Schwab Market Update | August 18, 2020

Schwab Market Update

Markets Mixed Amid Upbeat Earnings, Stimulus Uncertainty

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U.S. equities are mixed in afternoon action, as the markets peruse earnings reports from several high-profile retailers. Meanwhile, elevated U.S. and China tensions, the deadlock on Capitol Hill regarding a next round of stimulus, as well global COVID-19 fears are all weighing on sentiment. Dow members Home Depot and Walmart posted better than expected quarterly earnings as did fellow retailer Kohl’s, while Amazon.com announced plans to add 3,500 new jobs and expand offices in six cities. In economic news, housing construction activity came in higher than forecasts. Treasury yields are dipping as bond prices nudge higher, while the U.S. dollar is continuing its descent, gold is rebounding after last week's drop and crude oil prices are lower. Europe finished lower. 

At 12:50 p.m. ET, the Dow Jones Industrial Average is declining 0.1%, the S&P 500 Index is gaining 0.3% and the Nasdaq Composite is rising 0.6%. WTI crude oil is decreasing $0.20 to $42.69 per barrel, Brent crude oil is declining $0.04 to $45.33 per barrel, and wholesale gasoline is up $0.01 at $1.28 per gallon. The Bloomberg gold spot price is rising $23.80 to $2,009.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is trading 0.6% lower at 92.30.

Dow member Home Depot (HD $285) is moving lower after posting Q2 earnings-per-share (EPS) of $4.02, compared to FactSet estimates of $3.68 per share. Revenues rose 23.4% year-over-year (y/y) to $38.1 billion, besting the projected $34.5 billion. The company noted that an additional $480 million was spent on company associates in Q2, bringing the total to approximately $1.3 billion in enhanced pay and benefits to employees in response to the COVID-19 pandemic. The world's largest home improvement retailer said, “The investments we have made across the business have significantly increased our agility, allowing us to respond quickly to changes while continuing to promote a safe operating environment. This enhanced our team's ability to work cross-functionally to better serve our customers and deliver record-breaking sales in the quarter.” The company also declared a cash dividend of $1.50 per share.

Dow Component Walmart, Inc. (WMT $136) reported Q2 EPS of $2.27, or $1.56 ex-items, versus $1.25 a year ago and compared to the $1.25 FactSet estimate. Revenues grew 5.6% y/y to $137.7 billion, north of the Street's forecast of $135.6 billion. Q2 U.S. same-store sales jumped 9.3% y/y, as ecommerce sales surged 97.0%. The company said it incurred incremental costs related to COVID-19 of nearly $1.5 billion. Shares are trading to the upside.

Kohl's Corporation (KSS $20) reported a Q2 gain of $0.30 per share, or a shortfall of $0.25 per share ex-items, versus the profit of $1.55 a year ago, compared to the expected loss of $0.88 per share. Revenues fell 23.1% y/y to $3.4 billion, north of the projected $3.0 billion. Company CEO Michelle Gass noted, “During the second quarter we made significant progress in rebuilding our business. We reopened all of our stores with new safety and operating procedures, accelerated digital growth, and showed great discipline in managing inventory and expenses meaningfully lower. In doing so, we generated positive operating cash flow and further enhanced our financial position.” Shares are trading lower.

Amazon.com, Inc. (AMZN $3,299) shares are trading higher as the company announced plans to add 3,500 new jobs and expand offices in New York, Detroit, Dallas, Denver, Phoenix and San Diego. AMZN indicated that the planned expansion will take place over the next two years.

U.S. lawmakers continue to be at a stalemate on an expected new fiscal relief package, which has caused some uneasiness in the markets as some key emergency support measures have expired. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Stock Market Reaction to Expiring COVID-19 Programs, how if not extended or replaced, the fading support for the unemployed raises the risk of weakening economic momentum, turning the V-shaped recovery into a W. Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his article, Clock Ticks as Congress Struggles for Consensus on Next Aid Bill, noting how despite the slow pace of negotiations, we continue to think a deal will be struck this month.

For timely commentary, you can follow the experts from the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and you can visit www.schwab.com/volatility to find more analysis and strategies on the current market environment.

Housing construction activity better than forecasts

Housing starts (chart) for July rose 22.6% month-over-month (m/m) to an annual pace of 1,496,000 units, well above the Bloomberg forecast of 1,245,000 units, and compared to June's upwardly-revised pace of 1,220,000 units, from the initially-reported 1,186,000 units. Moreover, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, gained 18.8% m/m to an annual rate of 1,495,000, north of expectations of 1,325,000 units, and compared to June's upwardly-revised 1,258,000 rate.

As noted in our latest Schwab Market Perspective: Is the Worst Behind Us?, the deepest point of economic contraction looks to be behind us and we continue to affirm that much of the economic recovery is dependent on the virus—both its trajectory as well as progress on a vaccine or other therapeutic remedies. Yet despite a slowdown in the spread, some state and local governments have already halted or reversed their reopening plans, while businesses and consumers continue to decide how soon to reopen and how much to go out, respectively—all substantial risks to the recovery. Fortunately, even staggered reopening efforts across the country have brought back a considerable number of jobs. However, payrolls are still nearly 13 million below the pre-pandemic peak and investor sentiment is looking a bit frothy—making stocks increasingly vulnerable to a pullback associated with any negative virus- or economic-related catalyst.

Treasuries are moving higher, with the yield on the 2-year note ticking 1 basis point (bp) lower to 0.14%, while the yield on the 10-year note is sliding 3 bps to 0.65%, and the yield on the 30-year bond is declining 4 bps to 1.40%. 

Bond yields have nudged higher, bolstered by some hotter-than-expected July inflation data and favorable employment data, while the U.S. dollar has remained in a soft patch. Managing Director and Senior Investment Strategist with Charles Schwab Investment Advisory, Inc., David Kastner, CFA, offers a look at the implications of the U.S. dollar's decline in his latest Schwab Sector Views: Which Sectors May Benefit From a Weaker Dollar?.

Europe lower on rising virus fears

European equities finished lower, as the markets continued to grapple with news of rising COVID-19 infections across Europe and ongoing U.S.-China tensions. Brexit talks are set to resume today in Brussels with the primary sticking points appearing to be rules over state aid and fishing rights. The economic calendar was scarce today before it picks up in earnest tomorrow with inflation data set for release, before wrapping up the week with a host of August manufacturing and services sector reports. The euro and British pound traded higher versus the U.S. dollar, which has struggled as of late, while bond yields in the region were mixed. Global confidence matters and has been improving in real time, as discussed by Schwab's Jeffrey Kleintop in his latest article, Confidence Is Everything: 3 Things May Shake It. Jeff notes that three potential developments over the rest of the year could shake this confidence: the virus progression as schools and universities reopen, the ramifications of the U.S. election, and the outcome of post-Brexit trade talks.

The U.K. FTSE 100 Index was down 0.8%, Germany's DAX Index was 0.3% lower, Spain's IBEX 35 Index and France's CAC-40 Index decreased 0.7%, Italy's FTSE MIB Index lost 0.5%, and Switzerland's Swiss Market Index declined 0.6%.

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