Stocks Mixed in Final Trading Session of First Half of 2017

Charles Schwab: On the Market

Posted: 6/30/2017 4:15 PM ET

Stocks Mixed in Final Trading Session of First Half of 2017

U.S. stocks finished the last trading session of the first half of 2017 mixed as tech issues succumbed to some late-day pressure. The major equity indexes were lower for the week, with the Nasdaq outpacing its peers for the steepest decline. Some favorable earnings and economic data may have aided in today's advance as Dow member Nike's results were met with cheers and Chicago-area manufacturing activity unexpectedly jumped further into expansion territory. U.S. Treasuries were lower, joining a wave of global yield gains in the wake of some recent rhetoric from central bank officials. The U.S. dollar was nearly unchanged, crude oil prices were higher and gold saw a minor decline.

The Dow Jones Industrial Average (DJIA) increased 63 points (0.3%) to 21,350, the S&P 500 Index gained 4 points (0.2%) to 2,423, and the Nasdaq Composite declined 4 points (0.1%) to 6,140. In moderately-heavy volume, 952 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.11 to $46.04 per barrel and wholesale gasoline was $0.03 higher at $1.51 per gallon. Elsewhere, the Bloomberg gold spot price decreased $4.29 to $1,241.22 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.69. Markets were lower for the week, as the DJIA was 0.2% lower, the S&P 500 Index declined 0.6% and the Nasdaq Composite tumbled 2.0%.

Dow member Nike Inc. (NKE $59) reported Q4 earnings-per-share (EPS) of $0.60, above the FactSet estimate of $0.50, as revenues rose 5.0% year-over-year (y/y) to $8.7 billion, north of the projected $8.6 billion. The company said it had double-digit revenue growth in Western Europe, Greater China, and the Emerging Markets, as well as strong growth in sportswear and running, helping offset continued sluggishness in North America. The company offered full-year guidance that appeared to please analysts, notably its forecast for a rebound in sales in North America, while announcing plans to sell products directly on Amazon.com (AMZN $968) and Facebook Inc's. (FB $151) Instagram. Shares of NKE traded nicely higher.

Micron Technology Inc. (MU $30) posted fiscal Q3 EPS of $1.40, or $1.62 ex-items, versus the projected $1.52, as revenues rose 20% quarter-over-quarter (q/q) to $5.6 billion, above the forecasted $5.4 billion. The chip maker said its results reflect solid execution of its cost reduction plans and ongoing favorable industry supply and demand dynamics as DRAM average selling prices rose double digits and NAND sales volumes jumped. MU issued Q4 guidance that exceeded the Street's forecasts. Shares gave up early gains and finished lower despite the results.

The tech sector has led the markets solidly lower for the week and yesterday's decisive decline, on heightened volatility as the group is facing scrutiny regarding valuations as discussed in our article, Tech's Rough Ride: Is There More Turmoil Ahead? on the Insights & Ideas page at www.schwab.com.

However, the tech sector remains one of the best performers over the past twelve months and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest commentary, The Space Between … Tech Today Doesn't Resemble Tech Circa 2000, that tech companies' fundamentals and valuations look vastly dissimilar to the 2000 era. We think the latest pullback in tech is more likely to represent a pause that refreshes some excess optimistic sentiment than it is the start of something nastier. We are maintaining our outperform rating on the tech sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: From the Top Down for more, but as with any fast-growing segment of a portfolio’s holdings, we also remind investors of the power of diversification and periodic rebalancing. Read both articles on the Markets & Economy page at www.schwab.com and be sure to follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

Personal income and spending tick higher, Chicago PMI jumps 

Personal income (chart) was up 0.4% month-over-month (m/m) in May, above the Bloomberg forecast of a 0.3% gain, and compared to April's downwardly revised 0.3% increase. Personal spending ticked 0.1% higher last month, in line with expectations and versus April's unrevised 0.4% gain. The May savings rate as a percentage of disposable income was 5.5%. The PCE Deflator was down 0.1%, matching expectations, after the prior month's 0.2% rise. Compared to last year, the deflator was 1.4% higher, below estimates of a 1.5% gain. April's y/y figure was un revised at a 1.7% increase. Excluding food and energy, the PCE Core Index was up 0.1% m/m, in line wih expectations, and the index was 1.4% higher y/y, matching estimates. April's y/y figure was unrevised at a 1.5% increase.

The final May University of Michigan Consumer Sentiment Index (chart) was unexpectedly revised higher to 95.1 from the preliminary level of 94.5, where it was expected to remain. But the index is down versus May's level of 97.1. Compared to last month, the expectations component dipped, while the current conditions component jumped. The 1-year inflation outlook remained at May's 2.6% rate, while the 5-10 year forecast dipped to 2.5% from 2.6%.

The Chicago Purchasing Managers Index (chart) surprising surged further into a level depicting expansion (above 50), after jumping to 65.7 in June—the highest since May 2014—from 59.4 in May, and versus the expectations of a decrease to 58.0.

Treasuries dipped, with the yield on the 2-year note gaining 1 basis point (bp) to 1.38%, the yield on the 10-year note adding 3 bps to 2.30% and the 30-year bond rate ticking 2 bps higher to 2.83%. Bond yields have rebounded from depressed levels and Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. We expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read more, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Finally, the political front remains in focus with uncertainty being exacerbated by this week's delayed Senate healthcare bill vote until after the July 4th holiday, while the debt ceiling debate continues and the markets are looking for any developments on tax and regulatory reforms, as well as other reflationary policy implementation. As such, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Europe dips and Asia mixed following recent tech slide

European equities turned lower on some possible quarter end posturing with the markets continuing to grapple with the recent rallies in the euro and British pound and bond yields in the region. These moves have come courtesy of commentary from European Central Bank (ECB) President Mario Draghi and Bank of England (BoE) Governor Mark Carney that have caused some uneasiness that global central banks may be turning more hawkish. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com. The euro and British pound pared recent gains but bond yields continued to move higher. Also, the recent tech rollover that has pressured the markets also remained in focus, with the group showing some modest signs of stabilization. In economic news, German retail sales topped forecasts and the eurozone consumer price inflation estimate came in a bit hotter than expected, while U.K. Q1 GDP growth was unrevised at a 0.2% q/q gain, as projected. The political front continued to garner attention ahead of key elections in the eurozone and as U.K. Brexit negotiations are set to ramp up. Jeff and Vice President of Trading and Derivatives, Randy Frederick offer the video, Political Risk: How Should Investors Respond?, on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mixed on the heels of some upbeat Chinese business activity data, while technology issues weighed on the markets after leading U.S. equities solidly lower yesterday. Uneasiness amid the apparent shift among global central banks to a slightly-more-hawkish stance also hampered the markets. China's official Manufacturing PMI Index surprisingly improved to 51.7 in June from 51.2 in May, and compared to the 51.0 level that was forecasted, with a reading above 50 denoting expansion. Additionally, China's key services sector growth accelerated. Mainland Chinese shares ticked higher and those traded in Hong Kong declined. Japanese equities fell with the yen gaining ground, while the nation reported cooler-than-expected national consumer price inflation data for May, which was accompanied by an unexpected flat reading for consumer price inflation for Tokyo in June, versus expectations of a slight gain. Also, Japan's household spending declined by a smaller amount than expected and industrial production dropped more than forecasted in May. Australian and South Korean securities declined, while Indian stocks rose. For a look at the global landscape, see Schwab's Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.

Tech selloff, central banks and quarter-end conspire to pressure stocks

U.S. stocks finished the week lower amid some posturing to close out a strong quarter. The global equity markets felt pressure from the continued rollover in the tech sector, which had helped drive the markets higher for the past year. Also, the markets appeared slightly shaken by an apparent shift in tone to slightly more hawkish from global central banks. ECB President Draghi noted that "the threat of deflation is gone and reflationary forces are at play," while BoE Governor Carney said the discussion of beginning to remove stimulus will be on the docket in the months to come. The euro and British pound rallied versus the U.S. dollar, leading to a weekly pullback for the greenback, while Treasury yields bounced off recent lows amid a jump in global bond rates. The downward move for equities was limited by a rally in financials on the recovery in bond yields and bolstered by upbeat results from the Fed's latest banking sector stress tests, which opened the floodgates to a plethora of hiked dividends and share buybacks, headlined by Dow member JPMorgan Chase & Co. (JPM $91) and Citigroup Inc. (C $67). Energy issues also helped limit the damage as crude oil prices recovered from a recent tumble amid some resiliency in face of an unexpectedly bearish oil inventory data.

Next week, although the domestic markets will have an abbreviated session on Monday and be closed on Tuesday in observance of the Independence Day Holiday, the economic calendar will be robust possibly adding to the aforementioned central bank volatility. The week will commence with the release of the ISM Manufacturing PMI Index and monthly auto sales, while factory orders, the Fed's June meeting minutes, the ISM non-Manufacturing Index, and trade balance will come after the break. However, the headlining report will likely be Friday's June nonfarm payroll report, which is expected to show job growth remains steady at a 175,000 pace and average hourly earnings continue to creep higher, rising 0.3% m/m.

As noted in the Schwab Market Perspective: Shifting Sentiment?, technology stocks have hit a speed bump as investors may be questioning the durability of the U.S. bull market. Economic confusion may be contributing to investor skepticism, as the labor market continues to tighten and housing is in good shape, but inflation has been in retreat along with commodity prices. Meanwhile, for the first time in a while, the Fed sounded slightly more hawkish at its June meeting. However, we believe strong earnings growth and a solid economy will continue to support further gains, but more volatility should be expected. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next that deserve mention include: Australia—building approvals, retail sales, trade balance and the Reserve Bank of Australia monetary policy decision. China—Caixin's manufacturing and services sector reports. India—manufacturing and services reports. Japan—Q2 Tankan Large Manufacturing Index. Eurozone—Markit's business activity reports, retail sales and ECB monetary policy meeting minutes, along with German factory orders and industrial production. U.K.—Markit's business activity reports, trade balance and industrial and manufacturing production.