Charles Schwab: On the MarketPosted: 8/17/2017 4:15 PM ET
Stocks Close Near Lows Amid Flow of DC Woes
U.S. stocks closed sharply lower with tech listings under scrutiny and leading the decline after results from Dow member Cisco Systems disappointed on its profit margin outlook. The pressure on equities developed early and accelerated toward the end of the trading session as the dysfunction in DC continues and monetary policy uncertainty remains. Treasuries, gold and crude oil prices were higher and the U.S. dollar ticked to the upside after paring its initial advance. In other economic developments, reads on weekly jobless claims, manufacturing and Leading Indicators were upbeat, but had seemingly little impact.
The Dow Jones Industrial Average (DJIA) fell 274 points (1.2%) to 21,750, the S&P 500 Index dropped 38 points (1.5%) to 2,430, and the Nasdaq Composite tumbled 123 points (1.9%) to 6,222. In moderate volume, 739 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.31 to $47.09 per barrel and wholesale gasoline was $0.03 higher at $1.59 per gallon. Elsewhere, the Bloomberg gold spot price gained $5.66 to $1,288.77 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 93.67.
Dow member Wal-Mart Stores Inc. (WMT $80) reported Q2 earnings-per-share (EPS) of $0.96, or $1.08 ex-items, compared to the $1.07 FactSet estimate, as revenues grew 2.1% year-over-year (y/y) to $123.4 billion, above the forecasted $122.8 billion. Q2 U.S. same-store sales rose 1.8% y/y, in line with expectations. The company highlighted increased traffic at store levels and on-line. WMT issued Q3 EPS and same-store sales guidance with midpoints slightly below estimates, while raising the low end of its full-year profit outlook. Shares were under pressure.
Dow component Cisco Systems Inc. (CSCO $31) announced fiscal Q4 EPS of $0.48, or $0.61 ex-items, compared to the projected $0.61, as revenues declined 4.0% y/y to $12.1 billion, roughly in line with forecasts. The company noted that it made progress transitioning its business to more software and recurring revenue. CSCO issued Q1 earnings and revenue guidance that matched estimates, while its profit margin outlook missed expectations. Shares traded lower.
L brands Inc. (LB $38) posted Q2 earnings of $0.48 per share, versus the $0.45 estimate, on previously reported revenues of $2.8 billion. The retailer said its Q2 same-store sales decline of 8.0% y/y was below its expectations. The company said the exit of swim and apparel categories had a negative impact on total company and Victoria's Secret same-store sales. LB issued Q3 EPS guidance that missed forecasts and it lowered its sales outlook, while lowering its full-year profit projection. Shares closed lower.
Jobless claims decline, Leading Indicators continue to climb
Weekly initial jobless claims (chart) declined by 12,000 to 232,000 last week, below the Bloomberg forecast of 240,000, with the prior week’s figure being unrevised at 244,000. The four-week moving average dipped by 500 to 240,500, while continuing claims decreased 3,000 to 1,953,000, south of estimates of 1,955,000.
The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for July rose 0.3% month-over-month (m/m), matching projections, and compared to last month's unadjusted 0.6% increase. This was the eleventh-straight monthly gain for the index, bolstered by ISM new orders, the yield curve, and consumer expectations, which more than offset the negative impact of building permits.
Industrial production (chart) was up 0.2% m/m in July, below estimates calling for a 0.3% gain, and compared to June's unrevised 0.4% increase. Manufacturing production dipped as output in the auto sector fell substantially and excluding the sector, manufacturing activity expanded. Mining and utilities production rose solidly. Capacity utilization remained at June's upwardly revised 76.7% rate, in line with forecasts. Capacity utilization is 3.2 percentage points below its long-run average.
The Philly Fed Manufacturing Index (chart) in August dipped to 18.9 from 19.5 in July, though a reading above zero indicates expansionary activity, compared to estimates of a decline to 18.0.
Treasuries ticked higher, with the yields on the 2-year note and the 30-year bond dipping 3 basis point (bps) to 1.30% and 2.78%, respectively, while the yield on the 10-year note declined 4 bps to 2.19%. Treasury yields and the U.S. dollar have been choppy as of late as some upbeat economic data has countered persistent subdued inflation reports, and yesterday's Fed meeting minutes showed the Central Bank is grappling with the divergence between the tightening labor market and low inflation. Also, the markets appeared to showing a dovish takeaway from the European Central Bank's July meeting minutes, while global sentiment continues to recover as concerns about the heightened tensions between North Korea and the U.S. recede.
Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Twist and Shout: 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.
Tomorrow, the lone release from the U.S. economic calendar will be the preliminary University of Michigan Consumer Sentiment Index for August, expected to have ticked higher to a reading of 94.0 from July's final read of 93.4.
Europe lower on monetary policy uncertainty, Asia mixed
European equities traded to the downside, as the markets grappled with monetary policy uncertainty, with yesterday's Fed meeting minutes revealing division regarding the divergence between the strong labor market and low inflation. Also, today's look at the July European Central Bank (ECB) meeting showed policymakers were concerned about the overheating of the euro, fostering uncertainty regarding the central bank's timing of the removal of stimulus measures. This comes on the heels of yesterday's reports that ECB President Mario Draghi will not introduce a new policy message at next week's key Fed symposium in Jackson Hole, Wyoming. The economic calendar delivered a larger-than-expected eurozone trade surplus and stronger-than-forecasted U.K. retail sales. The euro declined and the British pound dipped versus the U.S. dollar, while bond yields in the region were lower.
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.
Stocks in Asia finished mixed following some relatively upbeat data in the region, while the markets grappled with monetary policy uncertainty as yesterday's Fed minutes showed the Central Bank remains divided on the strong labor market and low inflation. Also, the exacerbated political dysfunction in the U.S. garnered attention, though concerns about the tensions between North Korea and the U.S. continued to fade.
Japanese equities dipped as the yen gained ground following a larger-than-expected trade surplus in the nation and as the U.S. dollar lost ground. Australian securities also slipped, even as the nation's employment growth topped expectations. Shares in mainland China finished higher, while those traded in Hong Kong declined. Indian stocks ticked higher and South Korean equities advanced. Markets in South Korea continued to trade near all-time highs despite the recently flared-up geopolitical tensions in the region, and Schwab's Jeffrey Kleintop, CFA, offers his articles, Missiles and Markets: An investor guide to geopolitical risks and The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com.
The international economic docket for tomorrow will be light, with reports to include PPI from Germany, the current account from both Italy and the Eurozone, as well as construction output from the latter.