Dow Deviates to Deliver Divergent Close

Charles Schwab: On the Market

Posted: 8/3/2017 4:15 PM ET

Dow Deviates to Deliver Divergent Close

U.S. stocks were mixed with the Dow ticking slightly higher, adding to its recent record-run, while the earnings front delivered another divergent dose of results. Earnings news was highlighted by Tesla's quarterly marks, while Teva Pharmaceuticals missed analyst expectations, reduced its forward guidance and slashed its quarterly dividend. Treasury yields were lower following much slower-than-expected growth in key U.S. services sector activity. The U.S. dollar was nearly unchanged, crude oil prices were lower and gold saw minor gains.

The Dow Jones Industrial Average (DJIA) gained 10 points (0.1%) to 22,026, the S&P 500 Index dipped 5 points (0.2%) to 2,472, and the Nasdaq Composite was 22 points (0.4%) lower at 6,340. In moderate volume, 834 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.56 to $49.03 per barrel and wholesale gasoline was $0.01 lower at $1.63 per gallon. Elsewhere, the Bloomberg gold spot price ticked $1.40 higher to $1,268.05 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 92.75.

Tesla Inc. (TSLA $347) reported a Q2 loss of $2.04 per share, or a loss of $1.33 ex-items, compared to the $1.88 per share shortfall forecasted by FactSet, as revenues grew 3.5% quarter-over-quarter (q/q) to $2.8 billion, and more than double year-over-year (y/y), above the projected $2.5 billion. The company said its Model 3 production is on track to achieve previously announced targets and it expects Model S and Model X deliveries to increase in the second-half of the year versus the first half. Shares rallied.

Aetna Inc. (AET $159) announced Q2 earnings-per-share (EPS) of $3.60, or $3.42 ex-items, versus the estimated $2.37, with revenues declining 2.5% y/y to $15.5 billion, topping the expected $15.2 billion. AET raised its full-year earnings outlook and traded higher.

Yum Brands Inc. (YUM $75) achieved Q2 profits of $0.58 per share, or $0.68 ex-items, compared to the expected $0.61, as revenues declined 3.0% y/y to $1.5 billion, above the forecasted $1.4 billion. Q2 same stores sales rose 2.0% y/y, just above the projected 1.8% gain. Same-store sales at KFC and Pizza Hut both came in slightly above estimates, while its growth in sales at Taco Bell trailed expectations. YUM maintained its full-year guidance. YUM closed lower.

Kellogg Co. (K $70) reported Q2 EPS of $0.80, or $0.97 ex-items, versus the projected $0.92, as revenues declined 2.5% y/y to $3.2 billion, roughly in line with forecasts. K reaffirmed its full-year guidance. Shares finished higher.

Teva Pharmaceuticals Industries Ltd. (TEVA $24) reported a Q2 loss of $5.94 per share, or EPS of $1.02 ex-items, compared to the expected $1.06 per share profit. Revenues rose 13.0% y/y to $5.7 billion, mostly in line with forecasts, primarily due to the inclusion of the Actavis generics business. The company noted lower-than-expected performance of its U.S. generics business and the continued deterioration in Venezuela. TEVA cut its full-year guidance and slashed its quarterly dividend by 75.0% to $0.085 per share. Shares tumbled.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Big Time: An Update on Our U.S. Large Cap Bias, that most secular trends point to large cap outperformance; but there are risks to the story. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Services sector activity growth slows more than expected

The July Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 53.9—the lowest since August 2016—from June's unrevised 57.4 level, and compared to the Bloomberg forecast of a dip to 56.9. A reading above 50 denotes expansion. New orders fell 5.4 points month-over-month (m/m) to 55.1, business activity dropped 4.9 points to 55.9, and employment declined 2.2 points to 53.6. Prices rose 3.6 points to 55.7. The ISM said the majority of comments from respondents were mostly positive about business conditions and the state of the economy.

The report suggests optimism may be getting somewhat tempered by the dysfunction in Washington, mixed economic data, and global monetary policy uncertainty. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her 2017 Mid-year US Equity Outlook: Rattle and Hum, the hope around policy did have a positive impact on "soft" economic data, which are survey- and confidence-based measures—they surged post-election but have recently been in retreat. She continues to believe the spread between the soft and hard (actual) economic data will narrow with the soft data continuing to catch down to the hard data, until we get more clarity on pro-growth policies' timing, especially tax reform.

With inflation being an area fostering uncertainty regarding whether the Fed has one more rate hike in it this year, today's ISM report and its manufacturing complement on Tuesday showed growth in prices accelerated, with the latter jumping above 60. This sets up the wage component of tomorrow's key July nonfarm payroll report to likely take center stage again. Compared to June, wages are projected to rise 0.3% after growing 0.2% in the previous report, and be up 2.4% y/y, down from the prior month's 2.5% pace. Job growth is expected to remain steady at 180,000 and the unemployment rate is forecasted to dip from 4.4% back to May's 4.3% rate, which was a 16-year low.

Liz Ann notes in her analysis of the most recent Fed decision, Fed Keeps it on the QT, that the Central Bank pointed to a September start point to balance sheet shrinkage, or quantitative tightening (QT), and we do believe another rate hike later in the year is in the cards. However, next up is the Jackson Hole annual conference, at which Fed Chief Yellen will speak, which could provide an opportunity to further steer the consensus around QT's timing. There is a September timing risk however, given that we could be in the midst of a debt ceiling stand-off, so stay tuned.

Read these articles on the Markets & Economy page at www.schwab.com and for a look at Washington, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's article, Health Care Reform: What Investors Should Know, on the Insights & Ideas page at www.schwab.com. Follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

The final Markit U.S. Services PMI Index was revised to 54.7 in July from the preliminary 54.2 level, which matched June's figures and was expected to remain. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

Weekly initial jobless claims (chart) declined by 5,000 to 240,000 last week, below forecasts of 243,000, with the prior week’s figure being revised higher by 1,000 to 245,000. The four-week moving average decreased by 2,500 to 241,750, while continuing claims rose 3,000 to 1,968,000, north of estimates of 1,958,000.

Factory orders (chart) grew 3.0% m/m in June, matching expectations, while May's figure was positively revised to a 0.3% decrease. June durable goods orders—preliminarily reported last week—were revised to a 6.4% gain from the preliminarily-reported 6.5% increase.

Treasuries were higher, with the yield on the 2-year note declining 2 basis points (bps) to 1.34%, while the yield on the 10-year note dropped 5 bps to 2.22% and the 30-year bond fell 6 bps to 2.80%.

Treasury yields have seen some renewed pressure after a brief rebound, while the U.S. Dollar Index remains near lows not seen since May 2016. Schwab's Chief Fixed Income Strategist Kathy Jones offers a look at the bond markets and the greenback in her articles, Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' on the Fixed Income page at www.schwab.com, and, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

Tomorrow's domestic docket will also yield the latest trade balance report, with the deficit forecasted to have narrowed to $44.5 billion in June from the $46.5 billion shortfall in May.

Europe mixed as markets digest data, Asia lower as uncertainties remain

European equities finished mixed, with the markets digesting ramped up earnings season, while the British pound lost solid ground on the U.S. dollar after the Bank of England left its monetary policy stance unchanged and cut its economic growth forecast due to the impact of the looming Brexit. For more see our article, Brexit Begins: What's Next for the U.K? on the Insights & Ideas page at www.schwab.com. In economic news, Markit's Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—slowed due to slight softness in Germany but continued to show expansion in July aided by stronger-than-expected services growth in France. Eurozone retail sales unexpected rose in June. The euro nudged higher versus the greenback and bond yields in the region were mostly lower. The energy sector dipped despite the continued run in crude oil prices during the session. For analysis of the global markets, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, An important benefit to global investors is back after 20 years on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished lower with the global markets grappling with mostly upbeat earnings reports, mixed economic data, and monetary policy uncertainty, while political and geopolitical concerns linger. Japanese equities declined, even as the yen gave back yesterday's gains, while a report showed the nation's services sector activity growth slowed last month. Weakness in basic materials continued to weigh on Australian stocks as the country's trade surplus narrowed more than expected in June. Shares trading in mainland China and Hong Kong retreated from a recent run. Indian stocks fell despite late-yesterday's decision by the Reserve Bank of India to cut rates, and South Korean securities pulled back after recently touching all-time highs in the wake of yesterday's tax reform plan that included tax hikes on corporations and individuals. Schwab's Jeffrey Kleintop CFA, offers his article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com, where you can also find his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks.

A relatively light international economic calendar will offer reports on labor cash earnings from Japan, retail sales from Australia and Italy and factory orders from Germany. In central bank action, the Reserve Bank of Australia will deliver a statement on its monetary policy.