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Tuesday, August 23, 2016

Markets Lose Steam to Post Modest Gains

Charles Schwab: On the Market
Posted: 8/23/2016 4:15 PM ET

Markets Lose Steam to Post Modest Gains

Although off the highs of the day, U.S. equities finished positive, aided by a near nine-year high in new home sales, a favorable read on eurozone business activity, as well as upbeat quarterly results from Best Buy. However, the gains were likely kept in check on some softer-than-expected domestic manufacturing data and as Fed Chairwoman Janet Yellen's key Friday speech looms on the horizon. Treasuries and the U.S. dollar were little changed, crude oil prices rebounded somewhat, while gold ticked lower.

The Dow Jones Industrial Average (DJIA) increased 18 points (0.1%) to 18,547, the S&P 500 Index rose 4 points (0.2%) to 2,187, and the Nasdaq Composite gained 15 points (0.3%) to 5,260. In moderate volume, 722 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.69 to $48.10 per barrel, wholesale gasoline added $0.02 to $1.50 per gallon and the Bloomberg gold spot price declined $1.02 to $1,338.07 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.55.

Best Buy Co. Inc. (BBY $39) reported 2Q earnings-per-share (EPS) ex-items of $0.57, well above the $0.43 FactSet estimate, as revenues were roughly flat year-over-year (y/y) to $8.5 billion, versus the projected $8.4 billion. Domestic 2Q same-store sales increased 0.8% y/y, compared to the expected 0.4% decline. Sales of appliances and consumer electronics rose solidly. BBY issued stronger-than-expected 3Q revenue guidance, while reaffirming its full-year sales outlook and raising its earnings forecast. Shares jumped over 18%.

J.M. Smucker Co. (SJM $144) posted fiscal 1Q EPS ex-items of $1.86, compared to the estimated $1.74, as revenues declined 7.0% y/y to $1.8 billion, versus the projected $1.9 billion. SJM reaffirmed its full-year profit outlook, while lowering its sales forecast. Shares were solidly lower.

Toll Brothers Inc. (TOL $32) announced fiscal 3Q earnings of $0.61 per share, in line with expectations, as revenues rose 23.5% y/y to $1.3 billion, roughly in line with expectations. The luxury homebuilder said the solid economy and employment picture are benefitting its target customers, while combined with continuing low interest rates, a favorable supply-demand equation and limited competition in the luxury market, "position us for continued growth." TOL narrowed its outlooks for full-year revenues and deliveries, while lowering its gross margin guidance. Shares finished higher.

New home sales surge, while manufacturing data disappoints

New home sales (chart) jumped 12.4% month-over-month (m/m) in July to an annual rate of 654,000, and well above the Bloomberg forecast of 580,000 units. The median home price dipped 0.5% y/y to $296,000. The supply of new home inventory dropped to 4.3 months at the current sales pace as sales surged in the Northeast m/m, gained solidly in the South and ticked higher in the Midwest, while sales in the West were flat. Compared to last year, sales in all regions were up solidly. New home sales are based on contract signings instead of closings.

This was the fastest pace in new home sales since October 2007 and the report comes ahead of tomorrow's broader measure of the housing sales market in the form of existing home sales, projected to dip 1.2% from more than a nine-year high to an annual rate of 5.51 million units in July (economic calendar). Existing home sales are based on contract closings. Additionally, MBA Mortgage Applications will also be released.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: There's a New Sector Coming, at the beginning of September, real estate will become a brand-new 11th sector, made up of mostly real estate investment trusts (REITs). Brad notes that when we update our ratings after September 1, we anticipate that our first rating of the real estate sector will be marketperform, while financials will remain at outperform, on the heels of the equity REIT group's nice run in 2016. We think it's getting a little late in the game to aggressively jump into this group as U.S. interest rates seem more likely to rise than to fall over the next couple of years and the laws of supply and demand are taking hold. Read our entire sector views at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The preliminary Markit U.S. Manufacturing PMI Index for August decelerated more than expected, declining to 52.1 from July's 52.9 level, and versus the forecasted dip to 52.6, with a reading above 50 denoting expansion in activity.

The Richmond Fed Manufacturing Activity Index surprisingly fell into contraction territory (a reading below zero), dropping to -11 in August from the 10 posted in July, while economists had anticipated a decline to 6.

Treasuries were nearly unchanged, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.75%, while the yields on the 10-year note and the 30-year bond were flat at 1.55% and 2.23%, respectively. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds? Also, for commentary on the record high stock market, see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Randy Frederick, titled Long-Running Bull Finally Attracting Believers? See both videos at www.schwab.com/insights and follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

Europe higher following upbeat eurozone and U.S data, Asia mixed 

European stocks finished higher, despite global caution ahead of this week's annual Fed monetary policy gathering in Jackson Hole, Wyoming, which will be highlighted by Chairwoman Janet Yellen's speech on Friday. Basic materials stocks rebounded, along with oil & gas issues, as crude oil prices reversed to the upside, aided by a favorable U.S. home sales report and an upbeat read on eurozone business activity in August. The preliminary Markit Eurozone Composite PMI Index—a gauge of output from both the services and manufacturing sectors—unexpectedly improved to 53.3 from July's 53.2 level and compared to the forecasted dip to 53.1. A reading above 50 denotes expansion and the index hit the highest level in seven months, suggesting the fallout from the U.K.'s late-June vote to leave the European Union, known as a Brexit, so far is having a limited impact.

Amid the choppiness and potential increase in volatility due to a plethora of factors facing the global markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification, complemented by his latest article, Your portfolio may be less diversified than you think. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. Also, for commentary 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. The euro was flat and the British pound finished higher versus the U.S. dollar, while bond yields in the region dipped.

Stocks in Asia finished mixed in cautious trading as the global markets await this week's annual Fed gathering in the U.S. as policy uncertainty remains elevated, culminating with Yellen's speech on Friday. The continued pullback in crude oil prices from last week's rally weighed on the energy sector. Japanese equities dropped, with the yen gaining solid ground on the U.S. dollar to weigh on export-related issues. Mainland Chinese securities increased slightly, while those listed in Hong Kong finished flat. Elsewhere, Australia’s markets saw a nice gain, with some weakness in oil & gas issues being more than offset by strength in financials and healthcare issues, while South Korean equities moved modestly higher, and stocks in India were little changed.

Tomorrow’s international economic calendar will hold Japan’s Leading Index, consumer confidence from the Eurozone, and GDP from Germany.

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