Stocks Lower as DC Shuffle Continues

Charles Schwab: On the Market

Posted: 8/18/2017 4:15 PM ET

Stocks Lower as DC Shuffle Continues

Unable to hold gains, U.S. stocks finished to the downside but were off the lows of the day after battling back from morning pressure on the heels of reports that Steve Bannon, a key advisor to President Trump, submitted his resignation. Treasuries were slightly lower, crude oil prices rallied and the U.S. dollar and gold ticked to the downside. In equity news, Deere & Co just missed on its Q3 sales figures, while Foot Locker's results added to the recent woes for the retail sector. In economic news, consumer sentiment rose to its strongest level since January.

The Dow Jones Industrial Average (DJIA) lost 76 points (0.4%) to 21,675, the S&P 500 Index declined 4 points (0.2%) to 2,426, and the Nasdaq Composite shed 5 points (0.1%) to 6,217. In moderate volume, 921 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rallied $1.42 to $48.51 per barrel and wholesale gasoline was $0.03 higher at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price gained $1.54 to $1,286.60 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 94.42. Markets were lower for the week, as the DJIA decreased 0.8%, the S&P 500 Index fell 0.7% and the Nasdaq Composite was 0.6% lower.

Deere & Co. (DE $117) reported fiscal Q3 earnings-per-share (EPS) of $1.97, above the $1.93 FactSet estimate, as net sales of equipment grew 16.6% year-over-year (y/y) to $6.8 billion, just shy of the projected $6.9 billion. Shares were under heavy pressure.

Foot Locker Inc. (FL $34) posted Q2 profits of $0.39 per share, or $0.62 ex-items, versus the expected $0.90, as revenues decreased 4.4% y/y to $1.7 billion, south of the forecasted $1.8 billion. Q2 same-store sales fell 6.0% y/y, compared to the expected 0.8% gain. Shares fell sharply.

Gap Inc. (GPS $23) announced Q2 EPS of $0.68, or $0.58 ex-items, compared to the forecasted $0.52, on previously reported revenues of $3.8 billion. Q2 same-store sales grew 1.0% y/y, versus the estimated 0.1% increase. GPS raised its full-year EPS outlook. Shares gave up early gains and closed lower.

Ross Stores Inc. (ROST $59) rallied after the off-price retailer raised its full-year EPS guidance after posting Q2 earnings of $0.82 per share, above the forecasted $0.77, and same-store sales growth of 4.0% y/y that bested the 2.0% expectation. Revenues of $3.4 billion were roughly in line with estimates.

Expectations drive surprising jump in consumer sentiment

The preliminary University of Michigan Consumer Sentiment Index (chart) rose to 97.6 in August—the strongest since January's thirteen-year high—from the prior month's 93.4 level, and compared to the Bloomberg expectation for it to tick higher to 94.0. The current economic conditions component declined more than expected month-over-month, while the expectations measure posted the biggest jump since December 2011. The 1-year inflation forecast remained at July's 2.6% rate, while the 5-10 year inflation outlook dipped to 2.5% from 2.6%.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: What Makes the World Go Around?, the industrial sector is often overlooked but is at the center of much of what occurs in the global economy. Brad adds that high consumer confidence could help industrials, along with improving global growth and a solid U.S. economy. However, the diversity of the group and monetary and fiscal uncertainty keep us from upgrading the sector … for now. Read more on the Markets & Economy page at www.schwab.com and follow us on Twitter: @schwabresearch.

Treasuries finished mostly lower, with the yields on the 2-year and 10-year notes gaining 1 basis point (bp) to 1.31% and 2.19%, respectively, while the 30-year bond rate was nearly unchanged at 2.78%.

Treasury yields have been jittery, slipping to the downside this month, while the U.S. Dollar Index has shown some signs of relative stabilization. The markets have grappled with mostly upbeat economic data, though low inflation persists, and flared-up monetary policy uncertainty regarding the Fed and European Central Bank (ECB), while the growing dysfunction in the White House appears to be starting to impact sentiment. Finally, tensions between North Korea and the U.S. seem to be fading.

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 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 pares losses, Asia mostly lower

European equities came off the worst levels of the day but remained mostly lower following yesterday's late-day drop in the U.S.. Risk aversion ramped back up as the exacerbated political dysfunction in the U.S. fostered concerns and the terror attack in Spain further weighed on sentiment. These added to already elevated geopolitical concerns on the heels of the recently ramped up concerns toward North Korea, along with flared-up monetary policy uncertainty toward the ECB and Fed. This comes ahead of next week's key Fed symposium in Jackson Hole, Wyoming, with heads of both central banks set to speak. Travel and leisure issues led to the downside following the terror attack in Spain. The euro was modestly higher and the British pound dipped versus the U.S. dollar, while bond yields in the region finished mixed. In economic news, eurozone construction output declined in June.

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 mostly lower on the heels of the drop in the U.S. yesterday, as the global markets rein in risk appetites in the face of political dysfunction in the U.S., along with Fed and ECB monetary policy uncertainty, while geopolitical concerns linger in the wake of the terror attack in Spain and amid the recently flare-up tensions between the U.S. and North Korea. Japanese equities fell with the yen rallying on the heightened risk aversion, while Australian securities decreased. Shares trading in Hong Kong and India were lower and South Korean stocks also dipped, but remained near all-time highs despite the North Korean uneasiness. However, mainland Chinese stocks finished flat. Amid this backdrop, 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.

Back-to-back weekly loss as sentiment swings negative and volatility ticks higher

All looked well to begin the week, with fading tensions between North Korea and the U.S. helping the markets rebound from last week's drop. However, as the week matured sentiment swung to the negative side and volatility flared-up. The woes for the retail sector continued following disappointing guidance from Dow member Wal-Mart Stores Inc. (WMT $79), as well as reports from Coach Inc. (COH $40) and Dick's Sporting Goods Inc. (DKS $27), while Dow component Home Depot Inc's (HD $147) stronger-than-expected report failed to please the Street. Target Corp's (TGT $56) favorable results and a much stronger-than-expected July retail sales report were not enough to offset losses for the consumer discretionary sector. Q2 earnings season is all but in the books and profit growth for the S&P 500 is running just north of 9.0% and sales expansion above 5.0%, per data compiled by Bloomberg.

Moreover, a plethora events and reports this week suggesting growing dysfunction in the White House finally started to show signs of testing stock market resiliency, while minutes from July meetings by the Fed and ECB exacerbated monetary policy uncertainty. Risk aversion regained momentum to stymie an early-week rally in Treasury yields and lift the U.S. dollar, utilities and gold, while applying late-week pressure to market leaders technology and financials. Energy stocks led the weekly decline for the markets, despite Friday's spike in crude oil prices.

Volatility could remain next week as Federal Reserve Chairwoman Janet Yellen and ECB President Mario Draghi are set to speak Friday at the Central Bank's key symposium in Jackson Hole, Wyoming. Leading up to the speeches, next week's economic calendar will bring Markit's August business activity reports, July new and existing home sales, and the preliminary July durable goods report.

As noted in the latest Schwab Market Perspective: Volatility Returns!, Geopolitical, U.S. political and "bubble" concerns rose recently, putting a dent in the market's recent run. U.S. political turmoil is likely to keep market volatility elevated in the near term, along with the Fed's likely commencement of slowly unwinding its bloated balance sheet, but we believe the bull market still has legs. U.S. economic growth continues to be fairly healthy, and earnings season was positive for both bottom- and top-line growth; lending support to the bulls. But the storm in Washington is picking up velocity, especially as the upcoming debt ceiling fight looms large. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next week that deserve a mention include: Japan—Consumer price inflation. Eurozone—Markit's business activity reports, along with German Q2 GDP and business and investor sentiment indexes. U.K.—Q2 GDP.