows that the best stock market performance during a rate hiking cycle comes when the Fed moves slowly in the first year, but quicker in the second year. That pattern appears to be panning out in this cycle. Read more at www.schwab.com/marketinsight.

For analysis of the Fed and President Trump's highly-anticipated reflationary policies, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors? at www.schwab.com/onbonds, and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights. Follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will offer the ADP Employment Change Report, with private sector payrolls forecasted to rise by 189,000 jobs in February, as well as final 4Q nonfarm productivity and unit labor costs, with productivity anticipated to have increased 1.5% on an annualized basis and costs forecasted to have risen 1.6%. Additional releases expected tomorrow include wholesale inventories, with economists expecting a 0.1% month-over-mon (m/m) decrease in January, matching that registered in December, and the weekly MBA Mortgage Applications report.

Europe and Asia mixed on Fed, data and politics

European equities finished mixed, with the global markets grappling with elevated U.S. Fed rate hike expectations, along with some disappointing German manufacturing data. Also, political uncertainty continued to fester as the markets await U.S. President Donald Trump's reflationary policy plans, while gearing up for an upcoming key French Presidential election as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Also, be sure to check out Jeff's articles, Five Reasons to Stay Invested Despite Heightened Uncertainty and The future of Europe: EU 2.0 and its impact on the markets at www.schwab.com/oninternational. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Germany reported a 7.4% m/m drop in factory orders for January, after rising 5.2% in December and compared to the projected 2.5% decline. In other economic news, eurozone 4Q GDP was unrevised at a 0.4% quarter-over-quarter rate and a 1.7% y/y pace of growth, both matching expectations. The euro dipped and the British pound saw modest pressure versus the U.S. dollar, while bond yields in the region finished mixed. 

Stocks in Asia finished mixed as the markets grapple with the boosted expectations of a rate hike in the U.S. next week, along with exacerbated political uncertainty ahead of a key election in France and amid anticipation of U.S. President Trump's policy plans. Also, geopolitical concerns have ticked higher on news that North Korea fired ballistic missiles off its east coast over the weekend. Japanese equities declined, with the yen choppy, while Australian securities gained ground on the heels of the unchanged monetary policy decision by the Reserve Bank of Australia. Chinese stocks advanced and those trading in Hong Kong rose with banking stocks leading the way and as traders continue to focus on the ongoing government's annual legislative meeting.

South Korean equities advanced despite the North Korean news, though Indian listings declined. For more on global investing, see Schwab's Director of International Research, Michelle Gibley's, CFA, articles, Currency Hedging: 5 Things You Need to Know and 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 a plethora of releases from Japan as the island nation reports its trade data, 4Q GDP, bank lending figures and Leading Index. Releases from across the pond will include industrial production from Germany and trade data from France.

Markets Begin Shortened Week in Stride

Charles Schwab: On the Market

Posted: 2/21/2017 4:15 PM ET

Markets Begin Shortened Week in Stride

The U.S. equity markets lost no steam in their return to action following the long holiday weekend, with all the major indexes adding to record highs. Upbeat earnings reports from Dow members Wal-Mart and Home Depot provided some sustenance, as did a much stronger-than-expected read on eurozone business activity, despite an unexpected slowdown in growth for the U.S. manufacturing and services sectors. Meanwhile, Treasury yields and the U.S. dollar tacked on to their respective runs, and crude oil prices also advanced. Gold finished lower.

The Dow Jones Industrial Average (DJIA) increased 119 points (0.6%) to 20,743, the S&P 500 Index added 14 points (0.6%) to 2,365, and the Nasdaq Composite gained 27 points (0.5%) to 5,866. In moderate volume, 877 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.55 to $54.33 per barrel and wholesale gasoline was $0.02 lower at $1.50 per gallon. Elsewhere, the Bloomberg gold spot price declined $2.49 to $1,235.98 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 101.38.

Dow member Wal-Mart Stores Inc. (WMT $71) reported 4Q earnings-per-share (EPS) of $1.22, or $1.30 ex-items, versus the $1.28 FactSet estimate, as revenues increased 1.0% year-over-year (y/y) to $130.9 billion, compared to the projected $131.1 billion. Walmart's U.S. 4Q same-store sales rose 1.8% y/y, above the expected 1.3% gain. Shares were nicely higher.

Dow component Home Depot Inc. (HD $145) posted 4Q EPS of $1.44, above the estimated $1.33, with revenues rising 5.8% y/y to $22.2 billion, compared to the projected $21.8 billion. 4Q same-store sales grew 5.8% y/y, north of the forecasted 3.7% gain. HD issued full-year EPS guidance that came in just shy of estimates, but its sales outlook bested forecasts. Separately, the company raised its quarterly dividend by 29% to $0.89 per share, and authorized a new $15.0 billion share repurchase program. HD gained ground.

Macy's Inc. (M $32) announced 4Q profits of $1.54 per share, $2.02 ex-items, versus the expected $1.95, as revenues decreased 4.0% y/y to $8.5 billion, below the forecasted $8.6 billion. Quarterly same-store sales fell 2.7% y/y, compared to the estimated 2.5% decline. The company issued full-year earnings guidance that topped forecasts and a sales forecast that bracketed estimates. M traded to the upside.

Schwab’s Chief Investment Strategist Liz Ann Sonders offers a look at the earnings front in her latest article, Better Days: Earnings Growth Picks Up Sharply in 2017, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Dow component Verizon Communications Inc. (VZ $49) announced an agreement to revise its takeover agreement of Yahoo Inc. (YHOO $46) lower by $350 million to about $4.5 billion. Shares of both companies were modestly higher.

Kraft Heinz Co. (KHC $95) reported that it has withdrawn its $143 billion merger proposal with Unilever NV (UN $45). Shares of KHC fell, while UN was solidly lower.

Shares of Popeyes Louisiana Kitchen Inc. (PLKI $79) rallied after agreeing to be acquired by parent of Burger King, Restaurant Brands International Inc. (QSR $58), for $79.00 per share in cash, or roughly $1.8 billion. QSR was also nicely higher on the news.

Business activity reports show expansion surprisingly slowed

The preliminary Markit U.S. Services PMI Index for February declined to 53.9 from January's reading of 55.6, versus the Bloomberg forecast of an improvement to 55.8. The preliminary Markit U.S. Manufacturing PMI Index for February decreased to 54.3 from January's 55.0 level, and versus forecasts of 55.4. Markit said despite the slowdowns, the service sector is still on pace to register its fastest quarterly growth since the end of 2015, while manufacturing new order growth remained faster than at any other time since March 2015. Readings above 50 for both reports denote expansion in activity.

Treasuries were lower, as the yield on the 2-year note ticked a basis point (bp) higher to 1.20%, while the yields on the 10-year note and the 30-year bond rose 2 bps to 2.43% and 3.04%, respectively. For a look at the bond markets, see Schwab's Director of Income Planning, Rob Williams', CFP, and Senior Research Analyst, Cooper Howard's, CFA, latest article, Short-Term Bonds: Why They Could Outperform As Interest Rates Rise, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Treasury yields have ticked higher and the U.S. dollar continues to rally as of late, while the stock markets remain at all-time highs, bolstered by continued upbeat economic data, March Fed rate hike expectations that remain intact, and lingering optimism of U.S. President Donald Trump's reflationary policy pledges. For a look at the political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington's Way: Why Trump's Policy Changes Could Take Time, at www.schwab.com/insights.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Simple Indicators In A Complex World, noting that while markets may exhibit increasing volatility, we believe the bull market is being supported by tangible and effective indicators of global growth. For analysis of the indicators see Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Read these articles at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Tomorrow, the U.S. economic calendar will be headlined by the release of existing home sales, the largest portion of the housing sales market, projected to rise 1.1% month-over-month (m/m) to an annualized rate of 5.55 million units in January. This will be the first look at existing home sales activity in 2017, after posting the highest level of sales in a decade in 2016. The report will be followed by the afternoon release of the minutes from the Federal Open Market Committee's (FOMC) two-day meeting that concluded on February 1st with an unchanged monetary policy decision. The statement appeared to foster a dovish takeaway by the markets but last week's Congressional testimony by FOMC Chief Janet Yellen suggested a March rate hike was still on the table. Rounding out the docket will be MBA Mortgage Applications.

As noted in the latest Schwab Market Perspective: Not So Fast!, elevated earnings and economic expectations could lead to a pullback or more sideways action but we believe the bull market in U.S. stocks will continue. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here. Read more at www.schwab.com/marketinsight.

Europe mostly higher following upbeat business activity reports, Asia mixed

European equities finished mostly to the upside, on the heels of a much stronger-than-expected read on eurozone business activity, which helped take attention away from festering political uncertainty in the U.S. and Europe. For further analysis, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? and Director of International Research, Michelle Gibley's, CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. Markit's Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—improved to 56.0 in February, from 54.4 in January, and compared to the expected 54.3 reading. A level above 50 denotes expansion and this was the highest level since April 2011, with French services and German manufacturing growth highlighting the report. The euro was lower and the British pound was little changed versus the U.S. dollar, while bond yields in the region moved higher. Oil & gas issues saw some strength as crude oil prices moved higher amid optimism cooperation with OPEC production cuts will continue.

For our latest on international investing analysis, see Schwab's Jeffrey Kleintop's, CFA, articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read these articles at www.schwab.com/oninternational.

Asian stocks finished mixed as investors in the region awaited the U.S. markets to return to action following a long holiday weekend, while grappling with earnings and economic data, along with political uncertainty in the U.S. and Europe. Japanese equities gained ground, with the yen losing ground, while weakness in technology issued pressured markets in Australia. Stocks in India and South Korea advanced, with the latter getting a boost from a report that showed the nation's exports and imports both rose solidly in February. Chinese shares finished mixed, with stocks traded in the mainland seeing gains, while those in Hong Kong fell solidly. Schwab's Director of International Research, Michelle Gibley, CFA, provides some timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and 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.

Reports on tomorrow's international economic calendar include the Leading Index and wage data from Australia, CPI from Italy and the Eurozone, Germany's Ifo Business Climate Index, and GDP from the U.K.

Modest Losses Heading into the Weekend

Charles Schwab: On the Market

Posted: 11/18/2016 4:15 PM ET

Modest Losses Heading into the Weekend

U.S. equities finished out the last trading day of the week with slight losses, as the election-fueled bull market run paused. However, the U.S. dollar extended its rally on yesterday's solid economic data and comments from Fed Chair Yellen that bolstered December rate hike expectations. Meanwhile, financials continued to move higher and energy stocks got a boost from a turn upward for crude oil prices. Treasuries and gold were lower.

The Dow Jones Industrial Average (DJIA) lost 36 points (0.2%) to 18,868, the S&P 500 Index declined 5 points (0.2%) to 2,182 and the Nasdaq Composite fell 12 points (0.2%) to 5,322. In moderately-heavy volume, 930 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.38 to $46.36 per barrel, wholesale gasoline gained $0.01 to $1.46 per gallon and the Bloomberg gold spot price was $8.31 lower at $1,208.11 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 101.32. Markets were higher for the week, as the DJIA rose 0.1%, while the S&P 500 Index gained 0.8% and the Nasdaq Composite jumped 1.6%.

Salesforce.com Inc. (CRM $78) reported 3Q earnings-per-share (EPS) ex-items of $0.24, above the $0.21 FactSet estimate, as revenues rose 25.0% year-over-year (y/y) to $2.1 billion, roughly in line with forecasts. CRM raised its full-year EPS and revenue guidance. Shares were solidly higher.

Williams-Sonoma Inc. (WSM $53) posted 3Q EPS of $0.78, one penny north of forecasts, with revenues rising 1.1% y/y to $1.3 billion, roughly in line with expectations. 3Q same-store sales declined 0.4% y/y, compared to the estimated 1.4% gain. WSM issued 4Q earnings and sales guidance that was below the Street's projections. Shares were lower.

Shares of Gap Inc. (GPS $26) fell sharply after the retailer noted challenging traffic trends during 3Q after reaffirming its full-year EPS outlook, which prompted some concerns among analysts regarding its 4Q performance, which includes the crucial holiday shopping season.

Leading indicators tick higher

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) rose 0.1% month-over-month (m/m) in October, in line with the Bloomberg projection, and compared to the prior month's unrevised 0.2% increase. Support came from the components pertaining to the yield curve and average workweek, while the index was bogged down by jobless claims, ISM new orders and consumer expectations.

The Kansas City Fed Manufacturing Activity Index for November fell to 1 from October's unrevised 6 level, though a reading north of zero depicts expansion.

Treasuries finished lower, as the yield on the 2-year note ticked 2 basis point (bp) higher to 1.07%, the yield on the 10-year note gained 4 bps to 2.34%, while the 30-year bond was flat at 3.02%.

Bond yields have surged in the wake of President-elect Donald Trump's surprising victory in last week's election, which also saw the Republicans maintain control of Congress. For our latest analysis of the bond markets following the surprise election results, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, at www.schwab.com/onbonds, where you can also find Schwab's Director of Income Planning, Rob Williams' latest article, Can Bond Funds Make Sense When Interest Rates Rise?. Follow Kathy and Schwab on Twitter: @kathyjones and @schwabresearch.

With the markets being driven by posturing since Donald Trump's surprising Presidential election victory last week, see Schwab's Chief Investment Strategist Liz Ann Sonders' and Senior Vice President with the Schwab Center for Financial Research, Mark Riepe's, CFA, video titled The Election's Over, so What's Next for Markets? at www.schwab.com/insights. Follow Liz Ann on Twitter: @lizannsonders. Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Could Tax Cuts Really Happen in 2017?, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016.

Europe declines, Asia mixed as monetary policy and politics command attention

European equities finished mostly lower, with cooled post U.S. election-posturing allowing the markets to focus on diverging global monetary policy and a host of looming political events in Europe. Schwab's Director of International Research, Michelle Gibley, CFA, offers analysis of the European political landscape in her latest article, Europe Votes: Could More Countries Reject the EU?. Michelle notes that upcoming votes in Europe could create market volatility, but resolving outstanding political uncertainty could be good for stocks and the economy. Read more at www.schwab.com/oninternational. Yesterday, Federal Reserve Chairwoman Janet Yellen signaled that a rate hike "could well become appropriate relatively soon," while warning about the risks to financial stability and frequency of tightening monetary policy of holding the fed funds rate at its current level for too long. European Central Bank President Mario Draghi said today that the current monetary policy support will be key for the economic outlook in coming years, while adding that it does not yet see a consistent strengthening of underlying price dynamics, per Bloomberg. The euro and British pound fell versus the U.S. dollar, while bond yields in the region finished mixed. Technology issues moved higher, though basic materials, oil & gas and utilities stocks saw some pressure.

Stocks in Asia finished mixed, with fading U.S. election fallout giving way to elevated Fed rate hike expectations in the wake of yesterday's plethora of stronger-than-expected data and comments from Fed Chair Yellen that signaled a December rate increase may be on track. Japanese equities gained ground, with the yen extending a slide versus the U.S. dollar to take the index to an 11-month high and technically entering a bull market. The gain came as yesterday the Bank of Japan began its first bond market operation since the September decision to change its monetary policy direction to focus on managing the yield curve. For our latest analysis of Japan's monetary policy, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Going Godzilla: What has the Bank of Japan Unleashed?.

Mainland Chinese stocks declined amid continued caution toward the real estate market as the government has cracked down on buying activity, while a report showed growth in October new home prices slowed m/m, but securities traded in Hong Kong advanced, snapping a two-session losing streak. Australia's markets rose, with strength in financials being accompanied by a rally in technology issues. South Korean listings and those traded in India both declined, with emerging markets remaining choppy in the wake of the U.S. election. Following the past week of U.S. election-fueled market volatility, Schwab's 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 all these articles from Jeff at www.schwab.com/oninternational, and follow him on Twitter: @jeffreykleintop.

Stocks continue election run

The Dow, S&P 500 and Nasdaq all threatened record territory as stocks extended a rally stemming from last week's surprising Presidential victory by Donald Trump. Moreover, Fed rate hike expectations remained elevated, bolstered by some strong economic data and Fed Chair Janet Yellen's Congressional testimony where she signaled a December hike was likely. Housing starts surged to more than a nine-year high, jobless claims tumbled to the lowest level since 1973, and retail sales easily topped expectations. Treasury yields and the U.S. dollar both added to rallies, with the yield on the 10-year note hitting levels not seen in about a year. Financials led the way, while healthcare issues gave back some of last week's post-election rebound. Energy was also a standout winner as crude oil prices overcame some of a recent plunge. The retail sector dominated the earnings front, highlighted by Best Buy Co. Inc. (BBY $45) and Target Corp. (TGT $76), though results were mixed as Dow members Wal-Mart Stores Inc. (WMT $69) and Home Depot Inc. (HD $128) both fell as their reports disappointed the Street. Outside the retail sector, Dow component Cisco Systems Inc. (CSCO $30) dropped to help limit gains for the Dow after issuing softer-than-expected 2Q guidance. With 3Q earnings season largely in the books, the growth rate for the S&P 500 sits at 3.0%, poised to post y/y growth for the first time since 1Q 2015, per data compiled by FactSet.

Although next week will be shortened by market closures on Thursday's Thanksgiving holiday, focus on the fallout from the election and elevated Fed rate hike expectations are likely to continue. As such, the U.S. economic calendar is poised to command attention, with the release of key reads on existing and new home sales, durable goods orders, Markit's preliminary Manufacturing PMI Index, and the final University of Michigan Consumer Sentiment Index.

International reports headlining a light week of data include: Japan—trade balance and the Consumer Price Index (CPI). Eurozone—Markit's business activity reports, as well as 3Q GDP and business confidence reports out of Germany. U.K.—3Q GDP.

Mild Morning Gains Fade by Friday Afternoon

Charles Schwab: On the Market

Posted: 11/4/2016 4:15 PM ET

Mild Morning Gains Fade by Friday Afternoon

U.S. stocks finished lower, though a steady October nonfarm payroll report that was highlighted by stronger-than-expected wage growth stirred a modest early advance. The morning gains for stocks faded as December Fed rate hike expectations remain elevated and political uncertainty continues to linger ahead of next week's Presidential election. Treasuries advanced, crude oil prices and the U.S. dollar were lower and gold was mildly higher.

The Dow Jones Industrial Average (DJIA) declined 42 points (0.2%) to 17,888, the S&P 500 Index decreased 3 points (0.2%) to 2,085 and the Nasdaq Composite lost 12 points (0.2%) to 5,046. In moderately-heavy volume, 899 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil declined by $0.59 to $44.07 per barrel, wholesale gasoline lost $0.04 to $1.38 per gallon and the Bloomberg gold spot price moved $2.31 higher to $1,305.12 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 96.95. Markets were lower for the week, as the DJIA lost 1.5%, the S&P 500 Index decreased 1.9% and the Nasdaq Composite was 2.8% lower.

Starbucks Corp. (SBUX $53) reported fiscal 4Q earnings-per-share (EPS) of $0.56, one penny above the FactSet estimate, as revenues grew 16.0% year-over-year (y/y) to $5.7 billion, roughly in line with forecasts. 4Q same-store sales rose 4.0% y/y, below the expected 4.9% increase. SBUX issued full-year EPS guidance that came in below estimates. Separately, the coffee chain raised its quarterly dividend by 25.0% to $0.25 per share. Shares finished solidly higher.

Activision Blizzard Inc. (ATVI $42) posted 3Q EPS ex-items of $0.52, north of the expected $0.42, with revenues rising 58.4% y/y to $1.6 billion, matching expectations. ATVI issued 4Q guidance that missed forecasts, while raising its full-year outlook. Shares were solidly lower.

Kraft Heinz Co. (KHC $84) announced 3Q earnings ex-items of $0.83 per share, versus the expected $0.74, as revenues rose 2.4% y/y to $6.3 billion, due to the merger of Kraft and Heinz, roughly in line with forecasts. KHC traded lower.

CBS Corp. (CBS $57) reported 3Q EPS of $1.05, north of the projected $0.98, with revenues increasing 4.0% y/y to $3.4 billion, above the estimated $3.3 billion. Shares moved nicely higher.

Shares of Whole Foods Market Inc. (WFM $29) reversed solidly to the upside following a Bloomberg report, citing people familiar with the matter, that the company's largest shareholder has met with potential activist investors to discuss making sweeping changes to the upscale grocer, including replacing management and exploring a sale of the company. Per the report, a Whole Foods spokeswoman responded that it values the strong and open relationships it has with its shareholders, and as discussed on yesterday's earnings call, "we are focused on pursuing the right strategies to position the company to produce strong results and returns for our shareholders over the long term."

October job growth steady and wage gains top estimates

Nonfarm payrolls (chart) rose by 161,000 jobs month-over-month (m/m) in October, versus the Bloomberg forecast of a 173,000 increase. September's gain was upwardly revised to 191,000 jobs. The total upward revision to job gains in August and September was 44,000. Private sector payrolls increased by 142,000, versus the forecasted 170,000 rise, after increasing by an upwardly revised 188,000 in September. The Labor Department noted that employment continued to trend up in healthcare, professional and business services, and financial activities, while adding that Hurricane Matthew affected parts of the East Coast during the month.

The unemployment rate dipped to 4.9% from 5.0%, in line with estimates, while average hourly earnings grew by 0.4% m/m, topping projections of a 0.3% increase, and September's upwardly adjusted 0.3% gain. Wages are up 2.8% y/y/, the largest gain since June 2009. The labor force participation rate dipped to 62.8% from 62.9%, but was up from the 62.5% rate a year ago. Finally, average weekly hours remained at September's unrevised 34.4 hours level, matching forecasts.

The report preserved elevated December Fed rate hike expectations, while the stronger-than-expected wage growth figures are likely fostering optimism that the consumer, which makes up the lion's share of U.S. economic output, could be poised to support the impact of a rate increase from an abnormally low level. As noted in the recent Schwab Market Perspective: Looking Past the Election, economic data continues to support a sluggish growth narrative, although there are glimmers of hope that we could see at least a modest acceleration in 2017. The U.S. consumer appears to be gaining some confidence and wage growth has already shown signs of picking up as the economy approaches full employment. We believe, after several false starts, the Fed will actually follow through on a rate hike this time around. Perhaps equally as important will be the message the Fed sends regarding what it may be looking to do into 2017. Read more at www.schwab.com/marketinsight.

The trade balance (chart) showed that the deficit came in at $36.4 billion in September, compared to the $38.0 billion estimate. August's deficit was revised to $40.5 billion from the $40.7 billion posted earlier. Exports rose 0.6% m/m to $189.2 billion, while imports fell 1.3% to $225.6 billion.

Treasuries were higher, with the yield on the 2-year note declining 2 basis points (bps) to 0.78%, while the yields on the 10-year note and the 30-year bond fell 4 bps to 1.77% and 2.56%, respectively. Bond yields remain choppy in the wake of a recent rally that has come courtesy of some upbeat economic data that has bolstered the case for a December rate hike, which was also preserved with Wednesday's unchanged monetary policy decision from the Federal Open Market Committee (FOMC). Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis of the FOMC's decision in her article, The Fed Plays It Safe, December Hike Likely, at www.schwab.com/insights, while also offering her article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds. Follow Kathy on Twitter: @kathyjones.

Europe and Asia lower as U.S. political uncertainty festers

European equities finished broadly lower, with the markets digesting the stable U.S. October labor report, while political uncertainty in the nation remained elevated with polls indicating a tight race ahead of next week's election. Financials saw pressure amid some lackluster earnings reports out of the sector. The British pound extended yesterday's rally versus the U.S. dollar that came amid eased "hard" Brexit concerns after a court ruled that the U.K. government would have to request parliamentary approval to trigger Article 50 and start official negotiations with the European Union (EU) regarding its vote to leave the EU, known as a Brexit. For more analysis of the Brexit fallout, Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article, Keep Calm and Carry On: The Brexit Shock That Wasn't. In economic news, the final Markit Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised lower to 53.3 in October, from the 53.7 preliminary report, where it was expected to remain, and up versus the 52.6 level recorded in September. The euro ticked higher versus the greenback, while bond yields in the region were mixed. Schwab's Chief Global Investment Strategist, 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. Read these articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished lower, with the looming U.S. Presidential election continuing to stymie global conviction and foster caution, while the extended selloff in crude oil prices remained a drag on the energy sector. Japanese equities fell, returning to action after yesterday's holiday break, with the yen continuing to strengthen on risk aversion bolstered by the heightened U.S. political risk. Australian securities dropped, with heavyweight financial, basic materials and oil & gas sectors all seeing pressure. Stocks trading in mainland China and Hong Kong dipped, reversing early gains amid the political uneasiness and some disappointing earnings reports weighing on sentiment. Indian equities traded lower with drugmakers falling on persistent uneasiness regarding to impact of the election on the U.S. healthcare sector, which overshadowed strength in consumer-related companies on continued optimism over the nation's recent tax reform measures. South Korean stocks ticked to the downside.

Amid the continued global market volatility, Schwab's 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 at www.schwab.com/oninternational.

Stocks fall as U.S. election nears

The equity markets fell solidly on the week, with an apparent tightening of the U.S. Presidential race bolstering political uncertainty and stymieing global conviction, with the healthcare sector continuing to get crushed. Crude oil prices extended a tumble to pressure the energy sector. Upbeat economic reads on personal spending and manufacturing activity, culminating with Friday's October labor report, along with the Federal Open Market Committee's (FOMC) monetary policy statement, preserved December rate hike forecasts. The real estate sector led a broad-based decline. The U.S. dollar slipped and Treasury yields modestly gave back some of a recent rally. Earnings season turned the corner to home stretch, and results were mixed, with Facebook Inc. (FB $121) disappointing with its warning of a meaningful revenue growth deceleration, while Electronic Arts Inc. (EA $81) topped profit projections and issued upbeat full-year earnings guidance. Thus far, of the 422 companies in the S&P 500 that have reported results, about 56.0% have exceeded sales expectations and approximately 76.0% have bested earnings estimates.

Next week, the NFIB Small Business Optimism Index, JOLTS Job Openings and the preliminary University of Michigan's Consumer Sentiment Index will headline a light U.S. economic docket, while earnings season downshifts. However, the political front will garner the most attention and volatility is set to remain as the results from Tuesday's Presidential election, including how the House and Senate races play out, are digested and scrutinized by the markets.

As noted in the Schwab Market Perspective, given the polling numbers and betting markets, the stock market appears to be expecting a Clinton win and continued gridlock, with at least the House remaining in Republican hands. If the results are quite different than expectations, market volatility could surge, but we suggest investors hold tight. Much as we saw following the Brexit vote, reacting in a kneejerk fashion can be detrimental to longer term performance. Read more at www.schwab.com/marketinsight. For more analysis on the election, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Election Night: How to Watch the Returns, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles.

International report due out next week that deserve a mention include: Australia—consumer confidence. China—trade balance, CPI and PPI, and lending statistics. Japan—machine orders. Eurozone—retail sales. U.K.—industrial and manufacturing production, and trade balance.

Stocks Manage Decent Gains

Charles Schwab: On the Market

Posted: 10/19/2016 4:15 PM ET

Stocks Manage Decent Gains

With the Nasdaq able to hold positive territory, U.S. stocks finished the regular trading session higher amid some upbeat earnings reports and as Fed rate hike expectations remained elevated. Financials and energy issues were among the top performers and crude oil prices rallied following a bullish government oil inventory report. Treasuries and the U.S. dollar were little changed and gold moved higher. In other developments, domestic housing construction data was mixed and the Fed's Beige Book report showed economic activity continued to expand at a moderate to modest pace.

The Dow Jones Industrial Average (DJIA) rose 41 points (0.2%) to 18,203, the S&P 500 Index added 5 points (0.2%) to 2,144 and the Nasdaq Composite ticked 3 points higher to 5,246. In moderate volume, 781 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil increased $1.20 to $51.82 per barrel, wholesale gasoline was unchanged at $1.51 per gallon and the Bloomberg gold spot price gained $6.97 to $1,269.47 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 97.92.

Dow member Intel Corp. (INTC $36) reported 3Q earnings-per-share (EPS) ex-items of $0.80, above the $0.73 FactSet estimate, as revenues rose 9.0% year-over-year (y/y) to $15.8 billion, compared to the expected $15.6 billion. INTC issued 4Q revenue guidance that came in a bit shy of estimates. Shares finished solidly lower.

Morgan Stanley(MS $33) posted 3Q profits of $0.81 per share, north of the $0.63 expectation, as revenues grew 14.1% y/y to $8.9 billion, topping the forecasted $8.1 billion. MS said it saw record revenue in its wealth management segment and a strong performance in its sales and trading business. Shares closed higher.

Yahoo Inc. (YHOO $43) announced 3Q EPS ex-items of $0.20, exceeding the estimated $0.14, with revenues excluding traffic acquisition costs (TAC) declining 14.6% y/y to $857 million, below the projected $861 million. The company noted that in addition to its continued efforts to strengthen its business, it is busy preparing for integration with Verizon. YHOO gained solid ground.

For analysis of earnings and the stock markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Three Reasons Stocks May Avoid Another Lost Decade, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Housing construction activity mixed

Housing starts (chart) for September fell 9.0% month-over-month (m/m) to an annual pace of 1,047,000 units, below the Bloomberg forecast of a 1,175,000 unit rate. August starts were upwardly revised to an annual pace of 1,150,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 6.3% m/m in September to an annual rate of 1,225,000 units, after August's unrevised 1,139,000 rate, and well above the expected annual pace of 1,165,000 units.

Housing data will continue to dominate the economic front tomorrow in the form of the key release of existing home sales, with contract closings expected to rise 0.4% m/m to an annual rate of 5.35 million units in September. For analysis of investing in real estate, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article Real Estate Sector: Marketperformat www.schwab.com/marketinsight.

At 2:00 p.m. ET, the Federal Reserve released its Beige Book report—an anecdotal report on national economic activity used by the Central Bank to prepare for the next two-day monetary policy meeting which concludes on November 2. The report showed that U.S. economic activity continued to expand at a modest or moderate pace in most reporting districts from late August to early October and outlooks were mostly positive. Employment and wage growth were modest and labor market conditions remained tight in most areas. Consumer spending was mixed for the period, while demand for nonfinancial services generally expanded compared to the previous report. Manufacturing activity widely diverged amid the regional landscapes and the strong U.S. dollar continued to weigh on exports according to a few districts.

As noted in the recent Schwab Market Perspective: Spinning Our Wheels, after a temporary soft patch in August, economic data has improved. The next couple of weeks will be data heavy and we'll be watching closely to gauge likely Fed policy. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

The MBA Mortgage Application Index rose 0.6% last week, after dropping 6.0% in the previous week. The increase came as a 0.8% decline for the Refinance Index was more than offset by a 3.0% rise for the Purchase Index. The average 30-year mortgage rate rose 5 basis points (bps) to 3.73%.

Treasuries were little changed, with the yields on the 2-year and 10-year notes flat at 0.80% and 1.74%, respectively and the 30-year bond rate ticked nearly 1 bp lower to 2.50%. 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.

Ahead of tomorrow's existing home sales release, the U.S. economic calendar will also deliver the Philly Fed Manufacturing Index, forecasted to have declined to 5.0 for October from 12.8 in September, along with the weekly initial jobless claims report, expected to show an increase to 250,000 from last week's 246,000 level. Finally, we will also receive the Leading Index, with economists expecting a 0.2% m/m increase for September after the 0.2% decline experienced in August.

The markets continue to grapple with the uncertain U.S. political landscape as the November election looms and ahead of tonight's third and final Presidential debate. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Where Do the Candidates Stand? Key Issues for Investors, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles. Also, for a look at the election and the potential impact on sectors, see Schwab's Brad Sorensen's, CFA, latest Schwab Sector Views: Election Specialat www.schwab.com/marketinsight.

Europe ticks higher, Asia mixed following China data

European equities turned modestly higher, though caution likely persisted ahead of tomorrow's monetary policy decision from the European Central Bank (ECB), which will be preceded by tonight's final U.S. Presidential debate. Also, the global markets digested a plethora of mixed Chinese economic data, as an in line 3Q GDP report was met with a disappointing read on industrial production. Crude oil prices rose to lift the energy sector on the heels of a bullish U.S. oil inventory report, while financials modestly extended a recent rally that has come from upbeat earnings from the sector in the U.S. and a reprieve from elevated concerns toward European banks. For analysis of the potential impacts of flare-up in the European banking sector uneasiness, see Schwab's Fixed Income Director Collin Martin's, CFA, article titled, European Bank Stress: What Does It Mean for the Preferred Securities Market? at www.schwab.com/marketinsight. In economic news in the region, eurozone construction output declined m/m in August, while the U.K. August employment change rose more than expected. The euro dipped and the British pound ticked higher versus the U.S. dollar, while bond yields in the region finished mixed.

With the global markets choppy amid a plethora of uncertainty/volatility, Schwab's 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.

Stocks in Asia finished mixed as the markets digested a divergent bag of Chinese economic data, while the yen gained some ground and attention remains on earnings, politics and Fed rate hike expectations in the U.S. China's 3Q GDP grew 6.7% y/y, matching forecasts and 2Q's expansion, helping ease concerns about slowing growth in the world's second largest economy. However, some of the enthusiasm may have been tempered by a separate release showing the nation's industrial production rose at a smaller-than-expected amount in September. China also showed September retail sales and fixed asset investment both rose in line with forecasts. The data follows yesterday's stronger-than-expected lending figures for last month. Mainland Chinese equities finished flat and those traded in Hong Kong declined. For more on China, see Schwab's Director of International Research Michelle Gibley's, CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017) at www.schwab.com/oninternational.

Japanese stocks rose amid the slight gain in the yen, and Australian securities advanced with weakness in oil & gas issues being more than offset by strength in basic materials issues. South Korean equities finished flat and Indian stocks gave back some of yesterday's rally.

In addition to the aforementioned ECB monetary policy meeting, tomorrow's international economic docket will yield machine tool orders from Japan, business confidence and employment data from Australia, retail sales from the U.K., PPI from Germany and the current account for the Eurozone.

With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?

Charles Schwab: With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?

By

Kathy A. Jones

- July 20, 2016

Key Points

• Bond yields in major countries have rebounded after plummeting to all-time lows in recent weeks, leading some to conclude that the bond bull market is over.
• However, the end of the bull market doesn't mean a bear market is starting, as slow global growth, deflationary pressures abroad, a firm dollar and demographic trends are likely to keep yields low.
• Investors should focus less on short-term changes in the market and more on structuring a fixed income portfolio that can work for them over the long run.

The bull market in U.S. Treasuries looks set to mark its 35^th anniversary this fall—assuming it continues. It has been a good run, with investors enjoying attractive returns from their bond portfolios over the years. Ten-year U.S. Treasury yields peaked at 15.84% on September 30, 1981 and fell to a modern-era low of 1.36% on July 8, 2016. (Remember, falling yields reflect rising prices.)

But yields have since bounced back, rising to 1.59% in mid-July. Is this a sign the bull market has run its course? Pundits have repeatedly declared the end of the bond bull market over the years, but, to paraphrase Mark Twain, news of its death has always been premature.

Ten-year Treasury yields, 1970-present

Source: Bloomberg. 10-Year Treasury Constant Maturity Rate (USGG10YR). Data as of 7/15/ 2016. Past performance is no guarantee of future results.

We're not willing to declare the bond bull market over, but we will concede that the recent drop in Treasury yields looked overdone in light of the solid U.S. economic data reported over the past few months. Looking at the U.S. economy in isolation, one would expect investors to be more sanguine. Economic growth is running at a steady 2.0% to 2.5% pace, and inflation is edging higher. Excluding volatile food and energy components, inflation is already above the Federal Reserve's 2% target by some measures. The unemployment rate—at less than 5%—is near where most economists believe the "full 'employment" threshold lies and wages are edging higher for most workers.

Normally, yields fall when the outlook for the economy is uncertain. There is little in the data cited above to support the recent drop.

Moreover, the market probably went too far in reducing expectations for the pace of rate hikes by the Fed. In the immediate aftermath of Britain's vote in June to leave the European Union—better known as the Brexit vote—market expectations for an increase in the federal funds rate this year fell to just 15%. They have since rebounded above a 40% likelihood of a rate hike, which seems more realistic to us.

Implied probability of a Fed rate hike

Source: Bloomberg, World Interest Rate Probability. Data as of 7/15/2016.

Why bond yields will likely stay low

However, bond yields are determined in the global market, and forces outside the U.S. are likely to keep U.S. bond yields low, in our view. The market may have overreacted to the actual Brexit vote, but the specter of rising nationalism and a potential increase in trade barriers suggested by the vote also exacerbated long-standing concerns about global growth. Global trade volumes have fallen to half their long-term historical level in recent years. Since trade is highly correlated with global growth, any indications that the free movement of goods, labor or capital across borders might slow tend to stoke concerns about the global economy.

Gross Domestic Product (GDP) versus Trade Volume – World

Source: International Monetary Fund, World Economic Outlook Database, world gross domestic product and world trade volume of goods and services, annual data as of 12/31/ 2015. Shaded areas indicate recessions.

Consequently, central banks around the globe have been easing monetary policies by pushing short-term interest rates to historically low or even negative levels and expanding bond buying programs. The Bank of England has already indicated it is likely to cut rates in August due to the negative impact that the "Brexit" vote is expected to have on its economy. The European Central Bank has pushed short-term interest rates into negative territory and expanded its bond-buying program to include corporate bonds.

The Bank of Japan is even said to be moving toward dropping "helicopter money" to stimulate its economy. (Helicopter money refers to a concept originating with economist Milton Friedman, whereby the central bank provides money directly to citizens—as if dropping it from a helicopter—in order to increase spending and prevent deflation. In practice it is likely to take the form of the government issuing perpetual debt.) With major central banks already holding large portions of outstanding government bonds on their balance sheets, the potential for higher bond yields appears limited, in our view.

Central banks' holdings of government bonds as share of outstanding debt

Source: Federal Reserve Board (U.S. Fed), European Central Bank (ECB) and Bank of Japan (BOJ) data as of 3/31/ 2016. *Holdings including government debt of Germany and other eurozone countries as of 3/31/2016.

Meanwhile, demand for yield remains strong, especially in countries with aging populations. Pension funds, insurance companies and retirees are all seeking some sort of positive yield to help generate income. With more than $10 trillion bonds priced with negative yields to maturity, investors have driven up the prices of all types of bonds—even the riskiest, such as high-yield corporate and emerging market bonds. As paltry as they are, U.S. bond yields are significantly higher than yields in most other major countries, leading foreign investors desperate for positive yields to the U.S. bond market.

U.S. yields are by far more attractive than yields in other major countries

Source: Bloomberg. Data as of 7/18/2016.

The inflow of foreign capital into the U.S. has boosted the dollar by more than 3% on a trade-weighted basis since the Brexit vote. The biggest increase has been against the British pound, which fell 11% against the dollar, but the euro is down about 3% and even the Chinese yuan is 2% lower. A strengthening dollar tends to hold down growth by making U.S. exports less competitive and reduces inflation because it causes import prices to fall. The trend in the dollar is a key indicator we watch since it often has the same impact as a Fed rate hike—slowing growth and lowering inflation.

The dollar is trying to do the Fed's job for it

Source: Bloomberg, daily data as of 7/18/2016. The U.S. Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies. Past performance is no guarantee of future results.

What to do now:

 

We've always believed that the bond bull market would end with a whimper instead of a bang. Yields may have hit generational lows, but it's unlikely they will rise sharply or substantially any time soon. The forces holding yields down—slow growth, deflationary pressure from abroad, a firm dollar and demographic trends—are likely to remain intact for the foreseeable future.

We are concerned that in response to these factors, yield-starved investors are stretching too far into low-quality bonds and/or long maturity bonds without getting compensated for the risks. When evaluating a fixed income portfolio here are a few considerations to take into account and some resources to help:

Start with realistic expectations. We don't expect rates to rise soon, but we also don't expect returns for fixed income investors to be as strong in the next year as they have been in the past year. This article explains why market returns may not be as good in the future.

Match your bond holdings to your investment needs. Treasuries and investment grade bonds tend to add stability to a portfolio, while bonds with more credit risk can add income but carry a higher risk of loss. This article explains how to include an appropriate allocation to each, based on what you want to achieve.

Consider a laddered bond portfolio. Bond ladders—an investment strategy in which you purchase individual bonds with staggered maturities, spreading investments across a particular time horizon—are a way to avoid trying to time interest rate changes. The goal of a ladder is to have bonds maturing at set, but staggered, intervals. Short-term bonds provide stability and create opportunities to reinvest if rates rise, while the longer-term "rungs" of the ladder generate income. This article provides more details on how they work.

See the opportunity. Higher interest rates could spell the end of the bull market, as prices tend to fall when rates rise. But higher interest rates would also be a welcome change for investors seeking income in a low-yield world: Rising interest income would be a boon for investors with a longer time horizon. Consult a Schwab representative to get an evaluation of your current bond holdings and help with constructing a portfolio that meets your needs.