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Friday, July 29, 2016

A Week of Uncertainty

Charles Schwab: On the Market
Posted: 7/29/2016 4:15 PM ET

A Week of Uncertainty

U.S. equities ended today's session in the same fashion as it has seen all week, mixed and near the flat line, as investors continued to search for some sort of catalyst amid another sundry of divergent reports on both the equity and economic fronts. Meanwhile, a much softer-than-expected 2Q U.S. GDP report was offset somewhat by relatively favorable reads on consumer sentiment and regional manufacturing activity. Treasuries were higher, as was gold, while the U.S. dollar tumbled, and crude oil prices inched higher.

The Dow Jones Industrial Average (DJIA) fell for the fifth-straight session, shedding 24 points (0.1%) to 18,432, while the S&P 500 Index added 4 points (0.1%) to 2,174 and the Nasdaq Composite increased 7 points (0.1%) to 5,162. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil was $0.46 higher at $44.60 per barrel, wholesale gasoline gained $0.02 to $1.32 per gallon and the Bloomberg gold spot price jumped $18.04 to $1,353.79 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—plunged 1.3% to 95.52. Markets were mixed for the week, as the DJIA lost 0.8%, the S&P 500 Index ticked 0.1% lower, while the Nasdaq Composite advanced 1.2%.

Alphabet Inc. (GOOGL $791), the parent of Google, reported 2Q earnings-per-share (EPS) ex-items of $8.42, above the $8.04 FactSet estimate, as revenues excluding traffic acquisition costs (TAC) rose 22.1% year-over-year (y/y) to $17.5 billion, topping the expected $16.9 billion. Shares finished higher.

Amazon.com Inc. (AMZN $759) posted 2Q profits of $1.78 per share, exceeding the estimated $1.11, with revenues rising 31.0% y/y to $30.4 billion, above the projected $29.6 billion. AMZN issued 3Q revenue guidance with a midpoint above expectations and shares were modestly higher.

Dow member Merck & Co. Inc. (MRK $59) announced 2Q EPS ex-items of $0.93, north of the forecasted $0.91, as revenues grew 1.0% y/y to $9.8 billion, roughly in line with estimates. Shares were slightly higher, as it raised the low end of its full-year profit outlook and increased its revenue guidance.

Dow component Exxon Mobil Corp. (XOM $89) reported 2Q earnings of $0.41 per share, well below the expected $0.64, as revenues fell 22.2% y/y to $57.7 billion, below the anticipated $58.0 billion. The company said its performance reflects sharply lower commodity prices, weaker refining margins and continued strength in the chemical segment. XOM traded solidly lower.

Dow member Chevron Corp. (CVX $102) posted a 2Q loss of $0.78 per share, including items pertaining to impairments and other non-cash charges that may be affecting comparability to the projected $0.32. Revenues fell 27.4% y/y to $29.3 billion, above the expected $28.3 billion. The company said its results reflect lower oil prices and its ongoing adjustment to a lower oil price world, while noting that its downstream business continued to perform well. Shares of CVX inched higher.

United Parcel Service Inc. (UPS $108) achieved 2Q earnings of $1.43 per share, roughly in line with forecasts, as revenues increased 3.8% y/y to $14.6 billion, mostly matching projections. UPS reaffirmed its full-year EPS guidance. Shares were lower.

For more on the global earnings landscape, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Earnings estimates are rebounding: what it means for stocks, at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop.

First read on 2Q GDP disappoints

The first look (of three) at 2Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 1.2%, from the downwardly revised 0.8% expansion in 1Q, and well below the 2.5% growth forecasted by Bloomberg. Personal consumption came in slightly south of forecasts, rising 4.2%, following the positively adjusted 1.6% increase recorded in 1Q, and versus the 4.4% gain that was projected. The preliminary 2Q GDP report showed the solid gain in personal consumption was accompanied by favorable contributions from exports and imports, though output was negatively impacted by private inventory investment, residential and nonresidential fixed investment, and state and local government spending.

On inflation, the GDP Price Index came in at a 2.2% rise, above expectations of a 1.9% increase, from an upwardly revised 0.5% gain seen in 1Q, while the core PCE Index, which excludes food and energy, increased 1.7%, matching forecasts, and following the upwardly revised 2.1% growth in 1Q.

The final July University of Michigan Consumer Sentiment Index (chart) was revised to 90.0 from the preliminary level of 89.5, and compared to expectations of a slight rise to 90.2. Expectations and current conditions components of the report were both revised higher. The index was down compared to June's level of 93.5. The 1-year inflation outlook ticked higher and the 5-10 year inflation forecast held steady.

The Chicago Purchasing Managers Index (chart) remained in expansion territory (above 50), dipping to 55.8 in July from 56.8 in June—which was the highest since January 2015—and versus expectations of a decline to 54.0.

The 2Q Employment Cost Index (chart) grew by 0.6% q/q, matching forecasts and the increase posted in 1Q.

Today's data was in line with our view in the latest Schwab Market Perspective: New Records…Same Skepticism, that wages and housing appear to be helping bolster spending and confidence among the all-important consumer, while business confidence and spending remain hamstrung. Additionally, some inflation measures heating up may force the Federal Open Market Committee's (FOMC) hand and we believe the risk of an actual inflation problem remains low; but we could have an inflation scare. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries finished higher following the GDP report, with the yield on the 2-year note declining 6 basis points (bps) to 0.66%, while the yields on the 10-year note and the 30-year bond fell 5 bps to 1.45% and 2.18%, respectively. Bond yields have been mixed in the wake the FOMC leaving its monetary policy stance unchanged this week as discussed by Schwab's Chief Investment Strategist, Liz Ann Sonders in her commentary, A Hopeful Transmission: Fed Holds Rates Steady, But…

For more on the bond market moves, see Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her recent article titled, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Kathy on Twitter: @lizannsonders and @kathyjones.

Financials lead Europe higher, Asia mixed in reaction to Bank of Japan decision

European equities finished mostly higher, with financials leading the way, buoyed by a plethora of positive earnings results. Also a troubled Italian lender announced that it has received an alternative rescue proposal to help ease ramped up concerns in the nation's banking sector. The move for the sector came ahead of key European banking stress tests results that are due out after the closing bell in the U.S. Traders digested a smaller-than-expected expansion of stimulus measures out of Japan, as well as the softer-than-expected 2Q GDP in the U.S. These were accompanied by the preliminary estimate of 2Q eurozone GDP, which slowed to a q/q growth rate of 0.3%, as expected, from the 0.6% expansion posted in 1Q. Also, the eurozone consumer price inflation estimate for July came in hotter than anticipated. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region were mostly lower. Amid the heightened volatility in the global markets following a plethora of data and monetary policy decisions, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read more at www.schwab.com/oninternational.

Stocks in Asia finished mixed, with Japanese stocks posting wild swings in the wake of the Bank of Japan's (BoJ) monetary policy decision to hold off on more aggressive stimulus measures and instead just boost its buying program of exchange traded funds (ETFs). The yen rallied sharply following the decision, though BoJ Governor Kuroda reiterated that further easing will be done if needed and said the central bank has not hit a policy limit, per Bloomberg. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational. Japanese equities were able to post gains after briefly falling sharply on the heels of the BoJ's decision. Ahead of the announcement, Japan reported cooler-than-expected core consumer price inflation and a larger-than-expected drop in household spending, while its industrial production grew more than anticipated for June.

Mainland Chinese shares declined, though stocks did post a solid monthly gain, buoyed by recent relatively favorable economic data, while those in Hong Kong fell sharply. Australian securities ticked higher, with healthcare and consumer services issues outweighing some weakness in basic materials stocks, while markets in India and South Korea traded lower.

Mixed week full of data and monetary policy decisions

U.S. stocks finished mixed on the week that saw 2Q earnings season reach its apex, while results from Dow member Apple Inc. (AAPL $104), Facebook Inc. (FB $125) and Alphabet Inc bolstered a solid gain for technology issues. For the 316 companies in the S&P 500 that have reported results thus far, 58% have topped revenue forecasts, while 81% have bested earnings expectations, per data compiled by Bloomberg. The global markets grappled with an unchanged monetary policy decision from the U.S. FOMC and a disappointing stimulus announcement from the Bank of Japan. Treasury yields and the U.S. dollar both came under pressure as the FOMC decision was followed by much softer-than-expected U.S. 2Q GDP growth. As such, crude oil prices fell to weigh on the energy sector. For analysis of the stock market sectors amid the heightened volatility and renewed pressure on oil prices and the U.S. dollar, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Drilling Down on the Energy Sector at www.schwab.com/marktetinsight.

Another week of heavy data looms

With earnings season remaining robust, next week's domestic economic calendar will also be plentiful, headlined by key July services and manufacturing reports from the Institute for Supply Management (ISM) and Markit, while culminating with Friday's July nonfarm payroll report. U.S. economic data has been positive as of late helping push the Dow and S&P 500 to all-time highs in July as discussed by Liz Ann Sonders in her article, 19th Nervous Breakout: Stocks Finally Reach New Highs. Liz Ann offers one of her favorite mantras, "better or worse usually matters more than good or bad when it comes to the stock market," and lists a plethora of recent better-than-expected economic reports. She also points out that many—including the ISM readings—are leading indicators, but there are implications for Fed policy. Read more at www.schwab.com/marketinsight.

Other notable releases on next week's economic calendar include: personal income and spending, monthly auto sales, factory orders and the trade balance.

Along with manufacturing and services reports across the board, next week's international reports worth noting include: Australia—the Reserve Bank of Australia monetary policy decision. Eurozone—retail sales and German factory orders. U.K.—Bank of England monetary policy decision.

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