Schwab Market Update
Equities Waver Ahead of Tomorrow’s FOMC Decision
Listen to the latest audio Schwab Market Update. Or listen and subscribe for free to the end-of-day Schwab Market Update podcast:
U.S. stocks closed lower as the markets took a moment to reassess a recent run that pushed equities into record high territory. The downward move came as the markets braced for tomorrow's highly anticipated monetary policy decision from the Fed, while also weighed several persistent headwinds to the global economy. Most notably, the global markets continued to wrestle with the economic impacts of the ongoing spread of the Delta coronavirus variant as well as the intensified crackdown on big business by China. Growth-oriented issues struggled the most as the Consumer Discretionary, Communications and Information Technology sectors all underperformed, whereas Utilities and Real Estate led the way. Earnings season continued to chug along but results from Tesla, Dow member 3M, UPS and GE were met with mixed reactions. In economic news, Consumer Confidence unexpectedly improved, durable goods orders missed forecasts, home prices rose more than expected, and regional manufacturing growth surprisingly accelerated. Treasuries traded higher to apply pressure on yields, while the U.S. dollar dipped. Gold prices turned modestly higher while crude oil prices were down. Asia finished mixed with China and Hong Kong falling, while Europe closed lower as Financials and Energy slid.
The Dow Jones Industrial Average decreased 86 points (0.2%) to 35,059, the S&P 500 Index declined 21 points (0.5%) to 4,401, and the Nasdaq Composite fell 180 points (1.2%) to 14,661. In moderate volume, 881 million shares were traded on the NYSE and 4.2 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.26 lower to $71.65 per barrel. Elsewhere, the gold spot price modestly increased $0.60 to $1,799.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.2% to 92.44.
Tesla Inc. (TSLA $645) reported fiscal Q2 earnings-per-share (EPS) of $1.45, topping the $0.94 FactSet estimate, as revenues rose 98.0% year-over-year (y/y) to $12.0 billion, exceeding the Street's forecast of $11.5 billion. The company noted that it broke new and notable records, as it produced and delivered over 200,000 vehicles, achieved an operating margin of 11.0% and exceeded $1.0 billion of net income for the first time in its history. However, the company added that supply chain challenges, in particular global semiconductor shortages and port congestion, continued to be present in Q2 and with global vehicle demand at record levels, component supply will have a strong influence on the rate of its delivery growth for the rest of the year. Shares were lower.
Dow member 3M Company (MMM $201) posted adjusted Q2 EPS of $2.59, north of the projected $2.28, as revenues grew 24.7% y/y to $8.9 billion, above the expected $8.5 billion. The company noted that it delivered strong performance in Q2, once again posting organic growth across all business groups and geographic areas, along with increased earnings and robust cash flow. MMM raised its full-year earnings and revenue guidance. Shares traded lower.
United Parcel Service Inc. (UPS $195) announced adjusted profits of $3.06 per share, topping the expected $2.81, with revenues rising 14.5% y/y to $23.4 billion, above the forecasted $23.2 billion. The company's U.S. domestic package revenue came in just shy of forecasts, while its international package revenues exceeded estimates and its supply chain and freight revenues also topped forecasts. Shares fell.
General Electric Company (GE $13) reported adjusted Q2 EPS of $0.05, compared to the expected $0.03, with revenues rising 9.0% y/y to $18.3 billion, topping the forecasted $18.1 billion. The company said orders and revenue returned to growth, its operating margins expanded across all segments, and it generated positive industrial free cash flow. GE raised its full-year industrial free cash flow outlook, while reaffirming its earnings guidance, noting that momentum is building across its businesses, driven by healthcare and services overall, with aviation showing early signs of recovery. Shares traded higher.
As we enter the busiest week for earnings season, Schwab's Chief Investment Strategist Liz Ann Sonders delivers her latest article, One Step Closer … to Peak Earnings Growth?. She discusses how as anticipated, corporate earnings are set for another stellar quarter; but with peak growth rates likely behind us, the road ahead gets choppier.
Find all our market commentary amid the recent volatility, including a discussion by Schwab experts on How to Make Rational Buy and Sell Decisions, on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.
Durable goods orders miss, Consumer Confidence surprisingly improves to pre-pandemic levels
June preliminary durable goods orders (chart) rose 0.8% month-over-month (m/m), versus the Bloomberg estimate of a 2.2% rise and compared to May's upwardly-revised 3.2% increase. Ex-transportation, orders were up 0.3% m/m, below of forecasts of a 0.8% gain and compared to May's positively-adjusted 0.5% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, gained 0.5%, compared to projections of a 0.7% rise, while the prior month's figure was revised higher to a 0.5% increase.
The Conference Board's Consumer Confidence Index (chart) unexpectedly improved to 129.1 in July from June's upwardly-revised 128.9 level, and versus estimates calling for a 123.9 figure. The index improved to the highest level since February 2020 as an improvement for the Present Situation Index portion of the survey more than offset a dip in the Expectations Index of business conditions for the next six months. On employment, the labor differential—consumers’ appraisal of jobs being "plentiful" minus being "hard to get"—continued to increase, ticking higher to 44.4 from the 44.2 level posted in June. 12-month inflation expectations edged slightly lower.
The Conference Board added that, "Consumers' appraisal of present-day conditions held steady, suggesting economic growth in Q3 is off to a strong start. Consumers' optimism about the short-term outlook didn't waver, and they continued to expect that business conditions, jobs, and personal financial prospects will improve. Short-term inflation expectations eased slightly but remained elevated. Spending intentions picked up in July, with a larger percentage of consumers saying they planned to purchase homes, automobiles, and major appliances in the coming months. Thus, consumer spending should continue to support robust economic growth in the second half of 2021."
The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 17.0% y/y gain in home prices in May, versus estimates of a 16.3% increase. Compared to the prior month, home prices were up 1.8% on a seasonally adjusted basis, above forecasts of a 1.5% gain.
The Richmond Fed Manufacturing Activity Index unexpectedly moved further into expansion territory (a reading above zero) for this month. The index moved higher to 27 from June's 22 reading, and versus forecasts calling for a decline to 20. Growth in new orders decelerated, but wages jumped, along with employment, and shipments. Prices paid remained elevated after gaining ground.
Treasuries were higher as yields remained choppy, with the yield on the 2-year note down 1 basis point (bp) to 0.20%, while the yields on the 10-year note and 30-year bond declined 5 bps to 1.24% and 1.89%, respectively.
Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, If the Economy's So Strong, Why Are Bond Yields Falling?, how the steep drop in yields has defied conventional wisdom. Kathy notes that it looks to us like the market moves reflect the view that the peaks in growth and inflation in this cycle have passed, and the prospect of tighter policy by the Fed would dampen the outlook for the economy. She adds that while we agree with that assessment longer term, we believe yields are now too low relative to the economic outlook and are likely to rebound later this year.
Tomorrow’s economic calendar in the U.S. will be headlined by the afternoon reveal of the Federal Open Market Committee (FOMC) monetary policy decision, which will be accompanied Fed Chairman Jerome Powell's customary press conference. Prior to that, the day will begin with the preliminary read for the June wholesale inventories report, forecasted by economists to show a 1.1% increase, versus last month’s 1.3% rise. MBA Mortgage Applications for the week ended July 23rd will round out the day.
Asia mixed and Europe lower as Financials and Energy decline
European equities closed lower, as the Energy and Financials sectors saw pressure as the markets digested the recent wild swings in the stock markets and as the busy week brings a fully-loaded earnings calendar ahead of tomorrow's monetary policy decision out of the U.S. The markets also digested further crackdowns by China on big business, while the festering Delta coronavirus variant continued to garner some uncertainty and cloud the outlook for global growth. The euro and the British pound rose versus the U.S. dollar. Bond yields in the Eurozone and the U.K. dipped.
Amid the concerns regarding the implications of the Delta coronavirus variant, Schwab Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Where To Invest Now: COVID And Correlation, discussing how COVID-19 resurgences appear to be the primary driver of moves across many markets this year. Jeff adds that until the COVID-19 case count gets back under control, the yen may strengthen, the U.K. yield curve may flatten, and defensive lockdown-era leaders in the stock market may continue to outperform. Amid this uncertainty, Jeff says the key is diversification since many different types of stocks are making new all-time highs, but they are not moving in sync with each other.
The U.K. FTSE 100 Index was down 0.4%, France's CAC-40 Index declined 0.7%, Germany's DAX Index decreased 0.6%, Switzerland's Swiss Market Index dipped 0.2%, Spain's IBEX 35 Index fell 0.9%, and Italy's FTSE MIB Index traded 0.8% lower.
Stocks in Asia finished mixed with equities in China and Hong Kong extending yesterday's drop that has been fostered by China's intensified crackdown on big business, including the Tech and Education sectors, while geopolitical tensions also increased following talks between China and the U.S. Meanwhile, the markets continued to contend with concerns regarding the global economic implications of the Delta coronavirus variant. The markets remain choppy amid lingering uncertainty as to whether we have reached peak earnings/economic growth rates, as well as continued grappling with the path forward for global monetary policies, which have lifted bond yields as of late and the U.S. dollar. Schwab's Kathy Jones and Senior Fixed Income Research Analyst, Christina Shaffer discuss in their article, What’s Next for Emerging-Market Bonds?, noting that the landscape is changing for emerging market bonds, as China pushes harder on the brakes for new credit growth and a Fed policy change could potentially be a seismic event. In economic news, Hong Kong June exports rose much more than expected, South Korean Q2 GDP growth was a bit shy of forecasts, and China's industrial profits rose at a smaller pace in June than in May.
Japan's Nikkei 225 Index rose 0.5%, even as the yen continued to gain some ground. China's Shanghai Composite Index fell 2.5% and the Hong Kong Hang Seng Index tumbled 4.2%. South Korea's Kospi Index increased 0.2%, and Australia's S&P/ASX 200 Index finished 0.5% higher, while India's BSE Sensex 30 Index decreased 0.5%.
Tomorrow’s international economic calendar will bring leading index data from Japan, reports on inflation for Australia, and consumer confidence data out of France, Italy and Germany.
©2021 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.