Charles Schwab: On The Market – January 14, 2016

U.S. stocks rebounded solidly from wednesday’s tumble as crude oil prices increased and Dow member JPMorgan Chase (JPM) announced 4Q results that topped expectations to aid in the blue-chip index’s triple digit gains. Treasuries were mixed with domestic economic reports showing an unexpected rise in weekly jobless claims and a decline in import prices. In other equity news, Best Buy (BBY) announced revenue and same-store sales figures declined and GoPro (GPRO) lowered its quarterly revenue outlook. The U.S. dollar was higher and gold was lower.

The Dow Jones Industrial Average (DJIA) rallied 228 points (1.4%) to 16,379, the S&P 500 Index surged 32 points (1.7%) higher to 1,922, and the Nasdaq Composite jumped 89 points (2.0%) to 4,615. In heavy volume, 1.3 billion shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.72 to $31.20 per barrel and wholesale gasoline gained $0.02 to $1.07 per gallon, while the Bloomberg gold spot price lost $16.70 to $1,076.89 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 99.06. 

Dow member JPMorgan Chase & Co. (JPM $58) reported 4Q earnings-per-share (EPS) of $1.32, above the FactSet estimate of $1.26, as revenues rose 1.0% year-over-year (y/y) to $23.7 billion, versus the expected $23.3 billion. The company said it had a good quarter as 2015 came to a close, with strong loan growth and credit quality, except for some stress in energy. JPM added that the consumer business continues to gather deposits, outpacing the industry, while markets were somewhat quieter, and it saw the impact reflected in the results of its trading and asset management businesses. JPM finished higher.

Best Buy Co. Inc. (BBY $26) announced that during the holiday period, its domestic revenue declined 0.8% y/y, primarily driven by a same-store sales decrease of 1.4%, as its mobile phone category was softer than both its expectations and the prior year. Excluding mobile phones, domestic revenue increased y/y due to its strong performance in health & wearables, home theater and appliances. “Despite a slightly softer-than-expected topline, we are improving our fourth quarter operating income rate outlook as a result of our continuing conviction to a disciplined promotional strategy and strong expense management,” the company added. Shares of BBY fell.

GoPro Inc. (GPRO $12) lowered its 4Q revenue outlook, reflecting lower-than-anticipated sales of its capture devices due to the slower-than-expected sell through at retailers, particularly in the first half of the quarter. The company also announced a reduction in its workforce of about 7.0%, to better align resources to key growth initiatives. Shares tumbled.

Jobless claims surprisingly rise 

Weekly initial jobless claims (chart) rose by 7,000 to 284,000 last week, versus the Bloomberg estimate calling for a decline to 275,000 as the prior week’s figure was unrevised at 277,000. The four-week moving average increased by 3,000 to 278,750, while continuing claims grew by 29,000 to 2,263,000, north of the forecasted 2,210,000 level. 

The Import Price Index (chart) declined 1.2% month-over-month (m/m) for December, compared to the projection of a 1.3% drop, and November’s 0.4% decrease was revised to a 0.5% fall. Y/Y, prices were lower 8.2%, versus the 8.4% forecasted drop, and following November’s downwardly revised 9.5% fall. 

Treasuries were mixed, with the yield on the 2-year note losing 1 basis point (bp) to 0.90%, while the yield on the 10-year note was flat at 2.09% and the 30-year bond rate ticked 1 bp higher to 2.89%. 

This Friday, the U.S. economic front for the week will culminate with a robust docket, with reports including the December Producer Price Index, the January Empire Manufacturing Index, the Fed’s December industrial production and capacity utilization report, and November business inventories. However, data on the all-important U.S. consumer will likely garner the lion’s share of attention. December retail sales are projected to dip 0.1% m/m after rising 0.2% the month prior. Excluding autos, sales are projected to grow 0.2% after rising 0.4% in November, while stripping out autos and gas, sales are anticipated to increase 0.4% following the previous month’s 0.5% gain. Also, we will get the preliminary January University of Michigan Consumer Sentiment Index, forecasted to tick higher to 92.9 from December’s 92.6 level. 

Schwab’s Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Cautionary Note, the supposedly moribund consumer appears to have come through better than expected during the holiday season. Consumers appear to have slowed paying down their debt balances, potentially a positive development for spending, but still seem reluctant to increase their borrowing. All of this leads us to keep our marketperform rating for the consumer discretionary sector in place. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. 

Europe and Asia see pressure as global uneasiness remains

European equities traded broadly lower, following the afternoon drop in the U.S. yesterday, with global growth and oil concerns festering. Also geopolitical uneasiness was exacerbated by news of deadly explosions and gunfire in Indonesia. The Bank of England left its monetary policy stance unchanged as expected, holding its benchmark interest rate at 0.50% and maintaining its asset purchase target. The euro turned lower versus the U.S. dollar and bond yields in the region finished mostly higher. In economic news, German 2015 GDP matched expectations with a 1.7% pace of growth, while Italian industrial production unexpectedly declined m/m in November. 

Stocks in Asia finished mostly to the downside on the heels of the sharp drop in the U.S. yesterday that stemmed from continued volatility in the oil markets and festering global growth concerns. Japan’s Nikkei 225 Index gave back most of yesterday’s jump, which was the first gain for the index this year. Yesterday’s late-day strength in the yen and a much larger-than-expected drop in Japan’s November machine orders—a gauge of capital spending—weighed on sentiment. Weakness in oil & gas and technology issues pressured Australian stocks despite a relatively better-than-forecasted December employment report. Equities trading in Hong Kong and India decreased and South Korean securities also finished lower, while the Bank of Korea left its benchmark interest rate unchanged at 1.50% as expected. 

However, stocks in mainland China posted an afternoon rally to overcome solid early losses and close higher with the yuan remaining relatively stable. Small-cap listings got a boost from companies in the group pledging to help stabilize the markets, while reports of state funds buying equities and signs of increased government efforts to help stabilize the markets aided the afternoon recovery, per Bloomberg. The yuan’s recent tumble has been a source of a rout in the Chinese and global markets to begin the year, and Schwab’s Chief Fixed Income Strategist, Kathy Jones, discusses Why the Chinese Currency Decline is Rattling Markets, and Schwab’s Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers a look at the Chinese Stock Market Selloff: What’s New, What’s Not. 

Finally, Indonesia came into focus as the central bank cut its benchmark interest rates, while news of explosions and gunfire in central Jakarta unnerved sentiment. Schwab’s Jeffrey Kleintop, CFA, offers analysis for investors in his article, Geopolitical Risks in 2016: Is Your Portfolio Prepared?. Jakarta’s Composite Index finished 0.5% lower in volatile action. 

Tomorrow, the international economic docket will include the CPI from Italy, construction output from the U.K. and the trade balance for the eurozone.