Stocks Trade in Red Shade

Charles Schwab: On the Market

Posted: 8/23/2017 4:15 PM ET

Stocks Trade in Red Shade

U.S. stocks were unable to breech the unchanged mark during the trading session, closing lower as last night's speech by President Trump cast a shadow over global trade issues and has market participants pondering a possible government shutdown. Volume remained on the lighter side, while on Friday Fed Chair Yellen will speak at the Central Bank's annual symposium in Jackson Hole, WY. Treasury yields and the U.S. dollar were lower and crude oil prices and gold were higher. In other economic developments, Markit business activity reports indicated expansion in both the manufacturing and service sectors continued in August.

The Dow Jones Industrial Average (DJIA) declined 88 points (0.4%) to 21,812, the S&P 500 Index was 8 points (0.3%) lower at 2,444, and the Nasdaq Composite decreased 19 points (0.3%) to 6,278. In light-to-moderate volume, 682 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.58 to $48.41 per barrel and wholesale gasoline was up by $0.03 to $1.62 per gallon. Elsewhere, the Bloomberg gold spot price increased $5.35 to $1,290.42 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 93.16.

Lowe's Companies Inc. (LOW $73) reported Q2 earnings-per-share (EPS) of $1.68, or $1.57 ex-items, versus the $1.62 FactSet estimate, as revenues increased 6.8% year-over-year (y/y) to $19.5 billion, below the projected $19.6 billion. Q2 same-store sales rose 4.5% y/y, compared to the expected 4.3% increase. LOW lowered its full-year EPS outlook, while reaffirming its revenue guidance. Shares traded solidly lower.

Salesforce.com Inc. (CRM $93) posted Q2 EPS of $0.02, or $0.33 ex-items, versus the projected $0.32, with revenues rising 26.0% y/y to $2.6 billion, above the forecasted $2.5 billion. The company raised its full-year guidance slightly. Shares dipped.

Intuit Inc. (INTU $136) announced fiscal Q4 profits of $0.09 per share, or $0.20 ex-items, compared to the estimated $0.17, as revenues grew 12.0% y/y to $842 million, north of the forecasted $809 million. INTU issued Q1 and full-year EPS guidance that was below expectations, while its revenue outlook for the year came in above expectations. Shares finished lower.

American Eagle Outfitters Inc. (AEO $12) reported Q2 EPS of $0.12, or $0.19 ex-items, versus the $0.16 expectation, as revenues increased 3.0% y/y to $845 million, topping the estimated $824 million. Q2 same-store sales grew 2.0% y/y, compared to the 0.4% dip that was forecasted. AEO issued Q2 EPS guidance with a midpoint below projections, while its same-store sales outlook was roughly in line with expectations. Shares were nicely higher.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA points out in his latest article, Earnings may be about to do something they've never done before, the earnings estimates for the world's companies have risen back to $30 again for the fourth time in 10 years. Without a rise in earnings above $30, stock prices may find it difficult to move any higher. Thanks to solid global growth supporting all the major regions of the world a break out above $30 now appears more likely than it has in a decade. Read more on the Markets & Economy page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.

Business activity continues to show expansion, new home sales fall

The preliminary Markit U.S. Manufacturing PMI Index unexpectedly dipped to 52.5 in August, from July's 53.3 level and compared to the Bloomberg expectation of an increase to 53.5. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector this month accelerated more than expected, rising to 56.9 from July's 54.7 level, above forecasts calling for a rise to 55.0. Readings above 50 for both reports denote expansion in activity.

New home sales (chart) dropped 9.4% month-over-month (m/m) in July to an annual rate of 571,000, well below the forecasts calling for 610,000 units and the upwardly revised 630,000 unit pace in June. The median home price was up 6.3% y/y to $313,700. New home inventory increased to 5.8 months of supply at the current sales pace from 5.2 in June. Sales fell sharply m/m in the Northeast and West, dipped in the South, but were up in the Midwest. Y/Y, sales are down in all regions except the West. New home sales are based on contract signings instead of closings.

Tomorrow, the economic calendar will complete the July housing sales picture with the release of existing home sales, projected to show contract closings on previously-owned homes rose 0.5% m/m to an annual rate of 5.55 million units. As low inventory has led to an acceleration in home prices that has outpaced income growth, affordability is a major factor threatening the continued housing recovery. The price and supply data of the report are likely going to garner the highest scrutiny. For analysis of real estate stocks and the impact of the housing market on the other major sectors, check out Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: What Makes the World Go Around?, on the Markets & Economy page at www.schwab.com and follow us on Twitter: @schwabresearch.

The MBA Mortgage Application Index dipped 0.5% last week, following the previous week's 0.1% gain. The decline came as a 0.3% rise in the Refinance Index was more than offset by a 1.5% drop for the Purchase Index. The average 30-year mortgage rate remained at 4.12%.

Treasuries traded higher with the yield on the 2-year note dipping 2 basis points (bps) to 1.31%, the yield on the 10-year note dropping 5 bps to 2.17% and the 30-year bond rate declining 4 bps to 2.75%.

Treasury yields and the U.S. dollar remained choppy ahead of Friday's key Fed symposium in Jackson Hole, Wyoming, where Fed Chief Janet Yellen and European Central Bank (ECB) President Mario Draghi are expected to speak. Both regions face subdued inflation and modest economic expansion and the markets will likely be looking for clues to the timing of the beginning of the Fed's reduction of its behemoth balance sheet and whether the Central Bank has one more rate hike in it this year. Also, focus will be on if the ECB's Draghi delivers a new policy message on tapering its stimulus measures, though reports have speculated that he will not deliver any new policy commentary.

As noted in the latest Schwab Market Perspective: Volatility Returns!, the Federal Reserve is likely to embark on its quantitative tightening (QT) plan, in order to slowly unwind its bloated balance sheet. We have confidence that the Fed has little desire to jolt the financial markets, but it and the market are in uncharted territory as unwinding a $4.5 trillion balance has never been done historically. We continue to believe this will be an additional volatility-driver. Read more on the Markets & Economy page at www.schwab.com.

Tomorrow's economic calendar will also yield weekly initial jobless claims, forecasted to have moved higher to a level of 238,000 from 232,000 last week and the latest Kansas City Fed Manufacturing Index, expected to tick higher to 11 in August from the 10 registered in July with a reading above zero denoting expansion in activity.

Europe sees pressure after yesterday's gain, Asia mixed on trade concerns

European equities gave back some of yesterday's advance, with the euro gaining ground on the U.S. dollar after an upbeat economic report in the region. The markets also continued to grapple with exacerbated global trade and political uncertainty in the wake of a speech last night by U.S. President Donald Trump. The stock markets shrugged off Markit's preliminary read on eurozone business activity for August that showed growth in unexpectedly accelerated, led by the manufacturing sector. The British pound was lower versus the greenback and bond yields in the region finished mixed. ECB President Mario Draghi spoke today but offered no new clues to any policy shifts at the central bank, ahead of Friday's speech in Jackson Hole, Wyoming.

Schwab's Jeffrey Kleintop, CFA points out in his article, What are fund flows telling us about trends and risks in the global stock market?, the underlying distribution of money flows appears to be driven by fundamentals or diversification, rather than purely by performance or geopolitical risk aversion, suggesting a trend that is more deeply rooted (although some markets may be vulnerable in the event of an escalation of geopolitical risk). Investors may want to consider these trends as they consider the global diversification in their own portfolio. Read more on the Markets & Economy page at www.schwab.com.

Stocks in Asia finished mixed following yesterday's gains, with the markets grappling with exacerbated trade concerns amid recent actions by the U.S. toward China and as President Trump delivered a speech last night that appeared to raise concerns about the future of NAFTA and the possibility of a U.S. government shutdown. For a look at the global landscape, see Schwab's Jeffrey Kleintop's, CFA, article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com. Japanese equities increased on the heels of yesterday's drop in the yen and as a report showed the growth in the nation's manufacturing output accelerated slightly in August. Australian securities declined amid weakness in financials, healthcare and technology issues, and Chinese stocks dipped. Markets in Hong Kong were closed due to Typhoon Hato. Indian shares advanced, led by property-related stocks, and South Korean equities ticked higher.

Tomorrow, the international economic docket will yield the Leading Index from Japan, business confidence from France and GDP, the Index of Services and total business investment from the U.K.