Markets Notch Fourth-Straight Gain

Charles Schwab: On the Market

Posted: 9/1/2017 4:15 PM ET

Markets Notch Fourth-Straight Gain

U.S. equities finished the week out on a high note amid lighter volume ahead of the three-day Labor Day holiday weekend. The ISM Manufacturing Index jumped to a six-year high to aid the advance, while automakers posted relatively upbeat monthly sales reports, helping to overshadow a softer-than-expected August nonfarm payroll report. Treasury yields rose and the U.S. dollar continued to rebound, while crude oil prices were mixed and gold was higher.

The Dow Jones Industrial Average (DJIA) rose 39 points (0.2%) to 21,988, the S&P 500 Index added 4 points (0.2%) to 2,476, and the Nasdaq Composite gained 7 points (0.1%) to 6,435. In light-to-moderate volume, 651 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.06 higher to $47.29 per barrel and wholesale gasoline lost $0.03 to $1.75 per gallon. Elsewhere, the Bloomberg gold spot price gained $3.58 to $1,325.01 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 92.83. Markets were higher for the week, as the DJIA increased 0.8%, the S&P 500 Index jumped 1.3% and the Nasdaq Composite soared 2.7%.

Lululemon Athletica Inc. (LULU $62) reported Q2 earnings-per-share (EPS) of $0.36, or $0.39 ex-items, versus the $0.35 FactSet estimate, as revenues grew 13.0% year-over-year (y/y) to $581 million, north of the projected $567 million. Q2 same-store sales rose 7.0% y/y, topping the expected 4.2% gain. The yoga and athletic apparel company raised its full-year guidance. Shares rallied.

Palo Alto Networks Inc. (PANW $147) posted a fiscal Q4 loss of $0.42 per share, or EPS of $0.92 ex-items, compared to the projected $0.79, with revenues rising 27.0% y/y to $509 million, above the estimated $488 million. The cybersecurity company issued full-year guidance that was mostly above expectations. Shares jumped over 10%.

The major automakers reported August sales today, with General Motors Co's (GM $37) sales rising 7.5% y/y, compared to FactSet's projected 3.7% increase. Fiat Chrysler Automobiles NV's (FCAU $16) Chrysler sales dropped 11.0%, compared to the expected 5.3% decrease. Ford Motor Co. (F $11) reported a 2.1% decline in sales, versus the expected drop of 3.1%. Shares of all three automakers were nicely higher.

August job growth misses forecasts, but manufacturing growth jumps to six-year high

Nonfarm payrolls (chart) rose by 156,000 jobs month-over-month (m/m) in August, compared to the Bloomberg forecast of a 180,000 increase. The rise of 209,000 seen in July was revised to a gain of 189,000 jobs. The total downward revision to the job gains in July and June was 41,000. Excluding government hiring and firing, private sector payrolls increased by 165,000, versus the forecasted gain of 172,000, after increasing by 202,000 in July, revised from the 205,000 rise that was initially reported. Job gains occurred in manufacturing, construction, professional and technical services, healthcare and mining.

The unemployment rate ticked higher to 4.4% from 4.3%, where it was forecasted to remain, while average hourly earnings rose 0.1% m/m, below projections of a 0.2% increase and July's unrevised 0.3% increase. Y/Y, wage gains were 2.5%, versus estimates of a 2.6% rise, and matching July's pace. Finally, average weekly hours dipped to 34.4 from July's unrevised 34.5 rate, where it was expected to remain.

The Institute for Supply Management (ISM) Manufacturing Index (chart) for August jumped to the highest level since April 2011, after rising to 58.8 from 56.3 in July, compared to forecasts calling for an increase to 56.5. A reading above 50 denotes expansion. New orders and production were little changed, holding onto levels above 60, while employment jumped to the highest level since June 2011. New export orders declined 2.0 points to 55.5 and inventories rose 5.5 points to 55.5, while prices paid was flat at 62.0. ISM said comments from the survey reflect expanding business conditions.

The final Markit U.S. Manufacturing PMI Index was revised to 52.8 for August from the preliminary reading of 52.5, where it was expected to remain, but below the 53.3 level posted in July. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

The final August University of Michigan Consumer Sentiment Index (chart) was revised lower to 96.8 from the preliminary level of 97.6, versus forecasts of 97.5. But the index is up solidly versus July's level of 93.4. Compared to last month, the expectations component of the report was higher, though the current conditions portion declined. The 1-year and 5-10 year inflation outlooks held at July's 2.6% and 2.5% rates, respectively.

Construction spending (chart) fell 0.6% m/m in July, versus projections of a 0.5% advance, and following June's downwardly revised 1.4% drop. Residential spending rose 0.8%, while non-residential spending fell 1.7%.

Despite being below expectations on most levels, today's jobs report—which is being discounted by economists due to seasonal factors—still suggests that the labor market is poised to continue to support economic prosperity. Also, the standout ISM Manufacturing Index, led by the jump in employment, likely bodes well for the broader economy as discussed by Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, in our article, Why the Industrial Sector Matters, on the Insights & Ideas page at www.schwab.com. Brad also discusses our outlook on all the major market sectors in his latest, Schwab Sector Views: Real Estate Roundup, on the Markets & Economy page. Follow us on Twitter: @schwabresearch.

Treasuries were lower following the plethora of data, as the yield on the 2-year note ticked 1 basis point (bp) higher to 1.33%, while the yields on the 10-year note and the 30-year bond rose 5 bps to 2.16% and 2.77%, respectively. Bond yields showed some relative signs of life after being quiet as of late, while the U.S. Dollar Index reversed to the upside, continuing to show signs of stabilization after recently hitting multi-year lows.

For our latest analysis of the political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's newest article, Congress Returns to Face Debt Ceiling, Government Shutdown Deadlines, on the Insights & Ideas page at www.schwab.com.

Schwab's Chief Fixed Income Strategist Kathy Jones offers a look at the bond markets in her article, What's the Bigger Risk: Bond Market Bubble or Complacency?, on the Fixed Income page at www.schwab.com, and for analysis of investing styles, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Radioactive II: Could the Tide Finally Be Turning for Active vs. Passive?, on the Markets & Economy page. Follow Kathy and Liz Ann on Twitter: @kathyjones and @lizannsonders.

Please note: All U.S. markets will be closed on Monday in observance of the Labor Day holiday.

Europe and Asia higher amid upbeat global manufacturing reports

European equities traded higher, as early strength in the euro relinquished following the upbeat U.S. manufacturing and auto sales reports, which accompanied favorable manufacturing reads in China, eurozone and U.K. The British pound remained higher versus the U.S. dollar but came off the best levels of the day. Bond yields in the region traded higher. The markets shrugged off the conclusion of the latest round of Brexit negotiations, with the European Union lead noting that talks failed to progress enough to move into a new phase set in October.

For a look at Brexit, see our article, Brexit Begins: What's Next for the U.K.? on the Insights & Ideas page. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA offers a look at a potential milestone for global profits in his latest article, Earnings may be about to do something they've never done before, on the Markets & Economy page at www.schwab.com and his video with Vice President of Trading and Derivatives, Randy Frederick, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished out the week mostly to the upside, aided by an upbeat read on Chinese manufacturing output for August, while the markets treaded cautiously ahead of a plethora of U.S. data today, headlined by the key August nonfarm payroll report. Also, conviction may have been held in check as tensions with North Korea lingered and global monetary policy and U.S. political uncertainties remained. For analysis of this backdrop, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the International Investing page at www.schwab.com, as well as his video with Randy Frederick, Political Risk: How Should Investors Respond?, on the Insights & Ideas page.

Stocks in Japan rose modestly, despite the yen regaining some recent losses yesterday and reports showing the nation's Q2 capital spending rose at a smaller pace than anticipated and growth in manufacturing output for August was revised lower. Mainland Chinese equities gained slight ground, but shares traded in Hong Kong gave up early gains and dipped, with the markets digesting recent earnings reports in the region and the aforementioned manufacturing report, which followed yesterday's data that showed growth in activity out of the key services sector decelerated last month. Securities in Australia and India advanced, with the latter showing some resiliency in the face of late-yesterday's softer-than-expected Q2 GDP report. Markets in South Korea finished lower.

Stocks show resiliency in the face of plethora of uncertainty

The U.S. stock markets followed a two-week losing streak with a back-to-back weekly gain to close out August, showing resiliency in the face of a plethora of volatility sources, led by healthcare and technology issues. U.S. political uncertainty remained though recently resurfaced optimism of tax reform helped ease some of the anxiety. Geopolitical concerns were exacerbated by North Korea's latest missile test—this time above Japan—and lingering global trade tensions. Global monetary policy uncertainty festered as last week's Jackson Hole speeches offered little in terms of policy signals, while stubbornly low inflation was countered by stronger-than-expected U.S. Q2 GDP growth and manufacturing activity in China, the U.S., the U.K. and eurozone showing accelerated output in August to lift industrial and materials stocks.

Consumer Confidence hit a five-month high and automakers rallied on Friday to help boost the consumer discretionary sector, and overshadow negative reactions to earnings reports from Best Buy Co. Inc. (BBY $54), Finish Line Inc. (FINL $9) and Dollar General Corp. (DG $72). Adding to the puzzle, the euro hit a more than two-year high against the U.S. dollar, making the European Central Bank a bit uncomfortable, but paused as the greenback rebounded modestly amid the market resiliency and data. Treasury yields were relatively quiet on the week. Even a spike in gas prices and volatile crude oil markets in the wake of Hurricane Harvey did not detour the markets.

Although a short week, next week's economic calendar will bring a flood of key reports for the markets to digest, courtesy of July factory orders, the July trade balance, August ISM non-Manufacturing and Markit Services PMI Indexes, the Fed's Beige Book, and final Q2 productivity and labor costs.

The international economic front will also be robust with reports including: Australia—Reserve Bank of Australia monetary policy decision, Q2 GDP, retail sales and trade balance. China—Caixin PMI Services Index, trade balance, CPI, and PPI. India—trade balance. Japan—trade balance, and Q2 GDP. Eurozone—European Central Bank monetary policy decision, retail sales, and Q2 GDP, along with German factory orders, industrial production, and trade balance. U.K.—industrial/manufacturing production, trade balance, and Bank of England inflation outlook.

As noted in the latest Schwab Market Perspective: A Preview of Coming Attractions?, Volatility has ramped up a bit in the traditionally-slow final weeks of summer, which could be a preview of a bumpy fall for investors. Solid economic data and strong corporate earnings should allow the bull market to continue, but fiscal and monetary uncertainties present risks. August narrowly avoided the first loss for global stocks this year; but underlying fundamentals still look generally positive. Read more on the Markets & Economy page at www.schwab.com.