Stocks Give Back Some Post Fed Gains

Charles Schwab; On the Market

Posted: 3/16/2017 4:15 PM ET

Stocks Give Back Some Post Fed Gains

U.S. equities finished the regular trading session mostly lower with health care stocks lagging on the heels of President Trump's budget proposal. Global equities advanced following yesterday's decision by the Federal Reserve and today's central bank decisions that included Japan, the U.K. and Switzerland announcing no changes to their respective monetary policy stances and China increasing its short-term interest rate. Treasuries, the U.S. dollar and crude oil prices were lower and gold gained ground. In equity news, Oracle topped earnings estimates and increased its dividend.

The Dow Jones Industrial Average (DJIA) decreased 17 points (0.1%) to 20,933 and the S&P 500 Index shed 4 points (0.2%) to 2,381, while the Nasdaq Composite ticked 1 point higher to 5,901. In moderate volume, 803 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.11 to $48.75 per barrel and wholesale gasoline ticked $0.01 higher to $1.59 per gallon. Elsewhere, the Bloomberg gold spot price gained $6.65 to $1,226.52 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.5% to 100.27.

Oracle Corp. (ORCL $46) reported fiscal 3Q earnings-per-share (EPS) of $0.53, or $0.69 ex-items, compared to the $0.62 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $9.3 billion, roughly in line with expectations. The company said the "hyper-growth" it continues to experience in the cloud has "rapidly" driven both its cloud software as a service (SaaS) and platform as a service (PaaS) businesses to scale. ORCL also issued 4Q EPS and revenue guidance that was mostly above estimates and increased its quarterly dividend by 27% to $0.19 per share. Shares rallied.

Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Big Machine: Why Large Caps Are Likely to Outperform at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.

Williams-Sonoma Inc. (WSM $49) posted 4Q profits of $1.63 per share, or $1.55 ex-items, versus the forecasted $1.51, as revenues dipped 0.3% y/y to $1.6 billion, roughly in line with expectations. 4Q same-store sales declined 0.9% y/y, compared to the 0.4% increase that was expected. Gross margin for the period topped projections. WSM issued 1Q and full-year guidance that was a bit shy of the Street's estimates. WSM increased its quarterly dividend by 5% to $0.39 per share. Shares were nicely higher.

Dollar General Corp. (DG $73) achieved 4Q EPS of $1.49, north of the estimated $1.41, as revenues grew 13.7% y/y to $6.0 billion, mostly matching expectations. Same-store sales rose 1.0% y/y, above the forecasted 0.2% gain. The company's current year profit outlook was below projections but included several one-time items that may be impacting comparability to the Street, while announcing an increase to its quarterly dividend of 4% to $0.26 per share. Shares gained ground.

Tesla Inc. (TSLA $262) announced offerings of common stock and convertible senior notes totaling about $1.15 billion, including options granted to the underwriters. The electric car maker said it intends to use the proceeds to strengthen its balance sheet and further reduce any risks associated with the rapid scaling of its business due to the launch of its Model 3, as well as for general corporate purposes. TSLA moved to the upside.

Housing construction activity mixed, jobless claims dip

Housing starts (chart) for February rose 3.0% month-over-month (m/m) to an annual pace of 1,288,000 units, above the Bloomberg forecast of a 1,264,000 unit rate. January starts were upwardly revised to an annual pace of 1,251,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, fell 6.2% m/m in February to an annual rate of 1,213,000, after January's favorably revised 1,293,000 rate, and south of the expected annual pace of 1,268,000 units. Starts and permits for single-family units rose, but multi-family activity declined m/m.

Weekly initial jobless claims (chart) dipped by 2,000 to 241,000 last week, slightly above forecasts of 240,000, with the prior week’s figure being unrevised at 243,000. The four-week moving average rose by 750 to 237,250, while continuing claims dropped by 30,000 to 2,030,000, south of estimates of 2,050,000.

The Philly Fed Manufacturing Index (chart) in March decreased but remained solidly at a level depicting expansion (a reading above zero) after decreasing to 32.8 from 43.3 in February, and compared to estimates of a decline to 30.0.

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, rose to a level of 5.63 million jobs available to be filled in January, from December's upwardly revised 5.54 million level, and above forecasts of 5.56 million. The hiring rate moved higher to 3.7% from December's 3.6% rate and the separation rate increased to 3.6% from 3.5%.

Treasuries were lower, with the yields on the 2-year note and the 30-year bond rising 3 basis points (bps) to 1.33% and 3.14%, respectively, and the yield on the 10-year note advancing 4 bps to 2.53%.

Treasury yields and the U.S. dollar fell yesterday despite the Fed's highly-expected rate hike, as its apparent dovish tone and forecast of further rate hikes for the rest of the year seemed to ease concerns that an upbeat economic outlook would accelerate the pace of further increases. For analysis of the Fed's decision, see our article, Fed Rate Hike: What Does It Mean for Your Portfolio?, and Senior Fixed Income Research Analyst, Collin Martin's, CFA, commentary, Fed Raises Rates, Signals Additional Hikes in 2017, at www.schwab.com/insights. Follow Schwab on Twitter: @schwabresearch.

In the latest Schwab Sector Views: How Should Investors Look at Health Care Now?, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, informs us that the health care sector has outperformed the S&P 500 on average during rate-hiking periods going back to 1970 (BCA Research), although just because it’s happened in the past doesn’t necessarily mean it will occur in the future. Read the whole article, as well as Brad's views on other sectors at www.schwab.com/marketinsight.

Finally, for a look at the stock markets and potential increased volatility, along with the festering political uncertainty, see our article, End of an Era: Why Volatility May Return to the Stock Market and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's commentary, Return of the Debt Ceiling: What It Means for Investors, at www.schwab.com/insights.

Tomorrow, the U.S. economic calendar will lead-off with the Federal Reserve's industrial production and capacity utilization report for February, with economists expecting a 0.2% m/m increase in production, rebounding from the 0.3% m/m decline and for utilization to have ticked higher to 75.5% from January's 75.3% level. The docket will round out the day with the release of the preliminary University of Michigan Consumer Confidence Index and the Leading Index.

Europe and Asia higher following plethora of central bank decisions

European equities gained ground, with basic materials and oil & gas issues extending yesterday's rebounds, while the global markets digested unchanged monetary policy decisions out of the U.K., Japan and Switzerland and rate increases in China. Also, the markets reacted favorably to the highly anticipated rate hike in the U.S., which was accompanied by an apparent dovish tone and forecast for future rate hikes this year that seemed to calm concerns of an accelerated pace of increases. Moreover, the results from the Dutch election look to have eased concerns about a populist threat in Europe. This sets the stage for the upcoming key French Presidential election in France next month 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 consumer price inflation rose in line with forecasts for February. The euro ticked higher and the British pound rose versus the U.S. dollar, while bond yields in the region were mostly higher.

Stocks in Asia finished higher in the wake of the expected rate hike and apparent dovish tone in the U.S., which also eased concerns about the pace of future rate increases for the year. Also, the Bank of Japan held its monetary policy steady as expected and the People's Bank of China raised its short-term interest rate for a third-straight month. Japanese equities ticked higher, with the rally in the yen as the U.S. dollar fell capping the upward move. Mainland Chinese stocks and those trading in Hong Kong gained solid ground. Australian securities managed to advance following an unexpected decline in the nation's employment change in February, which likely limited gains. South Korean equities rose and Indian listings finished higher. 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.

The international economic calendar for tomorrow will be light, offering wage data from France and trade data from Italy and the Eurozone, while the Eurozone will also report construction output.

Financial Review

Groping Along

Sinclair Noe — March 30, 2015

 

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DOW + 263 = 17,976
SPX + 25 = 2086
NAS + 56 = 4947
10 YR YLD + .01 = 1.96%
OIL – .19 = 48.68
GOLD – 13.40 = 1186.00
SILV – .28 = 16.79

The Commerce Department reports consumer spending rose just 0.1% in February; that follows a decline in January. The small increase in spending in February and outright decline in January suggest the economy failed in early 2015 to match the pace of growth at the end of last year. Gross domestic product is forecast to expand just 1.4% in the first quarter, down from 2.2% in the fourth quarter and 5% in the third quarter. Part of the problem might be harsh winter weather; if that is the case, we might expect a rebound in consumer spending in the spring.

Or maybe the American consumer is tired of spending, and is actually starting to save. The saving rate jumped in February to 5.8 percent, the highest since December 2012 and up from 4.4 percent just three months earlier. The savings rate slumped to as low as 1.9 percent in the run-up to the recession, a sign too many Americans were spending beyond their means. Since then, consumers have been trying to clean up their finances.

The National Association of Realtors said its pending-home-sales index rose 3.1% to 106.9 after a downward revision to January’s numbers. Total existing-homes sales in 2015 are forecast to be around 5.25 million, an increase of 6.4%, and the national median existing-home price is expected to increase around 5.6%.

The Commerce Department released the personal consumption expenditures price index, or PCE index, for February. It was up 0.3% for the past 12 months. The PCE is the Federal Reserve’s preferred measure of inflation. The oil price crash, a strong dollar and weak overseas economies have all kept inflation at bay. Some slack in the economy may also be keeping prices muted, but even after taking out food and energy, inflation came in at 1.4%, up very slightly from 1.3% in January. So, inflation is still well short of the 2% target established by the Federal Reserve. And we know the Fed has lowered its target for the unemployment rate to around 5%. We also know that the targets are not firm.

Full employment is that point where most people can find jobs and where the unemployment rate has dropped low enough where it just starts to spark inflation. Former Federal Reserve chairman Ben Bernanke gave a speech and answered questions today at Johns Hopkins. Bernanke said he doesn’t know where the so-called full-employment level is now, saying the Fed “is in some sense groping” to determine it.

One reason why it is difficult to determine full employment is because wages have been stuck in the mud; so, even as people have found jobs, their wages haven’t been enough to kick start inflation. Many of the jobs lost during the downturn were good paying jobs that were replaced in the recovery with lower paying jobs or part-time work. So, when it comes to pinpointing the full employment number, Bernanke says: “Nobody really knows that number with any precision,” adding, “and the Fed will continue to grope to find out what the right number is.”

In addition to a speech, today also marks the first day of Ben Bernanke’s blog. His first post dealt with why the Fed has kept rates artificially low for a long time and hurt savers. Of course, the simple answer is that rising rates would slow the economy at a time when the economy was not yet recovered from a massive downturn; and in that regard, the economy determines rates more than the Fed. What Bernanke didn’t really address is how lower rates pushed investors to chase yield, pushing them into the stock market, and what the effect of higher rates might be on the equity market.

Still, what was also important about the Bernanke blog was why he chose this topic for his first blog post. It almost seems he is trying to get us ready for a Fed rate hike. Dam the torpedoes, higher rates ahead. But it doesn’t look like the bond market is paying attention. Rates remain low despite the Fed warnings that they want to hike rates at some point this year. It looks like the setup for a letdown.

The big economic report this week is the jobs report.  U.S. exchanges will be closed on April 3 in observance of Good Friday, the day when the government releases its official employment report for March. Good Friday isn’t a federal holiday. It’s expected that the economy added about 255,000 net new jobs in March.

The pace of first-quarter profit warnings from S&P 500 companies is running slightly ahead of the same time a year ago, and well ahead of the five-year average. Ahead of the start of earnings reporting season, which unofficially kicks off when Alcoa reports results on April 8, about 84% of the companies that have provided first-quarter outlooks gave negative outlooks. That’s above the 81% that warned for the first quarter of 2014, and higher than the five-year average of 68%. Many of the companies blamed the negative effects of currency movements, lower commodity prices or both, for the negative pre-announcements.

Meanwhile, revenues of S&P 500 companies are expected to decline 2.8% in the first quarter from a year ago, which would mark the worst year-to-year drop since the third quarter of 2009. One sector is holding up well, healthcare is expected to see revenue growth of 9.1%. The energy sector, however, more than makes up for it. The average price of oil in Q1, at $48.65 a barrel, had been cut in half from a year ago ($98.56). So revenues are expected to plunge 38%. And earnings for the energy sector are expected to drop 64%.

But it’s not just the energy sector. Expect declining earnings for utilities, materials, telecom services, consumer staples, and IT. Look for possible earnings growth in consumer discretionary, financials, and healthcare. Oil & gas companies are blaming the oil bust for the collapse of their revenues and earnings. The rest of the companies are blaming the strong dollar in near unison. But ironically, they’re not pointing at the strong dollar and at oil as a force in lowering costs. Cost reductions are the result of superior management; sales and earnings declines are the fault of the strong dollar.

And of course, there will be a spillover effect into the second quarter; in fact revenues are expected to drop even more; down 3.1%, compared to first quarter declines of 2.8%. And earnings, after the decline of 4.6% in Q1, are expected to fall 1.8% in Q2, down from of an estimated growth of 4.2% and 5.3% respectively at the beginning of the year. Of course, part of this is ongoing game of ratcheting down expectations, only to beat expectations when earnings are reported, but more and more it looks like the economy might not be as strong it is sometimes portrayed.

Chinese stocks took off today after policy makers signaled the country had capacity to ease monetary policy and boost sluggish growth. Policymakers with the People’s Bank of China said that China’s policy makers had to be “vigilant” against the risk of disinflation and suggested that the nation had “room to act.” China’s central bank has already taken a series of easing steps since November, cutting interest rates twice and slashing banks’ reserve requirements.

Greece’s biggest creditor, Germany said this morning that the euro zone would give Athens no further financial aid until it has a more detailed list of reforms and some are enacted into law. Greece submitted a list of reforms on Friday. Greek Prime Minister Alex Tsipras spoke to the Greek parliament today; he said that Greece’s list of “short-term measures” to creditors included curbing fuel and tobacco smuggling, checks on bank transfers and fighting sales tax fraud. He said, “It’s time for the ‘haves’ to start paying and for the looting of the middle class and salaried workers to stop.” In the negotiations with the creditors, he said, “We are seeking an honorable compromise with our partners, but do not expect an unconditional surrender.”

A renewed Eurozone crisis poses the biggest risk to the global economy, according to a Fitch Ratings poll at its March sovereign credit briefing in Hong Kong and Singapore. The report showed that 41% of the respondents in Hong Kong and 45% in Singapore pointed to fresh Eurozone instability as the most likely thing to derail the global economic recovery. Whether by design or due to the combination of Greece submitting a lot of not-fully-fleshed out reforms right before the Easter holiday, it looks like Greece stays in the sweatbox for the next two weeks.

Monday is for mergers. Typically, the final details of a merger get worked out over a weekend and the announcement comes on a Monday. We had a boatload of deals announced this morning.

UnitedHealth Group announced plans to buy Catamaran Corp., the fourth-largest pharmacy-benefit manager in a$12.8 billion deal.

Teva Pharmaceutical Industries is acquiring Auspex Pharmaceuticals in a deal valued at $3.2 billion

Horizon Pharma said it planned on purchasing the pharma company Hyperion Therapeutics for $955 million, in cash and debt commitments.

Switzerland’s Dufry has agreed to buy airport tax and duty free seller World Duty Free in a deal that values the latter at about $3.9B, including debt. Dufry will pay about $1.5 billion for the Italian Benetton family’s 50.1% stake in the airport retailer. The deal is the second high-profile foreign takeover of an Italian company in less than a week after ChemChina bought a majority stake in tire maker Pirelli last Sunday.

In Asia’s biggest block deal this year, Chevron has sold its entire stake in Caltex Australia, the country’s biggest refiner, for$3.7 billion.