Markets Flat Amid Investor Caution

Charles Schwab; On the Market

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

Markets Flat Amid Investor Caution

U.S. equities finished mixed and near the unchanged mark as investors weighed eased geopolitical concerns against upbeat economic data that may have put the possibility of a Fed rate hike back into play. Retail sales came in much stronger than expected and manufacturing activity in the New York region surged. Meanwhile, Treasury yields rose on the reports, gold was lower, while crude oil prices and the U.S. dollar were little changed.

The Dow Jones Industrial Average (DJIA) gained 6 points to 21,999, the S&P 500 Index lost 1 point to 2,465, and the Nasdaq Composite ticked 7 points (0.1%) lower to 6,333. In light-to-moderate volume, 700 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.04 lower to $47.55 per barrel and wholesale gasoline was unchanged at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price lost $10.05 to $1,272.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 93.82.

Dow member Home Depot Inc. (HD $150) reported Q2 earnings-per-share (EPS) of $2.25, versus the FactSet estimate of $2.21, as revenues rose 6.2% year-over-year (y/y) to $28.1 billion, compared to the forecasted $27.8 billion. Q2 same-store sales grew 6.3% y/y, above the projected 4.9% gain. HD raised its full-year guidance. Shares finished lower despite the results.

Coach Inc. (COH $41) posted fiscal Q4 EPS of $0.53, or $0.50 ex-items, versus the forecasted $0.49, as revenues decreased 1.7% y/y to $1.1 billion, below the estimated $1.2 billion. Q4 same-store sales grew 4.0% y/y, above the estimated 3.6% increase. The company's gross margin declined y/y. COH issued current year earnings guidance with a midpoint below expectations, while its revenue outlook topped projections. Shares dropped decisively.

Dick's Sporting Goods Inc. (DKS $27) announced Q2 profits of $1.03 per share, or $0.96 ex-items, compared to the forecasted $1.00, as revenues rose 9.6% y/y to $2.2 billion, roughly in line with forecasts. Q2 same-store sales ticked 0.1% higher y/y, below the 1.4% gain that was expected. DKS issued Q3 guidance that came in below forecasts, while it lowered its full-year outlook. The company noted a "very competitive and dynamic marketplace," adding that "by design, we will be more promotional and increase our marketing efforts for the remainder of the year, as we will aggressively protect our market share." DKS fell sharply.

Retail sales top forecasts, while regional manufacturing and homebuilder sentiment jump

Advance retail sales (chart) for July rose 0.6% month-over-month (m/m), compared to the Bloomberg forecast of a 0.3% gain and compared to June's upwardly revised 0.3% increase. Last month's sales ex-autos grew by 0.5% m/m, versus expectations of a 0.3% gain, and following the favorably revised 0.1% increase seen in the previous month. Sales ex-autos and gas were up 0.5% m/m, compared to estimates of a 0.4% rise, and versus June's upwardly revised 0.3% rise. The retail sales control group, a figure used to help calculate GDP, increased 0.6%, compared to the projected 0.4% rise, and the prior month's figure was revised higher to a 0.1% rise. Ten of the thirteen categories were higher, with autos, building materials and nonstore retailers—including on line activity—leading the way, while gas, clothing and electronics and appliances sales were lower.

The report suggests strong consumer confidence and wages flashing early signs of trending higher could be starting to bolster consumer spending, the lifeblood of U.S. economic growth. However, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, points out in his Schwab Sector Views: Time to "Energize" Your Portfolio?, spending on traditional retail items has been cautious and competition among retailers—cited today by Dick's Sporting Goods—may limit profitability, leading to our maintained marketperform rating on consumer discretionary stocks. Read more on the Markets & Economy page at www.schwab.com and follow us on Twitter: @schwabresearch.

The Import Price Index (chart) ticked 0.1% higher m/m for July, matching projections, and compared to June's unrevised 0.2% decrease. Compared to last year, prices were up by 1.5%, in line with forecasts to match June's unrevised increase.

The Empire Manufacturing Index showed output from the New York region jumped further to a level depicting expansion (a reading above zero) for August. The index surged to 25.2 from July's unrevised 9.8 level, with forecasts calling for a reading of 10.0.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month rose to 68 from July's unrevised level of 64, where it was forecasted to remain. This index sits at the highest since May and well above the 50 mark, the point of separation for good versus poor conditions. The NAHB said its members are encouraged by rising demand in the new-home market, due to ongoing job and economic growth, attractive mortgage rates and growing consumer confidence. However, the report noted that builders continue to face supply-side challenges, such as lot and labor shortages and rising building material costs.

Tomorrow, we will get a look at housing construction activity, in the form of July housing starts and building permits (economic calendar). Starts are expected to tick 0.4% higher m/m to an annual rate of 1,220,000 units and permits are projected to decline 2.0% to an annual rate of 1,250,000 units. MBA Mortgage Applications will also be released.

Business inventories (chart) grew 0.5% m/m in June, north of forecasts calling for a 0.4% gain, and versus May's unrevised 0.3% increase.

Treasuries were lower, as the yield on the 2-year note rose 2 basis points (bps) to 1.35%, the yield on the 10-year note gained 4 bps to 2.26%, and the 30-year bond rate added 3 bps to 2.84%.

Treasury yields rose and the U.S. dollar was nearly unchanged on the data as expectations of one more Fed rate hike this year rebound modestly from last week's decline in the wake of subdued inflation data. This may bring more scrutiny on tomorrow's release of the Central Bank's July policy meeting minutes. For a look at the meeting, see Schwab's Chief Investment Strategist Liz Ann Sonders' article, Fed Keeps it on the QT, on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Bond yields and the greenback are also recovering as the recently flared-up geopolitical concerns on heightened tensions between North Korea and the U.S. appear to be easing. Schwab's Liz Ann Sonders notes in her latest article, Ogre Battle: United States Takes on North Korea … Implications for Stocks the S&P 500 was hit with a sharp near-1.5% reversal last Thursday, followed by a relief rally. We don't believe significant military escalation is the likely outcome of the battle of wills between President Trump and North Korea’s Kim Jong Un. But it is a year ending in "7" and there are other forces at work which could keep stocks in a choppy pattern for the next couple of months. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Europe and Asia mostly higher as geopolitical concerns remain in retreat

European equities finished mostly to the upside, as risk appetites continued to recover after being stymied by last week's rise in tensions between North Korea and the U.S. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA points out in his article, What are fund flows telling us about trends and risks in the global stock market?, that the money coming into ETFs is flowing into a broad range of stock markets featuring a preference for international stocks and revealing a surprising disconnect with the performance and geopolitical risk of the underlying markets. Read more on the Markets & Economy page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop. The euro and British pound lost ground on the U.S. dollar, while bond yields in the region moved to the upside. Stocks came off the best levels of the day as the markets assessed the implications of the plethora of upbeat U.S. data on Fed monetary policy, while economic news in the region was lackluster. German Q2 GDP growth slowed quarter-over-quarter, while U.K. consumer price inflation came in cooler than forecasted. Volume was lighter than usual as markets in Italy were closed for a holiday.

Stocks in Asia finished mostly to the upside as global risk aversion continued to ease after last week's flare-up in geopolitical concerns as tensions between North Korea and the U.S. escalated pressured the global markets. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors are best served when grim headlines are in the news by remembering that geopolitical risks are a regular part of investing and that a long history of geopolitical developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are most often the result. Investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. Read more on the International Investing page at www.schwab.com. Japanese equities jumped, as the yen gave back a recent rally, while Australian listings also gained ground. Stocks in mainland China advanced modestly following some stronger-than-expected July lending statistics, while those traded in Hong Kong declined amid a late-day slide led by oil companies and property-related issues. Volume was lighter than usual as markets in South Korea and India were closed for holidays.

Items on tomorrow's international docket include wage data from Australia, GDP from Italy and the Eurozone, and employment figures from the U.K.