Though off the worst levels of the day, U.S. stocks closed with steep losses ahead of the three-day holiday weekend as global uneasiness continued to fester with mainland Chinese markets tumbling into bear market territory and crude oil prices falling to 12-year lows. Treasuries rallied as a deluge of domestic economic data disappointed, while gold was higher and the U.S. dollar was lower. In equity news, earnings reports from Dow member Intel (O:INTC), along with Citigroup (N:C) and Wells Fargo (NYSE:WFC), fostered a negative reaction on the Street.
The Dow Jones Industrial Average (DJIA) tumbled 391 points (2.4%) to 15,988, the S&P 500 Index dropped 45 points (2.3%) to 1,877, and the Nasdaq Composite fell 127 points (2.7%) to 4,488. In heavy volume, 1.5 billion shares were traded on the NYSE and 2.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.78 to $29.42 per barrel and wholesale gasoline lost $0.05 to $1.02 per gallon, while the Bloomberg gold spot price increased $10.11 to $1,088.49 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 98.92. Markets were lower for the week, as the DJIA dropped 2.2%, the S&P 500 Index fell 2.2%, and the Nasdaq Composite Index lost 3.3%.
Dow member Intel Corp. (NASDAQ:INTC $29) reported 4Q earnings-per-share (EPS) of $0.74, above the $0.63 FactSet estimate, as revenues rose 1.0% year-over-year (y/y) to $14.9 billion, north of the expected $14.8 billion. However, the company's quarterly data center growth disappointed and its 1Q guidance is causing some concern on the Street, with its profit margin outlook coming in below forecasts and it offering a warning of headwinds in China and the rest of Asia. Shares closed sharply lower.
Citigroup Inc. (NYSE:C $42) posted 4Q EPS ex-items of $1.06, above the forecasted $1.05, with revenues rising 4.0% y/y to $18.6 billion, north of the expected $17.9 billion. C traded lower, with some analysts questioning how strong the company's revenue results were due to a plethora of one-time items, per Bloomberg.
Wells Fargo & Co. (N:WFC $49) announced adjusted 4Q profits of $1.03 per share, above the projected $1.02, as revenues increased 1.0% y/y to $21.6 billion, versus the anticipated $21.8 billion. WFC finished to the downside, with some analysts expressing concerns toward its operating margins that missed expectations and slightly larger-than-expected bad loan provisions.
Dow component General Electric Co. (NYSE:GE $28) reported an agreement to sell its appliances business to China's Qindao Haier Co. Ltd. for $5.4 billion, which will continue the use of the GE appliances brand. Shares moved lower.
Heavy dose of economic data mostly disappoints
Advance retail sales for December were down 0.1% month-over-month (m/m), matching the Bloomberg forecast, while November's 0.2% increase was adjusted to a 0.4% gain. Auto sales were flat and sales at gasoline stations fell 1.1%. Last month's sales ex-autos dipped 0.1% m/m, versus expectations of a 0.2% gain, while the 0.4% rise in the previous month was revised to a 0.3% increase. Sales ex-autos and gas were flat m/m for December, versus the 0.4% increase that was anticipated, while November's 0.5% gain was unrevised. Sales of general merchandise, clothing, electronics, and appliances all declined, while sales of furniture, home goods, food services, and building materials all gained.
The preliminary University of Michigan Consumer Sentiment Index rose to 93.3 this month from 92.6 in December, and compared to estimates calling for 92.9. The economic conditions component of the survey deteriorated, but the outlook aspect improved. The 1-year inflation projection declined to 2.4% from 2.6%, while the 5-10 year inflation outlook ticked higher to 2.7% from 2.6%.
The Producer Price Index (PPI) showed prices at the wholesale level in December were down 0.2% m/m, in line with expectations, while November's 0.3% gain was unrevised. The core rate, which excludes food and energy, ticked 0.1% higher m/m, matching forecasts, and November's 0.3% rise was unadjusted. Y/Y, the headline rate fell 1.0%, in line with projections, and the core PPI was up 0.3% last month, matching estimates. In November, producer prices were down 1.1% and up 0.5% for the headline and core rates, respectively.
The Empire Manufacturing Index showed the contraction in output from the New York region (a reading below zero) for January surprisingly accelerated sharply. The index dropped to -19.4 from the downwardly revised -6.2 in December, with the forecast calling for an improvement to -4.0.
Industrial production decreased 0.4% m/m in December, versus the estimated 0.2% decline, and November's 0.6% drop was revised to a 0.9% fall. Manufacturing production dipped, while output in mining and utilities fell. Capacity utilization declined to 76.5% from November's downwardly revised 76.9% rate, and versus projections of 76.8%. Capacity utilization is 3.6 percentage points below its long-run average.
Business inventories declined 0.2% m/m in November, compared to the forecasted 0.1% dip, and October's flat reading was revised to a 0.1% decline. Sales decreased 0.2% m/m, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—remained at October's 1.38 pace.
Today's data was mostly on the soft side, notably the disappointing manufacturing data, likely exacerbating global growth concerns, but the one bright spot was the larger-than-expected improvement in consumer sentiment, led by their expectations. The consumer has tailwinds of lower oil prices, increased minimum wages and signs of business' planning to raise compensation. We believe this combination could lead to upside surprises from consumer spending, helping to support the service side of the economy (88% of the U.S. economy), and offsetting the drag from the manufacturing sector.
Treasuries rallied, with the yield on the 2-year note declining 5 basis points (bps) to 0.84%, the yield on the 10-year note dropping 6 bps to 2.03% and the 30-year bond rate falling 8 bps to 2.80%.
Please note: All U.S. markets will be closed on Monday in observance of the Martin Luther King, Jr. Day holiday.
Europe lower, Asia falls as mainland Chinese stocks drop into bear market territory
European equity markets traded broadly lower, with oil and gas issues falling as crude oil prices returned to selloff mode after yesterday's rebound. Also, global sentiment was hampered by a sharp drop in China, while economic data in the U.S. came in softer than anticipated to exacerbate global growth concerns. Technology stocks also saw pressure on the heels of Intel's results across the pond. The euro rallied versus the U.S. dollar, while bond yields in the region moved mostly lower. In economic news, EU new car registrations rose solidly in December, the eurozone trade surplus widened more than anticipated, and U.K. construction output unexpectedly declined m/m in November.
Stocks in Asia finished lower despite the solid gain in the U.S. yesterday, with a return of the rout for the Chinese markets upending global sentiment, while crude oil prices turned back into the red overnight after posting a rebound yesterday. China's Shanghai Composite Index tumbled, reaching bear market territory as it is more than 20.0% below its December high. Despite some continued stability in the yuan, stocks found pressure from festering growth concerns, exacerbated by today's much smaller-than-expected new yuan loans report for December, while a report that some banks in Shanghai stopped accepting shares of smaller listed companies as collateral for loans exacerbated sentiment. Meantime, stocks trading in Hong Kong, India, Australia and South Korea all traded lower and Japanese equities erased early gains in afternoon action as the yen rallied on the sharp selloff in China.
2016 slide as markets see another wild weekly ride
The global markets continued to see heightened volatility for the week, with multiple selloffs leading to an extension of the rout to begin 2016. The same catalysts that led to last week's tumble persisted, with crude oil prices falling to 12-month lows and mainland China entering bear market territory on heightened global growth/currency concerns, while geopolitical uneasiness remained. Energy, financials and materials issues led a broad-based decline. 4Q earnings season began to roll on, with results from the financial sector being met with mixed reactions, though Dow member JPMorgan Chase & Co. (NYSE:JPM $57) was a standout winner. Meanwhile, General Motors Co. (NYSE:GM $29) raised its earnings outlook, while boosting its share buyback plan and dividend, while Ford Motor Co's (NYSE:F) (F $12) and CSX Corp's (NASDAQ:CSX $22) 2016 guidance disappointed.
We continue to believe that U.S. and global stocks will continue to experience bouts of volatility and pullbacks; but a major bear market is likely to be avoided. Key determinants of the path stocks will take include central bank policy, inflation, currency volatility and earnings/valuation. We continue to reinforce the benefits of broad and global asset class diversification during a more difficult market environment.
Housing heavy U.S. economic calendar next week
When the U.S. markets return from the long Martin Luther King Jr. Day holiday weekend, traders will be treated to a heavy dose of housing data, with releases including: the NAHB Housing Market Index, weekly mortgage applications, housing starts and building permits, and culminating with existing home sales.
Other releases on next week's domestic economic docket are weekly jobless claims, the Consumer Price Index (CPI), the Philly Fed Business Activity Index, Markit's preliminary Manufacturing PMI Index, and the Leading Index.
International reports of note for next week include: China—industrial production, retail sales, property prices and 4Q GDP. Japan—industrial production and capacity utilization, the Tertiary Industry Index and the All Industry Activity Index. Australia—vehicle sales, new home sales and consumer confidence. U.K.—house prices, CPI, PPI, retail sales and employment data. Eurozone—CPI, construction output and preliminary Markit Manufacturing and Services PMIs, as well as the European Central Bank's (ECB) monetary policy decision. Germany—CPI, PPI and preliminary Markit Manufacturing and Services PMIs. France—business confidence and preliminary Markit Manufacturing and Services PMIs.
Disclaimer: Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab (N:SCHW) & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.