Markets Rebound from Three-Day Skid

Charles Schwab: On the Market

Posted: 8/11/2017 4:15 PM ET

Markets Rebound from Three-Day Skid

U.S. equities finished the week on a high note following a three-day slide that has come courtesy of escalating tensions between North Korea and the U.S. Treasury yields were mixed and the U.S. dollar was nearly flat, as another lackluster inflation report appeared to have dampened expectations of another Fed rate hike this year. Crude oil inched higher gold extended a recent rally. Meanwhile, J.C. Penney and Snap posted larger-than-expected losses and NVIDIA's quarterly results faced some scrutiny.

The Dow Jones Industrial Average (DJIA) advanced 14 points (0.1%) to 21,858, the S&P 500 Index was 3 points (0.1%) higher at 2,441, and the Nasdaq Composite rose 40 points (0.6%) to 6,257. In moderate volume, 790 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.23 higher to $48.82 per barrel and wholesale gasoline was up $0.01 at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price gained $4.45 to $1,290.98 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.06. Markets were lower for the week, as the DJIA decreased 1.1%, the S&P 500 Index fell 1.4% and the Nasdaq Composite was 1.5% lower.

J.C. Penney Co. Inc. (JCP $4) reported a Q2 loss of $0.20 per share, or $0.09 ex-items, versus the FactSet estimate of a $0.04 per share shortfall, as revenues increased 1.5% year-over-year (y/y) to $3.0 billion, topping the projected $2.8 billion. Q2 same-store sales declined 1.3% y/y, versus the expected 1.2% decrease. JCP said it liquidated inventory in 127 off its closing stores which had a negative impact on gross margin and earnings-per-share (EPS). The company added that while broader retail remains challenged, nearly all categories delivered improved sales results, and it is encouraged by the improved performance in its total apparel business. JCP reaffirmed its full-year guidance. Shares tumbled.

NVIDIA Corp. (NVDA $155) posted Q2 EPS of $0.92, or $1.01 ex-items, versus the projected $0.70, as revenues rose 56.0% y/y, or up 15.0% quarter-over-quarter, to $2.2 billion, north of the expected $2.0 billion. The graphics chipmaker's gaming revenue topped expectations, but its data center sales missed forecasts and its gross margin came in a bit shy of estimates. NVDA issued Q3 revenue guidance with a midpoint above forecasts. Shares fell as the Street scrutinized the data center and margin results.

Snap Inc. (SNAP $12) announced a Q2 loss of $0.36 per share, wider than the forecasted $0.30 shortfall, as revenues rose 153.0% y/y to $182 million, south of the estimated $186 million. The social media company's daily active users missed expectations and shares saw heavy pressure.

Consumer price inflation misses forecasts

The Consumer Price Index (CPI) (chart) ticked 0.1% higher month-over-month (m/m) in July, versus the Bloomberg estimate calling for a 0.2% gain, while June's flat reading was unrevised. The core rate, which strips out food and energy, also nudged 0.1% to the upside m/m, compared to expectations of a 0.2% increase and matching June's unrevised rise. Y/Y, prices were 1.7% higher for the headline rate, below forecasts of a 1.8% rise, while the core rate was up 1.7%, in line with projections. June y/y figures showed an unrevised 1.6% rise and an unadjusted 1.7% increase for the headline and core rates respectively.

Prices for shelter, medical care, recreation and apparel all rose, slightly more than offsetting declines for autos, communication and household furnishing. The core rate remained below the Fed's 2.0% target for the third-straight month, causing uncertainty regarding if the Central Bank has one more rate hike in it this year as it also aims to start to shrink its behemoth $4.5 trillion balance sheet.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Fed Keeps it on the QT, the period of weak inflation continues, which Fed chair Janet Yellen has suggested is somewhat due to temporary factors. However, to date, the Fed has raised rates four times; yet over that same period, financial conditions have actually loosened. This is why the Fed feels it can continue to tighten policy in the face of lower inflation. Liz Ann adds that the Fed has signaled that September is likely the start point to balance sheet shrinkage, but eyes will be on the Jackson Hole annual conference and a potential debt ceiling stand-off for opportunities to further steer consensus around that timing. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Treasuries finished mixed, as the yield on the 2-year note declined 3 basis points (bps) to 1.29%, while the yield on the 10-year note dipped 1 bp to 2.19% and the 30-year bond rate ticked 1 bp higher to 2.79%.

Treasury yields and the U.S. Dollar Index have seen pressure in choppy action as this week's subdued inflation data is meeting continued global market skittishness amid the flare-up geopolitical tensions. For analysis of the bond markets and the greenback see Schwab's Chief Fixed Income Strategist Kathy Jones' 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.

Europe and Asia continue to see pressure 

Most European equities extended a weekly slide, with all major market sectors seeing pressure. Global sentiment remained hampered by escalating tensions between North Korea and the U.S., which continued to foster risk aversion. The euro rose and British pound was little changed versus the U.S. dollar, while bond yields in the region lost ground. In economic news, inflation data out of Germany and France matched expectation for July. 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 as well as his commentary, 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. However, healthcare issues gained solid ground to help German markets stabilize.

Stocks in Asia fell broadly after yesterday's solid drops in the U.S. and Europe as the global markets continue to rein in risk appetites amid ramped-up tensions between the U.S. and North Korea as rhetoric from both sides escalate. The Japanese yen rallied but markets in Japan were closed for a holiday. 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.

Stocks in South Korea fell sharply, as did those traded in mainland China and Hong Kong, with the global uneasiness being met with reports that Chinese regulators are investigating the nation's internet companies for cyber-security violations. After the closing bell, Hong Kong reported stronger-than-expected Q2 GDP growth. Australian securities traded noticeably to the downside and India's markets were lower. After the markets closed, India reported an unexpected dip in industrial production for June.

Stocks Fall as volatility sparks up

U.S. stocks fell on the week as volatility showed signs of life on ramped-up geopolitical concerns, with the U.S. and North Korea lobbing threats and warnings at each other. The earnings and economic fronts delivered mixed results to further dampen conviction. The Street cheered Michael Kors Holdings Ltd's (KORS $45) and Ralph Lauren Corp's (RL $84) better-than-expected earnings despite declining sales but jeered similar results from Macy's Inc. (M $21) and Kohl's Corp. (KSS $39). Dow member Walt Disney Co. (DIS $102) came under pressure after its topline and bottomline results diverged and analysts' scrutinized its new streaming service deal and plans. Of the 454 companies in the S&P 500 that have reported earnings so far, about 68% have topped revenue forecasts and roughly 78% have exceeded earnings projections, per data compiled by Bloomberg.

While inflation figures were cooler than expected, the Labor Department's Job Openings jumped to a record high and small business optimism improved to the highest since February. The U.S. dollar, Treasury yields and crude oil prices all finished lower on the week, along with most major market sectors, though consumer staples issues eked out a weekly advance.

Next week, the retail sector will remain in focus as Dow members Wal-Mart Stores Inc. (WMT $81) and Home Depot Inc. (HD $155), along with Target Corp. (TGT $56), will put the finishing touches on earnings season, while we will get the release of July retail sales. The housing market will also garner attention amid the releases of the NAHB Housing Market Index, as well as housing starts and building permits (economic calendar). Rounding out the busy week, the Fed will deliver its industrial production and capacity utilization report and the minutes from its July meeting, while we will get our first look at the consumer for August, in the form of the preliminary University of Michigan Consumer Sentiment Index.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of the retail and housing sectors, as well as our latest commentary on the consumer in his Schwab Sector Views: Time to "Energize" Your Portfolio? As noted in the latest Schwab Market Perspective: Things are Looking Good … But are They Too Good?, the bull market should continue but the risk of a "melt-up" appears to be rising. The U.S. economy is growing modestly and the Federal Reserve is maintaining its slow pace of policy normalization—both supports for further equity market gains, but geopolitical risk remains elevated. While the weaker U.S. dollar is a benefit for U.S. companies, there is a downside internationally … but it may not be where you think. Read these articles on the Markets & Economy page at www.schwab.com and follow us on Twitter: @schwabresearch.

International reports due out next week that deserve a mention include: Australia—employment change. China—lending statistics, retail sales, industrial production and property prices. India—trade balance and inflation statistics. Japan—Q2 GDP and trade balance. Eurozone—industrial production, Q2 GDP, trade balance, CPI, and the minutes from its July monetary policy meeting. U.K.—inflation statistics, employment change and retail sales.