Stocks Rebound from Morning Lows

Charles Schwab: On the Market

Posted: 8/29/2017 4:15 PM ET

Stocks Rebound from Morning Lows

After showing early discontent for North Korea's latest missile test over Japan, which rattled the global markets overnight, the U.S. equity markets were able to bounce back to finish out the day in the green. Treasury yields were lower and the U.S. dollar was nearly flat even after an upbeat Consumer Confidence report, as global monetary policy and U.S. political uncertainty and the impact of Hurricane Harvey continued to be an overhang. Crude oil prices were mixed and gold pared its recent rally.

The Dow Jones Industrial Average (DJIA) rose 57 points (0.3%) to 21,865, the S&P 500 Index added 2 points (0.1%) to 2,446, and the Nasdaq Composite gained 19 points (0.3%) to 6,302. In moderate volume, 680 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.13 lower to $46.44 per barrel and wholesale gasoline rose $0.03 at $1.60 per gallon. Elsewhere, the Bloomberg gold spot price lost $2.24 to $1,307.89 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 92.28.

Best Buy Co. Inc. (BBY $55) reported Q2 earnings-per-share (EPS) of $0.67, or $0.69 ex-items, versus the $0.63 FactSet estimate, as revenues rose 4.8% year-over-year (y/y) to $8.9 billion, above the projected $8.7 billion. Q2 same-store sales grew 5.4% y/y, topping the expected 2.1% increase. The company noted continued healthy consumer confidence and stronger demand for technology products. BBY issued Q3 guidance that easily exceeded estimates, while raising its full-year revenue outlook. However, shares—which have rallied sharply over the past year—fell, as the Street scrutinized the company's commentary on its conference call with analysts as it appeared to try to temper expectations of future performance after the blowout quarter.

Finish Line Inc. (FINL $9) tumbled after the athletic shoe and apparel retailer preannounced that its Q2 EPS, revenue and same-store sales are expected to be well below the Street's expectations. The company also slashed its full-year profit and same-store sales guidance. FINL said the marketplace for athletic footwear became much more promotional resulting in challenging sales and gross margin trends. Separately, the company announced that it has adopted a shareholder rights plan, intended to reduce the likelihood that any person or group would gain control of Finish Line through open market accumulation or coercive takeover tactics.

Acorda Therapeutics Inc. (ACOR $19) dropped decisively after the company received a Refusal to File (RTF) letter from the U.S. Food and Drug Administration (FDA) regarding its New Drug Application (NDA) for its Parkinson's disease treatment. The FDA said the NDA was not sufficiently complete to permit a substantive review. ACOR said it will seek immediate guidance to respond to the issues.

With volatility having the potential to pick up due to the plethora of global uncertainties, Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, Radioactive II: Could the Tide Finally Be Turning for Active vs. Passive?, noting that both active and passive management styles have a home in investors' portfolios. Passive continues to outperform active, but we may have seen the inflection point and plunging correlations and wider sector dispersion both bode well for active styles. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Consumer Confidence improves to a five-month high

The Consumer Confidence Index (chart) improved to 122.9 in August from the downwardly revised 120.0 in July, and compared to the Bloomberg estimate of a 120.7 reading. This is the highest level since March as both sentiment toward the present situation and expectations of business conditions for the next six months rose. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—jumped to 18.1 from the 14.5 level posted in July.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.7% gain in home prices y/y in June, versus expectations of a 5.6% increase. Month-over-month (m/m), home prices were up 0.1% on a seasonally adjusted basis for June, matching forecasts.

Treasuries were higher, as the yields on the 2-year and the 10-year notes fell 3 basis points (bps) to 1.31% and 2.12%, respectively, while the 30-year bond rate declined 2 bps to 2.74%. Treasuries are finding demand and the U.S. Dollar Index continues to fall to a level not seen in over two years amid the flare-up in tensions toward North Korea after its latest missile test, which joins festering global monetary policy and U.S. political uncertainties, along with the continued damage being done in the aftermath of Hurricane Harvey.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her article, What's the Bigger Risk: Bond Market Bubble or Complacency?, bond yields are low by historical standards and likely to rise, but we don’t see a bubble in the bond market. Slow growth, low inflation and strong investor demand for income are likely to limit any increase in yields. We are cautious. Valuations are high in some fixed income asset classes and we would caution against too much exposure to the riskier parts of the market. Read more on the Fixed Income page at www.schwab.com, and follow Kathy on Twitter: @kathyjones.

Tomorrow, the economic calendar will offer the second look (of three) at Q2 Gross Domestic Product, the broadest measure of economic output, with economists anticipating a slight upward revision to an annualized q/q rate of expansion of 2.7% from the 2.6% posted in the first release, while personal consumption is expected to be upwardly adjusted to an increase of 3.0% from the 2.8% reported previously, while the inflation gauges of the GDP Price Index and core PCE are forecasted to remain at their respective reading of 1.0% and 0.9%. As well, employment data is on tap ahead of Friday's key labor report in the form of the ADP Employment Change report, with the measure of private sector payrolls expected to show an increase of 185,000 jobs for August following the 178,000 registered in July. MBA Mortgage Applications will also be released.

Europe and Asia geopolitical concerns ramp up

The European equity markets finished broadly lower, with the euro extending its recent rally to a level versus the U.S. dollar that has not been seen since early 2015, while North Korea's latest missile test over Japan fostered a pullback in risk appetites. Amid this backdrop, Schwab's Liz Ann Sonders offers her latest article, Twist and Shout: United States Takes on North Korea … Implications for Stocks on the Markets & Economy page. The euro has rallied in the wake of Friday's speeches from Fed Chair Janet Yellen and European Central Bank President Mario Draghi, which failed to deliver any new clues to changes in monetary policy. The British pound was little changed versus the greenback and bond yields in the region traded lower. The U.K. markets returned to action following yesterday's holiday break and focus was also on the resumption of Brexit negotiations with the European Union. In economic news, German consumer confidence ticked higher unexpectedly for September and France posted a 1.7% y/y rise in Q2 GDP, a bit shy of the 1.8% gain that was expected, but an acceleration from the 1.1% growth posted in Q1.

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 for a look at Brexit talks, see our article, Brexit Begins: What's Next for the U.K.? on the Insights & Ideas page. Follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch.

Stocks in Asia finished lower but recouped some losses late in the session. Lingering global monetary policy and U.S. political uncertainties, and the fallout from Hurricane Harvey in Texas, were met with a flare-up in risk aversion as tensions with North Korea ramped up again after the country conducted its latest missile test over Japan. 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 Vice President of Trading and Derivatives, Randy Frederick, titledPolitical Risk: How Should Investors Respond? on the Insights & Ideas page. Follow Randy on Twitter: @randyafrederick. The yen rallied to weigh on Japanese equities, along with an unexpected decrease in the nation's household spending for July. Markets in Hong Kong, Australia, South Korea and India all traded lower as well. However, stocks in mainland China bucked the trend, finishing modestly higher.

Tomorrow's international economic calendar will present retail sales, trade data from Japan, CPI from Spain and Germany, confidence figures from the Eurozone, and PPI from Italy.