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Friday, August 19, 2016

Markets Finish Out Turbulent Week Lower

Charles Schwab: On the Market
Posted: 8/19/2016 4:15 PM ET

Markets Finish Out Turbulent Week Lower

A week full of indecision came to a close on a negative note, as a variety of economic reports, earnings results and events offered no relief from the cloud of ambiguity plaguing the markets as of late. Crude oil and commodity prices slightly added to their recent rallies, and Fed policy uncertainty continued to fester. However, Applied Materials and Deere & Co posted upbeat quarterly results to headline another dose of earnings data as 2Q earnings season nears a close. Treasuries finished lower, as did gold, while the U.S. dollar rebounded.

The Dow Jones Industrial Average (DJIA) fell 45 points (0.2%) to 18,553, the S&P 500 Index shed 3 points (0.1%) to 2,184 and the Nasdaq Composite declined 2 points (0.1%) to 5,238. In moderate volume, 834 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.22 higher at $49.11 per barrel, wholesale gasoline added $0.02 to $1.51 per gallon and the Bloomberg gold spot price declined $11.68 to $1,340.68 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 94.47. Markets were mixed and nearly flat for the week, as the DJIA ticked 0.1% lower, the S&P 500 Index was nearly unchanged, and the Nasdaq inched 0.1% higher.

Applied Materials Inc. (AMAT $30) reported fiscal 3Q earnings-per-share (EPS) ex-items of $0.50, two cents north of forecasts, with revenues rising 13.0% year-over-year (y/y) to $2.8 billion, roughly in line with forecasts. Total new orders for the chip and display engineering company easily topped expectations. AMAT issued much stronger-than-expected 4Q guidance and shares finished nicely higher.

Deere & Co. (DE $87) posted fiscal 3Q EPS of $1.55, well above the estimated $0.94, as net sales of its equipment operations fell 14.3% y/y to $5.9 billion, compared to the forecasted $6.0 billion. The company said its results reflect improved price realization and lower costs, partially offset by reduced shipment volumes and an unfavorable foreign-currency exchange. DE raised its full-year profit outlook and shares were decisively higher.

Gap Inc. (GPS $27) announced 2Q profits ex-items of $0.60 per share, one penny above expectations, on previously reported revenues of $3.9 billion. GPS issued softer-than-expected full-year EPS guidance. GPS traded higher.

2Q earnings season is all but in the books after this week's flurry of reports from the retail sector, highlighted by Dow member Wal-Mart Stores Inc's(WMT $73) better-than-expected results and guidance, which followed Target Corp's (TGT $70) disappointing outlook. Per data compiled by Bloomberg, of the 478 companies in the S&P 500, nearly 56% have topped sales forecasts and almost 79% have bested profit projections. Schwab's Chief Investment Strategist, Liz Ann Sonders discusses in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings whether earnings growth can squeak its way back into the green in the third quarter, at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Economic calendar quiet today

Treasuries were lower with the economic calendar void of any major reports today. The yields on the 2-year and the 10-year notes rose 4 basis points (bps) to 0.75% and 1.58%, respectively, while the 30-year bond rate increased 3 bps to 2.29%. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds?, at www.schwab.com/insights. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones addresses in her latest article, What Does Strong Job Growth Mean for Bond Investors?, at www.schwab.com/marketinsight. Follow Randy, Kathy and Schwab on Twitter: @randyafrederick, @kathyjones and @schwabresearch.

Action in the bond and currency markets was choppy this week as the markets grappled with the divergent global monetary policy landscape, including Fed policy uncertainty, exacerbated by mixed domestic economic data. Housing starts and homebuilder sentiment both improved, and industrial production continued to rebound, suggesting a Fed rate hike this year is still on the table, bolstered by some Fed speak throughout the week. However, core consumer price inflation came in cooler than expected and the July Fed policy meeting minutes fostered a dovish takeaway by the markets. Stocks were mixed week even after the Dow, S&P 500 and Nasdaq all hit record highs, aided by the continued rally in crude oil prices and a recovery in other commodity prices.

For analysis on the record high stock market, see the video from Schwab's Liz Ann Sonders and Randy Frederick, titled Long-Running Bull Finally Attracting Believers?, at www.schwab.com/insights. Follow Liz Ann on Twitter: @lizannsonders. Also, for commentary on the housing market, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: There's a New Sector Coming at www.schwab.com/marketinsight.

Fed policy focus and accompanying volatility is likely to begin to ramp back up next week, with the U.S. economic calendar yielding key data on the housing sector in the form of new and existing home sales, as well as durable goods orders and the second look (of three) at 2Q GDP. However, the highlight of the week will likely be the Fed's highly-anticipated annual monetary policy symposium in Jackson Hole, Wyoming, which will culminate with Friday's speech by Federal Reserve Chairwoman Janet Yellen.

As noted in the Schwab Market Perspective: The Calm Before the…., a period of peace has reigned in the market over the past month, but the lull in volatility likely won’t last. However, we do believe the secular bull market has further to run. The third quarter is shaping up to improve on lackluster first half U.S. economic results but weak corporate confidence remains an impediment to stronger growth. Fed uncertainty is likely to heat up heading toward the September Federal Open Market Committee (FOMC) meeting. Read the whole perspective at www.schwab.com/marketinsight.

European stocks see pressure, Asia mixed

European equities moved lower, with crude oil prices and other commodities giving back some of a recent run to weigh on basic materials and oil & gas issues, while financials led to the downside, as concerns toward the Italian banking sector resurfaced. Also, global monetary policy uncertainty continued to fester, with the U.S. Fed in focus on recent mixed data, comments from policymakers, and as a key meeting in Wyoming looms on next week's horizon. The euro and British pound gave back some of a recent rally versus the U.S. dollar, while bond yields in the region moved higher. Some more July U.K. data remained in focus as it begins to give the markets reads on the impact of the late-June vote by the nation to leave the European Union, known as a Brexit. U.K. public sector net borrowing declined by a smaller-than-expected amount last month, joining earlier reports this week showing retail sales easily topped forecasts, jobless claims unexpectedly declined and consumer price inflation surprisingly rose. For more on the potential impact of the Brexit vote, see the Schwab Center for Financial Research's article,
Brexit: What Investors Should Know, at www.schwab.com/marketinsight.

Stocks in Asia finished mixed to finish off a divergent week, filled with festering disappointment regarding the Bank of Japan's recently announced additional policy actions and heightened U.S. Fed policy uncertainty, which boosted the yen to lead to a solid loss for Japanese markets for the week. Also, optimism regarding the approval of the long-planned stock-trading link between Hong Kong and Shenzhen helped foster respectable weekly advances for the markets in China and Hong Kong. Australian equities traded higher, with basic materials stocks moving nicely higher, while financials ticked to the upside despite a downgrade by Moody's of the nation's largest banks. Indian securities declined, while those traded in South Korea finished flat. Amid the elevated uncertainty in the markets, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Next week’s international economic calendar will be fairly sparse, save the slew of Manufacturing PMI Indexes from around the globe, while the few other reports slated for release abroad include: Japan—inflation data, Leading Index and consumer sentiment; China—trade figures; Europe—GDP, the trade balance, and the Ifo Business Climate Index from Germany, and GDP from France.

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