Schwab Center For Financial Research – Market Analysis Group On The Market

Weekly Gains Crumble as Stocks Tumble

The U.S. equity markets closed sharply lower for a second-straight session on heavy volume due to quadruple witching, the simultaneous expiration of equity and index futures and options contracts. Oil prices continued to decline, while Japan’s central bank’s monetary policy decision seemed to underwhelm global market participants. Treasuries and gold were higher and the U.S. dollar lost ground. Corporate earnings reports were mostly upbeat, though economic reads on domestic services and manufacturing activity disappointed.

The Dow Jones Industrial Average (DIA) tumbled 367 points (2.1%) to 17,128, the S&P 500 Index (SPY) was 36 points (1.8%) lower at 2,006 and the Nasdaq Composite (QQQ) dropped 79 points (1.6%) to 4,923. In heavy volume, 2.5 billion shares were traded on the NYSE and 3.4 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.21 to $36.06 per barrel, wholesale gasoline added $0.01 to $1.27 per gallon, and the Bloomberg gold spot price increased $14.74 to $1,065.84 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.6% to 98.69. Markets were lower for the week, as the DJIA decreased 0.8%, the S&P 500 Index lost 0.3%, and the Nasdaq Composite Index declined 0.2%. 

Lennar Corp. (LEN $47) reported fiscal 4Q earnings-per-share (EPS) of $1.21, above the $1.11 FactSet estimate, as revenues rose 14.0% year-over-year (y/y) to $3.0 billion, roughly in line with expectations. The homebuilder said it was able to meet its delivery schedule despite a tight labor market and the impact of the new TRID regulations. The company also noted, “While the Federal Reserve announced the first interest rate increase in nine years, it stated that the increase was a sign of confidence in the economy. We believe that improving employment levels, wage growth and consumer confidence will continue to keep the housing market on its slow and steady recovery.” Shares quickly gave up early gains and closed lower. 

Schwab’s Chief Investment Strategist Liz Ann Sonders discusses the Fed’s decision in her article, Said the Fed to the Markets, “Take a Hike,” at www.schwab.com/marketinsight, and also follow Liz Ann on Twitter: @lizannsonders. Moreover, for fixed income analysis, see After the Fed Rate Hike: Suggestions for Bond Investors, under the “Insights and Ideas” tab at www.schwab.com/marketinsight, and follow us on Twitter: @SchwabResearch. 

Red Hat Inc. (RHT $81) posted 3Q EPS ex-items of $0.48, above the projected $0.46, with revenues growing 15.0% y/y to $524 million, versus the forecasted $522 million. The open source solutions company issued stronger-than-expected 4Q revenue guidance, while raising its full-year outlook. RHT traded nicely higher. 

Darden Restaurants Inc. (DRI $63) announced fiscal 2Q adjusted earnings of $0.54 per share, compared to the expected $0.42, as revenues rose 3.2% y/y to $1.6 billion, roughly in line with forecasts. The parent of Olive Garden and other chains raised its full-year guidance and increased its quarterly dividend by 14.0% to $0.50 per share, while authorizing a new $500 million share repurchase program. Shares gained solid ground. 

BlackBerry Ltd. (BBRY $9) reported a 3Q loss of $0.03 per share, smaller than the estimated $0.15 per share shortfall, with revenues declining 29.8% y/y to $557 million, versus the expected $489 million. BBRY finished trading decisively higher. 

Preliminary services sector report misses the mark

The preliminary Markit U.S. Services PMI Index fell to 53.7 in December from 56.1 in November, versus the Bloomberg forecast of a decline to 55.9, with a reading above 50 denoting expansion. Markit said this was the weakest level of services sector output since December 2014, amid a sharp downturn in new business growth and a slip in business confidence, while a solid pace of staff hiring was maintained. 

The Kansas City Fed Manufacturing Activity Index fell to -9 for December from 1 in November, where economists had expected it to remain, with a reading south of zero depicting contraction. 

Treasuries were higher, with the yield on the 2-year note decreasing 4 basis points (bps) to 0.95%, the yield on the 10-year note dropping 3 bps to 2.20% and the 30-year bond rate declining 1 bp to 2.92%. 

Europe gives back some of the week’s rally, Asia mostly lower

European equities finished noticeably lower, with the Stoxx Europe 600 Index giving back some of its three-day rally, which was the largest since August, per Bloomberg. The global markets continued to assess the impact of this week’s first rate hike in the U.S. since before the financial crisis, while Japan’s central bank’s monetary policy decision appears to have underwhelmed. Telecommunications issues led to the downside amid a drop in shares of Altice NV (ALLVF $13) after the U.S. Justice Department asked for a decision on its proposed acquisition of Cablevision Systems Corp. (CVC $31) to be deferred, per Bloomberg. Commodity-related stocks remained in focus, with crude oil prices coming off a two-day drop, while pressure on basic materials issues persisted. Spanish stocks were standout losers as political uncertainty ahead of this weekend’s general elections exacerbated sentiment in the region. The euro, which has fallen as of late, traded slightly higher versus the U.S. dollar, while bond yields in the region moved lower. 

Stocks in Asia finished mostly lower following the solid declines in the U.S. as the global markets grappled with the impact of this week’s Fed rate hike, while volatility ensued in Japan following the Bank of Japan’s (BoJ) monetary policy decision. The BoJ kept its main target of 80 trillion yen a year in asset purchases unchanged as expected, but announced an addition to its program for purchasing exchange-traded funds (ETFs), while extending the maturity of Japanese government bond holdings. Japanese securities fell after a short-lived jump on the announcement, with the yen rallying late in the session, suggesting the moves by the BoJ disappointed. Mainland Chinese stocks finished flat and equities trading in Hong Kong declined, with pressure being limited following a report that showed home price increases in the nation widened for November. Finally, stocks in South Korea and India dipped, however, Australian equities ticked higher, despite continued weakness in commodity-related stocks.

Stocks lower on week courtesy of Fed rate hike volatility

Stocks finished lowerafter rallying leading up to the midweek monetary policy decision by the Federal Reserve, which delivered the highly-anticipated first rate hike since before the financial crisis. However, U.S. stocks pulled back late in the week with volatility ramping up in the global equity, commodity and bond markets on the heels of the Fed’s decision. Schwab’s Liz Ann Sonders notes in her article, Said the Fed to the Markets, “Take a Hike,” the initiation of rate hikes removes the uncertainty around the start date obviously; but does not remove the uncertainty around the path of rate hikes from here. We believe this will remain a focus by investors in 2016; and is likely to contribute to some of the volatility we believe will persist across the equity and fixed income markets. We also believe that the Fed’s approach to its balance sheet will be the focus of investors’ attention for much of the coming year. 

News from the equity and economic fronts took a back seat to the Fed’s decision, though the recent flare-up in concerns toward the high-yield bond markets remained in focus as discussed by Schwab’s Chief Fixed Income Strategist, Kathy A. Jones and Fixed Income Director Collin Martin, CFA, in their article, Proceed with Caution: High-Yield Bonds Face a Triple Threat. Be sure to follow Kathy on Twitter: @kathyjones, and read the rest of the article at www.schwab.com/onbonds, where you can also find analysis on the topic from Schwab’s Managing Director of Mutual Fund & ETF Research, Michael Iachini, CFA, CFP, in his article, Junk Bond Selloff: What ETF Investors Should Know. 

List of next week’s economic reports, checked twice 

Amid the backdrop of the Christmas holiday shortened week in which the US and many international markets will be closed on Friday and the US stock market will close early on Thursday, the U.S. economic calendar will shed some light on the housing and manufacturing scenes with the release of existing and new home sales reports coupled with a preliminary read on November durable goods orders. As noted in the recent Schwab Market Perspective: What Was, What Is, and What May Be, some headwinds are keeping the U.S. economy from firing on all cylinders. Manufacturing weakened in the second half of the year according to the Institute for Supply Management (ISM) and while manufacturing is important and shouldn’t be ignored, it represents only 12% of US economic activity; while the export market is a relatively small part of overall gross domestic product (GDP). Read more at www.schwab.com/marketinsight and follow us on Twitter: @SchwabResearch. We will get the third and final look at 3Q GDP on Tuesday. 

Additionally, the consumer will be represented with the releases of the final University of Michigan Consumer Sentiment Index for December and personal income and spending figures for November. 

Key international reports next week include: China—the Leading Index. Japan—household spending, CPI and PPI, the Leading Index, construction orders, and the All Industry Activity Index. Eurozone—PPI, Import Price Index and GfK Consumer Confidence from Germany, consumer spending and 3Q GDP from France and industrial orders from Italy. U.K.—3Q GDP, current account balance, business investment and public borrowing.