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Friday, August 26, 2016

Stocks off Highs, Up from Lows in Mixed Close

Charles Schwab: On the Market
Posted: 8/26/2016 4:15 PM ET

Stocks off Highs, Up from Lows in Mixed Close

U.S. stocks erased early session gains and finished mixed on the heels of Fed Chair Janet Yellen's highly anticipated speech which was followed by comments from Vice Chair Stanley Fischer to CNBC, alluding to the possibility of two rate hikes before year end. Treasuries, gold and crude oil prices were lower and the U.S. dollar was higher. In economic news, 2Q GDP was revised slightly lower, as expected, while on the equity front, GameStop and Ulta Salon sank in the wake of some disappointing earnings reports.

The Dow Jones Industrial Average (DJIA) declined 53 points (0.3%) to 18,395, the S&P 500 Index lost 3 points (0.2%) to 2,169, and the Nasdaq Composite increased 7 points (0.1%) to 5,219. In moderate volume, 808 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.31 to $47.64 per barrel, wholesale gasoline added $0.01 to $1.43 per gallon and the Bloomberg gold spot price decreased $1.08 to $1,320.90 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% higher at 95.47. Markets were down for the week, as the DJIA ticked 0.9% lower, the S&P 500 Index declined 0.7%, and the Nasdaq decreased 0.4%.

GameStop Corp. (GME $29) reported 2Q earnings-per-share (EPS) ex-items of $0.27, one penny north of the FactSet estimate, as revenues declined 7.4% year-over-year (y/y) to $1.6 billion, below the projected $1.7 billion. 2Q same-store sales fell 10.6% y/y, versus the expected 5.9% decline. GME issued 3Q and full-year guidance that was roughly in line with forecasts. Shares finished solidly lower.

Ulta Salon, Cosmetics & Fragrance Inc. (ULTA $255) posted 2Q EPS of $1.43, above the projected $1.40, as revenues rose 21.9% y/y to $1.1 billion, roughly in line with expectations. Quarterly same-store sales rose 14.4% y/y, above the estimated 12.9% gain. ULTA issued softer-than-expected 3Q earnings guidance, while raising its full-year outlook. ULTA was under solid pressure.

Yellen's speaks, 2Q GDP revised slightly lower as expected

Federal Reserve Chairwoman Janet Yellen spoke at the Central Bank's annual policy symposium in Jackson Hole, Wyoming on the subject of the Fed's monetary policy toolkit. Yellen noted that the U.S. economy is now nearing the Central Bank's goals of maximum employment and price stability. Looking ahead, Yellen noted that the Federal Open Market Committee (FOMC) expects moderate GDP growth, additional strengthening in the labor market and inflation rising to 2.0% over the next few years. In light of this outlook, she believes the case for an increase in the fed funds rate "has strengthened in recent months." She did reiterate that the FOMC's decisions always depend on the degree to which incoming data continues to confirm its outlook, and that the FOMC continues to anticipate that gradual rate increases will be appropriate.

Stocks and Treasuries gained ground on the speech and the U.S. dollar remained lower. However, the markets reversed course as Fed Vice Chairman Stanley Fischer spoke on CNBC after the speech suggesting that a September rate hike may be on the table and next week's August nonfarm payroll report will probably weigh on the decision. Fischer added that Yellen's comments were consistent with the possibility of as many as two rate hikes this year

Yellen's comments are in line with Schwab's Chief Investment Strategist, Liz Ann Sonders' view in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings, that we continue to believe a rate hike is on the table for this year. However, the combination of Fed policy uncertainty and the contentious election season could mean the recent lull in volatility will not persist into the fall. Read more at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

The second 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 growth of 1.1%, revised slightly from the 1.2% expansion reported in the first report. This matched the Bloomberg forecast. 1Q GDP expanded by an unrevised 0.8% rate. Personal consumption came in at a 4.4% gain for 2Q, up from the preliminary estimate of a 4.2% increase, where it was expected to remain. Personal consumption grew by an unrevised 1.6% in 1Q.

On inflation, the GDP Price Index was revised to a 2.3% gain, versus forecasts of an unrevised 2.2% increase, while the core PCE Index, which excludes food and energy, was adjusted at a 1.8% rise, versus expectations of an unadjusted 1.7% increase.

The final August University of Michigan Consumer Sentiment Index (chart) was revised to 89.8 from the preliminary level of 90.4, and compared to expectations of a slight rise to 90.8. The index was down compared to July's level of 90.0. The expectations component of the report was revised lower but remained above July's level, while current conditions were adjusted higher but below the prior month's level. The 1-year inflation outlook held steady at 2.5% but was down from July's 2.7% rate.

Treasuries finished lower , with the yields on the 2-year and 10-year notes rising 5 basis points (bps) to 0.84% and 1.62%, respectively, while the yield on the 30-year bond was 2 bps higher at 2.29%.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? Follow Randy on Twitter: @randyafrederick.

Europe higher following Yellen's speech

European equities gained ground amid an initial positive reaction to Fed Chairwoman Janet Yellen's speech that mirrored recent comments from Central Bank officials that the U.S. economy is now nearing goals of maximum employment and price stability, and the case for a rate hike has strengthened in recent months. However, healthcare stocks remained hamstrung by festering concerns about a pricing crackdown following the presidential election in the U.S. France's 2Q GDP growth was up 1.4% y/y as expected and matching 1Q's growth, while 2Q U.K. GDP growth increased 2.2% to match forecasts and following the 2.0% y/y expansion seen in 1Q. The British pound dipped versus the U.S. dollar, following its recent rally that has been fueled by a string of upbeat data suggesting the economy is seeing a limited impact from the late-June vote in the U.K. to leave the European Union, known as a Brexit. For commentary on the Brexit vote fallout, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, Keep Calm and Carry On: The Brexit Shock That Wasn't at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. The euro lost ground on the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed as today's speech by U.S. Fed Chair Yellen kept conviction in check, while some disappointing inflation data out of Japan weighed on sentiment. Japan reported that core consumer inflation for July declined more than expected y/y, exacerbating deflationary concerns and sending equities in the region lower, while the yen reversed to the upside. However, Chinese stocks bucked the trend, rebounding modestly from yesterday's slide that came courtesy of resurfacing liquidity concerns and as reports fostered uneasiness about a government crackdown aimed at cooling the real estate markets. The cautious mood ahead of Yellen's speech resulted in a decline for securities in South Korea and India. Finally, weakness in financials and oil & gas issues helped pull Australian stocks to the downside. Amid the choppiness in 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 and why 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.

Stocks decline after Yellen's speech

U.S. stocks retreated from recent record highs for the week, following Friday's highly-anticipated speech from Federal Reserve Chairwoman Janet Yellen which culminated a week of commentary from Fed officials that raised the prospects for a rate hike this year, but did support the financial sector. Healthcare issues led to the downside amid resurfaced concerns about a crackdown on drug pricing as the U.S. presidential election looms, while the energy sector stumbled as crude oil prices came under pressure amid some bearish oil inventory reports. The U.S. dollar ticked higher and Treasuries were mixed, with rates on the short-end of the curve moving higher, while yields on the mid-to-long end lost ground.

Mixed earnings and economic data likely kept conviction in check. A jump in new home sales was met with a larger-than-expected drop in existing home sales, while durable goods orders showed business spending may be starting to pick up, though a preliminary read on services sector activity from Markit surprisingly declined. Best Buy Co. Inc. (BBY $40) rallied after its upbeat earnings report, while HP Inc. (HPQ $15) offered a disappointing outlook. 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. Read the whole perspective at www.schwab.com/marketinsight.

Labor report set to command attention

On the heels of today's comments from the Fed's Yellen and Fischer, next Friday's August nonfarm payroll report is poised to be a key focus for the global markets as a September rate hike remains a possibility (economic calendar). The report will also be preceded by key reads on personal income and spending, Manufacturing Purchasing Managers Indexes (PMIs) from ISM and Markit, the trade balance, Consumer Confidence, and August vehicle sales.

Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her article, What Does Strong Job Growth Mean for Bond Investors?, recent strong job growth has improved the odds the Fed will raise short-term interest rates in the coming months and this has potentially negative implications for the U.S. bond market, which has put in a strong performance so far this year. The risk of higher rates appears greater than the potential for lower rates. We suggest investors keep the average duration of their portfolios within the short- to intermediate-term bond range to help reduce volatility, and consider holding Treasury Inflation-Protected Securities. Read more at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Along with global manufacturing PMIs, international reports for next week worth noting include: Australia—building approvals and retail sales. China—industrial profits. India—2Q GDP. Japan—household spending, retail sales, and industrial production. Eurozone—consumer price inflation and unemployment rate. U.K.—mortgage approvals, consumer confidence and consumer credit.

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