Markets Continue Winning Streak

Charles Schwab: On the Market

Posted: 8/1/2017 4:15 PM ET

Markets Continue Winning Streak

U.S. equities finished higher amid upbeat U.S. and global manufacturing reports, while technology stocks rebounded slightly from a recent rollover ahead of tonight's earnings report from Dow member Apple. Treasury yields fell and the U.S. dollar and gold were higher, while crude oil prices saw pressure. News on the equity front consisted of more earnings reports, as Dow member Pfizer posted mixed results, Under Armour lowered its guidance, and Sprint posted a surprise profit, while monthly auto sales missed forecasts.

The Dow Jones Industrial Average (DJIA) advanced 73 points (0.3%) to 21,964, the S&P 500 Index was 6 points (0.2%) higher at 2,476, and the Nasdaq Composite increased 15 points (0.2%) to 6,363. In moderate volume, 827 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.01 to $49.16 per barrel and wholesale gasoline was $0.02 lower at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price gained $0.42 to $1,269.86 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 93.06.

Dow member Pfizer Inc. (PFE $33) reported Q2 earnings-per-share (EPS) of $0.51, or $0.67 ex-items, compared to the $0.65 FactSet estimate, as revenues declined 2.0% year-over-year (y/y) to $12.9 billion, below the expected $13.1 billion. PFE raised the lower end of its full-year EPS outlook, while reaffirming its revenue guidance. Shares dipped slightly. 

Under Armour Inc. (UA $16) posted a Q2 loss of $0.03 per share, versus the expected $0.06 per share shortfall, with revenues rising 9.0% y/y to $1.1 billion, roughly in line with estimates. UA lowered its full-year guidance and announced a restructuring plan. Shares finished lower.

Sprint Corp. (S $9) announced fiscal Q1 EPS of $0.05—the first profit in three years—versus the projected $0.01 per share loss, as revenues rose 1.8% y/y to $8.2 billion, matching the Street's expectations. S raised the low end of its earnings outlook. Shares gained ground.

As earnings season rolls on and has been mostly positive, Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, Big Time: An Update on Our U.S. Large Cap Bias, noting 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.

The major automakers reported July sales today, with General Motors Co's (GM $35) sales falling 15.4% y/y, compared to FactSet's projected 8.8% decrease. Fiat Chrysler Automobiles NV's (FCAU $12) Chrysler sales dropped 10.5%, compared to the expected 6.3% decrease. Ford Motor Co (F $11) reported a 7.5% decline in sales, versus the expected drop of 5.7%. Toyota Motor Corp (TM $114) announced a 3.6% rise in sales, compared to the 5.0% decline that was expected. Shares of the big three were lower, while TM was modestly higher.

Manufacturing activity continues to grow, personal income and spending mixed

The Institute for Supply Management (ISM) Manufacturing Index (chart) for July declined but remained solidly in expansion territory (above 50) after decreasing to 56.3 from 57.8 in June—which was the fastest pace since August 2014—compared to the Bloomberg forecast calling for a dip to 56.4. New orders and production both declined but held onto levels above 60, while employment and new export orders declined 2 points to 55.2 and 57.5, respectively. Inventories rose 1 point to 50.0 and prices paid jumped 7 points to 62.0. ISM said comments from the survey generally reflect expanding business conditions.

The final Markit U.S. Manufacturing PMI Index was revised to 53.3 for July from the preliminary reading of 53.2, where it was expected to remain, and above the 52.0 level posted in June. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Today's reports show manufacturing growth continues, boding well for the economy and adding credence to our view discussed in Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, Schwab Sector Views: One half down, one to go! of a modestly pro-cyclical stance, which means that our current calls are geared to perform better as the economy grows. And for now the economy appears to be on a relatively stable growth path that shows few signs of ending in the foreseeable future as depicted by the continued uptrend in the Index of Leading Economic Indicators. Read more on the Markets & Economy page and be sure to follow us on Twitter: @schwabresearch.

Personal income (chart) was flat month-over-month (m/m) in June, below forecasts of a 0.4% gain, and compared to May's downwardly revised 0.3% increase. Personal spending ticked 0.1% higher last month, matching expectations, and versus May's upwardly revised 0.2% gain. The June savings rate as a percentage of disposable income was 3.8%. The PCE Deflator was flat in line with expectations and the prior month's downwardly revised figure. Compared to last year, the deflator was 1.4% higher, above estimates of a 1.3% gain. May's y/y figure was upwardly revised to a 1.5% increase. Excluding food and energy, the PCE Core Index was 0.1% higher m/m, matching expectations, and the index was 1.5% higher y/y, above estimates of a 1.4% gain. May's y/y figure was upwardly revised to a 1.5% increase.

Construction spending (chart) fell 1.3% m/m in June, versus projections of a 0.4% advance, and following May's favorably revised 0.3% gain. Residential spending dipped 0.3%, while non-residential spending dropped 2.0%.

Treasuries were higher, as the yield on the 2-year note dipped 1 basis point (bp) to 1.34%, the yield on the 10-year note declined 4 bps to 2.25% and the 30-year bond rate fell 5 bps to 2.86%.

The political front remains in focus and a source of uncertainty with reshuffling in the White House continuing and following the failed attempt at health care reform as discussed in 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.

Tomorrow's economic calendar will be fairly light and include the ADP Employment Change report, with economists expecting the gauge of private sector payrolls to show an increase of 190,000 for July, as well as MBA Mortgage Applications.

Europe and Asia higher on earnings and economic data

European equities finished higher, with a plethora of earnings and economic data aiding sentiment, while the euro lost ground on the U.S. dollar to bolster the advance. Markit's final Eurozone Manufacturing PMI Index was revised lower but continued to depict expansion and Markit's U.K. Manufacturing PMI Index showed growth accelerated more than expected for July. Eurozone Q2 GDP was preliminarily estimated at a 0.6% quarter-over-quarter pace of growth, matching expectations, but a slight acceleration from the 0.5% expansion posted in Q1. The British pound ticked higher versus the greenback, while bond yields in the region were mostly lower. Markets in Switzerland were closed for a holiday. 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 higher on the heels of some upbeat economic data in the region and as global earnings season continues to show mostly better-than-expected results. China's Caixin PMI Manufacturing Index unexpectedly showed growth in the sector accelerated in July on the heels of yesterday's official government business activity reports that showed manufacturing and services sector growth continued last month. Also, South Korea reported a larger-than-expected jump in July exports and Japan's manufacturing output remained in expansion territory. The markets continued to shrug off the recent flare-up in geopolitical concerns on the heels of North Korea's missile test late last week. Schwab's Jeffrey Kleintop, CFA, offers his articles, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, and 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks, on the International Investing page. Stocks in Japan rose, despite some strength in the yen, while mainland Chinese equities and those traded in Hong Kong gained ground on the data, and markets in Australia advanced after the Reserve Bank of Australia left its monetary policy stance unchanged as expected. Meanwhile, securities in South Korea and India also traded to the upside.

Tomorrow's international economic calendar will include consumer confidence from Japan, employment data from Spain, retail sales from Switzerland, PPI from the Eurozone, and the Reserve Bank of India's monetary policy decision.