Stocks Rise after Bank of Japan Surprise
U.S. stocks rallied, locking in a second-straight weekly advance, on the heels of an unexpected move from the Bank of Japan to adopt a negative interest-rate policy.
Microsoft announced upbeat quarterly results that helped lift tech stocks, while Amazon weighed on the consumer discretionary sector after the company missed analysts’ quarterly forecasts.
In economic news, 4Q GDP was reported slightly below expectations, but a barometer of business activity in the Midwest surprisingly jumped into expansion territory.
Treasuries, crude oil, the U.S. dollar and gold were all higher.
The Dow Jones Industrial Average advanced 397 points (2.5%) to 16,466
The S&P 500 Index increased 47 points (2.5%) to 1,940
Leading the S&P 500 higher included big sector winners in technology +3.15%, Energy +2.92%, Materials +2.89 and Financials +2.79% as all 9 S&P 500 sectors finished in the green.
The Nasdaq Composite jumped 107 points (2.4%) to 4,614
In heavy volume, 1.6 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq
WTI crude oil gained $0.40 to $32.19 per barrel and wholesale gasoline added $0.03 to $1.13 per gallon
The Bloomberg gold spot price increased $2.61 to $1,117.95 per ounce
The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 1.1% higher at 99.57
Markets were higher for the week, as the DJIA advanced 2.3%, the S&P 500 Index increased 1.8%, and the Nasdaq Composite Index gained 0.5%
Preliminary 4Q GDP slightly misses forecasts, while Chicago PMI jumps
The first look (of three) at Q4 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 0.7%, from the unrevised 2.0% expansion in Q3, and below the 0.8% growth forecasted by Bloomberg. Personal consumption came in north of forecasts, rising 2.2%, following the unadjusted 3.0% increase recorded in 3Q, and versus the 1.8% gain that was projected. The slowdown in Q4 growth came as the deceleration in personal consumption was met with downturns in nonresidential fixed investment, in exports, and in state and local government spending that were partly offset by a smaller decrease in private inventory investment, a deceleration in imports, and an acceleration in federal government spending.
On inflation, the GDP Price Index matched expectations at a 0.8% rise from an unrevised 1.3% gain seen in 3Q, while the core PCE Index, which excludes food and energy, rose 1.2%, also in line with forecasts, and following the unrevised 1.4% growth in 3Q.
The domestic economic signals have not changed significantly during the past month in our opinion. While 44 2015 GDP growth was less than 1%, overall the 2% to 2.5% y/y real GDP growth rate that has prevailed for the past six years still seems to be intact although we are cautious and watching it closely. Employment indicators also continue to show improvement, suggesting that consumer spending should continue to support economic growth. The Federal Reserve is in a tight spot. Having just raised interest rates in December and expressed optimism about the outlook for the economy and inflation, it can hardly reverse course just because of volatile stock markets.
The final January University of Michigan Consumer Sentiment Index was revised to 92.0 from the preliminary level of 93.3, and compared to expectations of 93.0, with an upward adjustment for the current economic conditions outlook and a downward revision to the economic outlook. The index was also down compared to December’s level of 92.6. The 1-year inflation projection dipped to 2.5% from December’s 2.6% level, while the 5-10 year inflation outlook ticked higher to 2.7% from 2.6%.
The Chicago Purchasing Managers Index jumped back into expansion territory (above 50), rising to 55.6 in January—the highest since January 2015—from 42.9 in December, and versus expectations of a rise to 45.3.
The 4Q Employment Cost Index grew by 0.6% q/q, matching forecasts and the unrevised figure posted in Q3.
Treasuries were higher, with the yields falling, as the 2-year note and the 30-year bond declined 4 basis points to 0.77% and 2.75%, respectively, while the yield on the 10-year note decreased 6 bps to 1.92% a 9 month low.
Europe and Asia higher after further stimulus measures in Japan
European equities traded higher, with the global markets getting a boost from the surprise announcement from Japan’s central bank to adopt a negative interest-rate policy to try to boost economic growth and inflation. The euro fell versus the U.S. dollar even after the softer-than-expected 4Q GDP report in the U.S., while bond yields in the region traded to the downside. Italian banks bounced following some upbeat results in the sector, which has been pummeled as of late by concerns about rising bad loans. Oil & gas issues joined the broad-based rally, with crude oil prices continuing to show some signs of recovery. In economic news, German retail sales unexpectedly dipped in December and Spain’s 4Q GDP expanded in line with forecasts, while the eurozone core consumer price inflation estimate for January came in slightly hotter than anticipated.
The U.K. FTSE 100 Index, Italy’s FTSE MIB Index and Spain’s IBEX 35 Index were up 2.6%, Germany’s DAX Index gained 1.6%, France’s CAC-40 Index advanced 2.2%, and Switzerland’s Swiss Market Index traded 2.0% higher.
Stocks in Asia finished with widespread gains to close out the week, amid volatile action in the wake of the Bank of Japan’s (BoJ) monetary policy decision, in which it maintained its asset purchase program, while announcing that it will adopt a negative interest-rate strategy—in a three-tier system—and delay the timing of reaching its 2.0% inflation target. The decision, which was passed by a 5-4 majority vote, comes as Japan reported larger-than-expected drops in December household spending and industrial production, along with a modest increase in its core consumer price inflation. The BoJ said it will maintain its asset purchases and negative interest rates as long as it is necessary.
In recent years, actions by central banks have lifted stocks temporarily, but seemed to do little to boost economic activity. The key for sustaining a turnaround in the stock market is a recovery in growth and avoiding a global recession in 2016. Rather than rescuing investors, comments from central bankers are more likely to create volatility, both up and down, in the markets until the global economic path is clearer.
Japanese equities jumped with the yen falling sharply after the BoJ’s decision, while stocks trading in China and Hong Kong rallied. Mainland Chinese stocks rose for the first time in four sessions, with the People’s bank of China continuing to pump cash into the financial system ahead of next month’s holidays.
WEEKLY RECAP: Stocks show some resiliency for a second-straight week
Although volatility remained as oil prices and divergent global monetary policies continued to drive the markets, the S&P 500 and Dow chipped away at sharp drops for January, courtesy of another late-week comeback. The indexes overcame a mid-week selloff as the Federal Reserve maintained its monetary policy stance but its statement fostered some uncertainty regarding the trajectory of future rate hikes. For a second-straight week, the global markets got a boost from central bank action, with the Bank of Japan adopting a negative interest policy, which came on the heels of last week’s signal of further stimulus efforts from the European Central Bank (ECB). Energy stocks gained ground as crude oil prices showed signs of recovery, while the materials sector remained under siege amid festering global growth concerns. The rout for healthcare stocks rolled on to weigh on the Nasdaq.
Earnings season continued to ramp up, with mixed reports from some high-profile companies garnering attention. Dow member Apple Inc. posted softer-than-expected iPhone sales and issued disappointing guidance, along with Dow component Boeing Co. and Ford Motor Co., while Facebook Inc. blew away expectations, Dow member McDonald’s Corp. bested expectations, and Dow component Caterpillar Inc. offered a favorable earnings outlook. Housing data highlighted the U.S. economic calendar, with mortgage applications posting a third-straight solid weekly gain and new home sales jumping more than expected. As noted previously, the corporate picture appears decent, with Q4 earnings season showing mostly positive results so far. Although risks have risen and concerns have spiked, it still doesn’t appear to us that a U.S. recession is in the foreseeable future. Oil has been a major driver of market action, but should be ultimately beneficial to the majority of the economy.
THE WEEK AHEAD: Earnings, manufacturing, services and employment reports set to headline the week
Next week, earnings season will continue to roll on, while the economic docket will deliver some key data, with the ISM and Markit delivering their January business activity data ahead of Friday’s nonfarm payroll report for last month. In our opinion, there is little doubt, we are in a manufacturing recession, but at this point, the much larger services segment of the economy is showing sustained growth. Every predictive recession model we have studied still suggests a low risk of recession. In fact, if we are in one or heading toward one, it would be the first time in history the leading indicators did not roll over and provide ample warning.
Other notable domestic reports slated for next week include: personal income and spending, monthly auto sales, factory orders, and the trade balance. And the political season heats up officially with the Iowa caucuses scheduled for Monday.
Reports on next week’s international calendar include: Australia—Reserve Bank of Australia monetary policy decision, trade balance, building approvals, and retail sales. China—manufacturing and non-manufacturing PMIs. India—Reserve Bank of India monetary policy decision. Japan—business activity reports. Eurozone—Markit’s business activity reports, unemployment rate and retail sales, as well as German factory orders. U.K.—Bank of England monetary policy decision and Markit’s business activity reports.
Company Specific News
Dow member Microsoft Corp. reported fiscal 2Q earnings-per-share ex-items of $0.78, above the $0.71 FactSet estimate, as revenues declined 1.7% year-over-year (y/y) to $25.7 billion, north of the expected $25.3 billion.
Amazon.com Inc. posted 4Q earnings of $1.00 per share, below the $1.55 estimate, as revenues rose 22.0% y/y to $35.7 billion, versus the forecasted $35.9 billion. AMZN’s 1Q revenue outlook had a midpoint that was slightly above expectations.
Dow component Visa Inc. announced fiscal 1Q EPS ex-items of $0.69, above the projected $0.68, with revenues increasing 5.0% y/y to $3.6 billion, roughly in line with forecasts. The company said while it is not changing its financial outlook for the full-year, continued moderating cross-border volume growth and subdued domestic activity across geographies could ultimately affect its results.
Dow member Chevron Corp. reported a 4Q loss of $0.31 per share, although the results included $1.1 billion in impairments and other charges that may be impacting comparability to the expected $0.45 per share profit. The company said its 2015 earnings were down significantly y/y, reflecting a nearly 50.0% y/y drop in crude oil prices. Revenues dropped 33.3% y/y to $28.0 billion, compared to the projected $27.7 billion.
American Airlines Group Inc. posted 4Q EPS ex-items of $2.00, north of the estimated $1.97, as revenues decreased 5.2% y/y to $9.6 billion, roughly in line with forecasts.
Xerox Corp. announced plans to separate into two publicly-traded companies, one a document technology company and the other a business process outsourcing company, expected to be completed by the end of 2016. Separately, the company posted stronger-than-expected 4Q EPS and in line revenues, while announcing an 11.0% increase of its quarterly dividend.