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Schwab Market Update

U.S. Stocks Plunge

Mixed economic data and divergent earnings results from a number of Dow components coupled with continued angst over the rally in Treasury yields to form an unappealing recipe for investors to stomach, severely pressuring stocks in Tuesday's session. Treasuries were mixed, as the yield on the 10-year Treasury note hit 3.00% for the first time since 2014, while upbeat results from Dow members Caterpillar and Verizon were countered by disappointing reports from Google parent Alphabet, and Dow components 3M and Travelers. Meanwhile, strong Consumer Confidence and new home sales reports were met with some regional manufacturing data that surprisingly dropped into contraction territory. Crude oil prices and the U.S. dollar were lower, while gold was higher.

The Dow Jones Industrial Average (DJIA) tumbled 425 points (1.7%) to 24,024, the S&P 500 Index fell 36 points (1.3%) to 2,635, and the Nasdaq Composite plummeted 121 points (1.7%) to 7,007. In moderate-to-heavy volume, 861 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.94 to $67.70 per barrel and wholesale gasoline was $0.03 lower at $2.10 per gallon. Elsewhere, the Bloomberg gold spot price rose $7.38 to $1,332.21 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.2% at 90.77.

Alphabet Inc. (GOOGL $1,023), the parent company of Google, reported Q1 earnings-per-share (EPS) of $13.33, or $9.93 ex-items, versus the $9.28 FactSet estimate, as revenues excluding traffic acquisition costs (TAC) rose 23.5% year-over-year (y/y) to $24.9 billion, above the projected $24.3 billion. Shares were solidly lower, with the results fostering a mixed response as the revenue and EPS performance was met with higher TAC and operating expenses that pressured margins.

Dow member Caterpillar Inc. (CAT $144) posted Q1 EPS of $2.74, or $2.82 ex-items, compared to the projected $2.12, as revenues increased 31.0% y/y to $12.9 billion, north of the estimated $12.0 billion. CAT raised its full-year earnings guidance. Shares gave up an early gain fell after the company's Chief Financial Officer noted on a conference call with analysts that its Q1 EPS "will be the high watermark for the year."

Dow component Verizon Communications Inc. (VZ $50) announced Q1 profits of $1.11 per share, or $1.17 ex-items, versus the expected $1.11, with revenues rising 6.6% y/y to $31.8 billion, topping the forecasted $31.2 billion. VZ reaffirmed its full-year revenue outlook. Shares were higher.

Dow member 3M Company (MMM $201) reported Q1 earnings of $0.98 per share, or $2.50 ex-items, compared to the estimated $2.50, with revenues growing 7.7% y/y to $8.3 billion, above the forecasted $8.2 billion. MMM lowered the high end of its full-year guidance and shares fell.

Dow component Coca-Cola Company (KO $43) posted Q1 EPS of $0.31, or $0.47 ex-items, versus the expected $0.46, as revenues declined 16.0% y/y to $7.6 billion, due to bottler refranchising, but above the expected $7.3 billion. KO reaffirmed its full-year outlook. Shares were lower.

Dow member United Technologies Corp. (UTX $122) announced Q1 profits of $1.62 per share, or $1.77 ex-items, compared to the estimated $1.51, as revenues grew 10.0% y/y to $15.2 billion, above the expected $14.6 billion. UTX raised its full-year guidance. Shares relinquished early gains and finished lower.

Dow component Travelers Companies Inc. (TRV $133) achieved Q1 EPS of $2.42, or $2.46 ex-items, compared to the expected $2.68, as net premiums written rose 5.0% y/y to $6.8 billion, roughly in line with estimates. Separately, the company increased its quarterly dividend by 7.0% to $0.77 per share. Shares traded lower.

Consumer Confidence surprisingly improves, new home sales and housing prices top forecasts

The Consumer Confidence Index (chart) rose to 128.7 in April, from March's downwardly-revised 127.0, versus the Bloomberg estimate of a dip to 126.0. The Index moved closer to February's 17-year high, as the Present Situation Index and the Expectations Index of business conditions for the next six months both improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—dipped to 22.9 from the 23.8 level posted in March.

New home sales (chart) rose 4.0% month-over-month (m/m) in March to an annual rate of 694,000 units, versus forecasts calling for 630,000 units and the upwardly-revised 667,000 unit pace in February. The median home price was up 4.8% y/y at $337,200. home inventory declined to 5.2 months of supply at the current sales pace from 5.4 in February. Sales fell m/m in the Northeast and were down in the Midwest, but ticked higher in the South and jumped in the West. New home sales are based on contract signings instead of closings.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 6.8% y/y gain in home prices in February, versus forecasts of a 6.4% rise. Month-over-month (m/m), home prices were up 0.8% on a seasonally adjusted basis for February, above expectations of a 0.7% gain.

The Richmond Fed Manufacturing Activity Index unexpectedly dropped to a level depicting contraction (a reading below zero), falling to -3 in April from 15 in March, versus estimates of a rise to 16.

Treasuries finished mixed, as the yield on the 2-year note declined 2 basis points (bps) to 2.45%, while the yields on the 10-year note and 30-year bond moved 3 basis points higher to 3.00% and 3.17%, respectively.

Treasury yields have had a recent run upward, with the 10-year note reaching 3.00% for the first time since early 2014, causing some choppiness for the stock markets after a rise last week that took them to near positive territory for the year. The U.S. dollar paused and the markets continue to grapple with concerns about tighter financial conditions and resurfacing inflation expectations, along with a solid start to earnings season and a continued strong economic backdrop.

Schwab's Chief investment Strategist Liz Ann Sonders had cautioned investors for some time about this in her article, Gettin' Tighter: Financial Conditions' Effect on Stocks, noting that volatility is likely to remain high this year and investment discipline remains essential. Liz Ann also provides her latest article, Don't Fear the Yield Curve Reaper, in which she notes the yield curve has been flattening and the 10s-2s spread hit a low of 41 basis points last week, raising concerns. She adds that although ample headlines have warned about imminent threats of an inversion and subsequent recession, history shows long lag times and healthy stock market performance. Liz Ann concludes that large caps could resume their outperformance if yield curve history is any guide.

The only item on tomorrow's economic calendar is MBA Mortgage Applications.

Europe mixed on earnings and as concerns remain, Asia mostly higher

European equities finished mixed, with the host of mixed earnings reports on both sides of the pond being sifted through. The markets also continued to grapple with festering concerns about tightening financial conditions in the U.S. and another dose of disappointing economic data in the region. German business confidence in April declined more than expected. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers analysis of the recent soft patch of data in the region, courtesy of his article, From Overheating to Underwhelming: Is the Economy Hurting Stocks. The euro ticked higher and the British pound gained ground as the U.S. dollar paused from a recent run, while bond yields in the region traded mostly to the downside. Schwab's Jeffrey Kleintop notes in his commentary, When Will the High Volatility End?, that April may bring a halt to the decline in stocks, but heightened volatility may not be going away. Jeff stresses that staying invested with a diversified portfolio may be the best way to “master” investing in the coming years.

Stocks in Asia finished mostly to the upside despite the lackluster session in the U.S. yesterday, which came despite some upbeat economic data, which were offset by festering concerns about tightening financial conditions. Japanese equities advanced, with the yen's steady decline boosting stocks, stocks traded in mainland China and Hong Kong saw sharp gains amid signs that the government is willing to ease its tightening campaign, per Bloomberg. Markets in India continued a recent run by notching solid gains, while the lingering concerns toward the chip sector that has hamstrung technology stocks weighed on South Korean securities. Lastly, shares in Australia increased nicely, with strength in financials overshadowing a drop in resource-related issues. With volatility set to persist in 2018, check out our article, Late in the Cycle: Market Volatility in Context, as well as Vice President and Alternative Beta and Asset Allocation Strategist for the Schwab Center for Financial Research, Anthony Davidow's commentary, 4 Ways to Play Defense.

Similar to the U.S. calendar, tomorrow's international docket will be sparse, offering only Japan's All-Industry index and PPI from Spain.

Schwab Center for Financial Research - Market Analysis Group

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Next Steps

Don’t Fear the Yield Curve Reaper
Don’t Fear the Yield Curve Reaper

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