Markets Mixed Amid Political Uncertainty

Charles Schwab: On the Market

Posted: 7/18/2017 4:15 PM ET

Markets Mixed Amid Political Uncertainty

The U.S. equity markets were mixed, as continued pressure on Treasury yields and a disappointing report from Goldman Sachs pressured financials, but a blowout quarter from Netflix gave consumer discretionary stocks a boost. Meanwhile, political uncertainty was elevated as the Senate's healthcare bill failed again and a read on home-builder sentiment disappointed. Crude oil, gold and the U.S. dollar were higher.

The Dow Jones Industrial Average (DJIA) fell 55 points (0.3%) to 21,575, the S&P 500 Index gained 2 points (0.1%) to 2,461, and the Nasdaq Composite increased 30 points (0.5%) to 6,344. In light to moderate volume, 694 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.38 to $46.40 per barrel and wholesale gasoline was $0.02 higher at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price gained $7.80 to $1,241.91 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 94.67.

Dow member Goldman Sachs Group Inc. (GS $223) reported Q2 earnings-per-share (EPS) of $3.95, compared to the FactSet estimate of $3.38, as revenues dipped 1.0% year-over-year (y/y) to $7.9 billion, versus the projected $7.6 billion. GS topped estimates for most of its business units, but its fixed income currency and commodity unit's activity noticeably missed expectations. The company said a mixed operating environment persisted into Q2 as conditions continued to support underwriting and M&A, while also constraining certain market-making activity. Shares were lower.

Bank of America Corp. (BAC $24) posted Q2 profits of $0.46, above the projected $0.43, as revenues increased 7.0% y/y to $22.8 billion, versus the expected $21.9 billion. Trading revenues were slightly ahead of forecasts, while its net interest income and margin came in a bit shy of estimates. BAC lost ground.

Dow component Johnson & Johnson (JNJ $134) announced Q2 EPS of $1.40, or $1.83 ex-items, compared to projections of $1.79, with revenues rising 1.9% y/y to $18.8 billion, just below the $19.0 billion estimates. JNJ raised its full-year guidance, and shares were higher.

Dow member UnitedHealth Group Inc. (UNH $185) reported Q2 earnings of $2.32 per share, or $2.46 ex-items, versus the projected $2.38, as revenues grew 8.0% y/y to $50.1 billion, compared to the expected $50.0 billion. UNH raised its full-year EPS outlook, and shares were higher.

Netflix Inc. (NFLX $184) posted Q2 EPS of $0.15, one penny shy of estimates, as revenues increased 32.3% y/y to $2.8 billion, roughly in line with expectations. The company's net subscriber additions easily topped expectations. NFLX issued Q3 guidance that was well above estimates. Shares of NFLX rallied.

With Q2 earnings season ramping up and the stock markets at record highs, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Where's the Next Bubble?, and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, provides analysis of the major market sectors in his latest Schwab Sector Views: Christmas in July! (Status of the Consumer) on the Markets & Economy page at www.schwab.com. Be sure to follow us and Jeff on Twitter: @schwabresearch and @jeffreykleintop.

Homebuilder sentiment falls

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month dropped to 64 from June's downwardly revised level of 66, and below the Bloomberg forecast calling for a 67 reading. This was the lowest since November but remains well above the 50 mark, the point of separation for good versus poor conditions. The NAHB said its members are telling it they are growing increasingly concerned over rising material prices, particularly lumber.

Tomorrow, housing construction activity will be in focus, with the release of June housing starts and building permits (economic calendar). Starts are projected to snap a three-month streak of losses, rising 6.2% month-over-month (m/m) to an annual rate of 1,160,000 units, while permits are expected to increase 2.8% to an annual rate of 1,201,000 units, after posting back-to-back monthly declines. Weekly MBA Mortgage Applications will also be reported.

Schwab's Brad Sorensen, CFA, paints a pretty positive picture for the American consumer in his latest Schwab Sector Views, but adds that there are some concerning things that keep us from being overwhelmingly bullish on the consumer. Brad notes that while confidence remains high according to surveys, actions have been slower to come around as housing formations have only just started to tick higher, retail sales growth has been relatively tepid, and auto purchases have shown signs of rolling over. Read more on the Markets & Economy page at www.schwab.com.

The Import Price Index (chart) decreased 0.2% month-over-month (m/m) for June, matching the Bloomberg projection, and compared to May's upwardly revised 0.1% decrease. Compared to last year, prices were up by 1.5%, above forecasts calling for a 1.3% rise and following May's upwardly revised 2.3% increase.

Treasuries were higher, as the yield on the 2-year note dipped 1 basis point (bp) to 1.35%, while the yields on the 10-year note and the 30-year bond dropped 5 bps to 2.27% and 2.86%, respectively.

Bond yields and the U.S. dollar have slipped as of late following brief rebounds, pressured by continued subdued inflation data, exacerbated by Fed Chair Janet Yellen's dovish semi-annual monetary policy testimony last week. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. Read more on the Fixed Income page at www.schwab.com, where Kathy also discusses, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

The political front remains in focus as the highly scrutinized revised Senate healthcare bill appears to be getting scrapped again, and focus appears to be shifting to repealing Obamacare instead of replacing it. This adds credence to Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's Washington Midyear Update: 4 Key Issues for Investors to Watch, where he points out dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There's growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back—or that they may not happen at all. Read more on the Insights & Ideas page at www.schwab.com.

Europe sees pressure on political uncertainty and data, Asia mixed

European equities finished broadly lower, with another setback for the U.S. healthcare bill and the continued U.K. Brexit negotiations adding to political uncertainty. For analysis of the political front see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. Follow Randy on Twitter: @randyafrederick. Technology issues led to the downside as the markets digested ramped up earnings season on both sides of the pond. In economic news, German investor confidence declined for a second-straight month, while U.K. inflation data came in mostly below forecasts. The British pound saw some pressure versus the U.S. dollar on the data. The euro rose versus the greenback, ahead of this week's monetary policy decision by the European Central Bank, while bond yields extended a recent slide to weigh on financials, along with a negative reaction to earnings reports from the sector out of the U.S. Basic materials came under pressure.

Stocks in Asia finished mixed to mostly lower, following flared-up U.S. political uncertainty, while the yen gained ground to pressure Japanese equities after returning to action following yesterday's holiday break. The markets are also eyeing this week's monetary policy decision by the Bank of Japan. Australian securities fell sharply amid a broad-based decline among sectors, while those traded in South Korea finished flat, holding at a record high. Stocks in India dropped, retreating from a record high. With these markets at or near all-time highs, Schwab's Jeffrey Kleintop, CFA, offers his article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com. However, stocks in mainland China and Hong Kong advanced, with property-related issues leading a late-day charge as an upbeat property price report joined a recent string of stronger-than-expected data, headlined by yesterday's Q2 GDP report. In the wake of the data, Schwab's Jeffrey Kleintop, CFA, offers his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.

Tomorrow's international economic calendar will be very light, with the lone report of note being PPI from South Korea.