Busy Week Closes Out in a Lukewarm Session

U.S. equities finished mixed, but very near the unchanged mark, in a bumpy session that saw moves above and below the flatline. Another dose of positive economic data was unable to overcome the palpable uneasiness surrounding the persistent uncertainty regarding the timing, size and scope of a highly-anticipated new round of U.S. fiscal relief with the stalemate on Capitol Hill continuing. Retail sales, ex-autos, came in stronger than expected, industrial production continued to recover, Q2 productivity jumped, and consumer sentiment unexpectedly improved. In equity news, Applied Materials posted upbeat Q3 results and Q4 guidance, while Dow member Apple and Google are being sued by Fortnite creator Epic Games on app store guideline disputes. Treasury yields were mixed and the U.S. dollar resumed a soft patch, while gold was lower after a volatile week and crude oil prices dipped. Europe finished lower and markets in Asia closed out the week mixed.

The Dow Jones Industrial Average rose 34 points (0.1%) to 27,931, the S&P 500 Index inched nearly a point lower to 3,373, and the Nasdaq Composite declined 23 points (0.2%) to 11,019. In moderate volume, 716 million shares were traded on the NYSE and 3.5 billion shares changed hands on the NASDAQ. WTI crude oil shed $0.23 to $42.01 per barrel and wholesale gasoline gained $0.01 to $1.24 per gallon. Elsewhere, the Bloomberg gold spot price fell $10.57 to $1,943.14 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.2% to 93.13. Markets saw gains for the week, albeit slight, as the DJIA rose 1.8%, the S&P 500 increased 0.6% and the Nasdaq Composite advanced 0.1%.

Applied Materials Inc. (AMAT $68) reported fiscal Q3 earnings-per-share (EPS) of $0.91, or $1.06 ex-items, compared to the $0.95 FactSet estimate, with revenues rising 23.0% year-over-year (y/y) to $4.4 billion, north of the Street's estimate of $4.2 billion. The semiconductor equipment company said it is operating at pre-COVID levels of productivity and demand for its products is strengthening, adding that based on what it is hearing from its customers, it believes growth will be sustained in 2021. AMAT issued Q4 EPS and revenue guidance that was above expectations. Shares were nicely higher.

Dow member Apple Inc. (AAPL $460) was in focus after removing the game Fortnite from its App Store amid a dispute regarding the way customers buy items for the popular game after creator Epic Games Inc started allowing customers to buy items directly through it instead of having Apple handle the billing. Apple's App Store guidelines have it process transactions in which it takes a cut of up to 30%. Epic Games filed lawsuits against Apple and Alphabet Inc's(GOOGL $1,514) Google, which also pulled Fortnite shortly after Apple's action. Apple said Epic's changes had the "express intent of violating the App Store guidelines," and it offers a level playing field for businesses. EPIC said in the lawsuit filing that Apple's rules on customer payments is anti-competitive. Per Bloomberg, Google issued a similar statement, but noted that Android allows for multiple app stores, unlike the iPhone. AAPL and GOOGL traded lower.

U.S. lawmakers continue to struggle to find common ground 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.

Retail sales data mostly above forecasts in July, August consumer sentiment improves modestly

Advance retail sales (chart) for July rose 1.2% month-over-month (m/m), versus the Bloomberg forecast of a 2.1% increase after June's upwardly-revised 8.4% jump. Last month's sales ex-autos increased 1.9% m/m, compared to expectations of a 1.3% rise and June's favorably-revised 8.3% gain. Sales ex-autos and gas were up 1.5% m/m, compared to estimates of a 1.0% increase, and June's reading was adjusted upward to a 7.7% rise. The control group, a figure used to calculate GDP, rose 1.4% m/m, compared to projections of a 0.8% increase and versus June's upwardly-adjusted 6.0% advance. Sales of clothing and health and personal care both rose solidly, while sales at electronics and appliance store surged over 20% m/m. Auto sales were lower, along with building materials and sporting goods, while nonstore retail sales—including online activity—grew modestly m/m and were up sharply y/y.

The August preliminary University of Michigan Consumer Sentiment Index (chart) improved slightly to 72.8 versus expectations of a dip to 72.0 from July's 72.5 reading. The surprising increase for the index came as the current conditions component deteriorated by a smaller amount than projected and the expectations portion of the survey unexpectedly improved. The 1-year inflation forecast remained at July's 3.0% rate, and the 5-10 year inflation forecast ticked higher to 2.7% from the prior month's 2.6% level.

The Federal Reserve's industrial production (chart) rose 3.0% m/m in July, matching estimates, and versus June's upwardly-adjusted 5.7% gain. Manufacturing output rose 3.4%, continuing the solid rebound from April's record drop, and utilities output grew 3.3%. Mining production also gained ground, increasing 0.8%. Capacity utilization improved more than expected to 70.6% from the prior month's downwardly-revised 68.5% rate, versus forecasts calling for an improvement to 70.3%. Capacity utilization is 9.2 percentage points below its long-run average, but 6.4 percentage points north of the low set in April.

Manufacturing and retail sales data have been positive and painted a recovery picture to help the markets, but unemployment remains painfully elevated and still has a long road back to pre-pandemic levels. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Another Tricky Day: Dissecting July's Labor Market Report, how the labor market continues to heal; but the level of weakness remains unprecedented. She adds that hard-hit industries brought workers back in July, but the impact of virus-related rolling shutdowns could reverse some of that improvement. Liz Ann also points out that short-term, Congress is negotiating another income-replacement package; longer term, employment sectors in growth mode employ a larger share of the U.S. workforce than those in contraction mode.

Preliminary Q2 nonfarm productivity (chart) jumped by 7.3% on an annualized basis, versus expectations of a 1.5% increase, and following the favorably-revised 0.3% decrease seen in Q1. Unit labor costs also surged, rising by 12.2%, versus the forecast calling for a 6.9% gain. Unit labor costs were revised higher to an increase of 9.8% in Q1.

Business inventories (chart) fell 1.1% m/m in June, matching forecasts, and versus May's unadjusted 2.3% drop.

Treasuries finished mixed, as the yield on the 2-year note lost 2 basis points (bps) to 0.14%, the yield on the 10-year note was flat at 0.70%, while the 30-year bond rate ticked 2 bps higher to 1.45%.

Bond yields gained ground this week, bolstered by some hotter-than-expected July inflation data and a better-than-expected read on initial jobless claims. Moreover, the U.S. dollar showed some late-week softness to modestly extend a recent tumble.

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 as U.S. fiscal fight remains in focus, Asia mixed

European equities were lower, with the continued stalemate in the U.S. regarding a highly-anticipated new round of fiscal relief measures remaining a drag on conviction. The euro and British pound rose, as the U.S. dollar resumed a recent soft patch. Bond yields in the region were mixed. In economic news, Eurozone Q2 GDP contracted by 12.1% quarter-over-quarter and dropped 15.0% y/y, matching forecasts. The markets also appear to be a bit uneasy regarding some reports of rising new cases of COVID-19 in parts of Europe. Global stock market valuations have rebounded to above those of prior market peaks as discussed by Schwab's Jeffrey Kleintop in his latest article, How Have Recent Developments Impacted Long-Term Returns? Jeff notes that in the near-term, this is typical and is not anticipated to act as a drag on returns, but over the long-term, a high P/E ratio has historically had a negative impact on returns.

The U.K. FTSE 100 Index and France’s CAC-40 Index dropped 1.6%, Germany's DAX Index was down 0.7%, Spain's IBEX 35 Index declined 1.3%, Italy's FTSE MIB Index decreased 1.1%, and Switzerland's Swiss Market Index traded 0.9% lower.

Stocks in Asia finished mixed to close out the week, with the elusive agreement among U.S. lawmakers on a new fiscal relief package continuing to foster some uncertainty, while Chinese stocks gained ground despite some disappointing July economic data. The renewed weakness in the U.S. dollar also garnered some attention. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, "U.S. Dollar Outlook: What Could a Weaker Dollar Mean for Your Portfolio?" how the U.S. dollar has been showing signs of weakening, a trend that may underscore the importance of global diversification. Japan's Nikkei 225 Index nudged 0.2% higher, even as the yen strengthened late in the session, and China's Shanghai Composite Index rose 1.2%, shrugging off a smaller-than-expected rise in industrial production and a surprising drop in retail sales. The Hong Kong Hang Seng Index declined 0.2% and India's S&P BSE Sensex 30 Index fell 1.1% ahead of data after the closing bell that showed the nation's exports continued to drop in July. Australia's S&P/ASX 200 Index moved 0.6% to the upside.

Stocks end modestly higher for the week as markets continue early signs of rotation

U.S. stocks were able to finish the week with modest gains, as the markets grappled with a host of global economic data that continued to suggest recovery in economic activity, along with a plethora of uncertainties. A fiscal relief agreement remained in question, simmering U.S.-China tensions persisted, and the key U.S. presidential election continued to draw near. The markets again showed nascent signs of a potential rotation from growth and defensively-natured stocks to value or cyclically-sensitive issues amid the aforementioned economic data. July inflation statistics showed signs of life, initial jobless claims for last week came in below the 1 million mark for the first time since the pandemic began to disrupt in March, and Friday's robust docket delivered upbeat reads on consumer activity and sentiment, industrial production and nonfarm productivity.

Earnings season continued to roll down the home stretch and show the earnings "beat" rate remained near 85%, above historical averages per data compiled by Bloomberg. As such, Industrials, Energy, Materials, Financials and Consumer Discretionary sectors moved noticeably higher, while Information Technology, Communications Services, Real Estate and Utilities sectors underperformed. This week also saw the U.S. dollar continue to falter and crude oil prices nudge higher on another round of bullish oil inventory data. The Treasury yield curve noticeably steepened and gold saw some heightened volatility, giving back some of the record high run that culminated last week.

With earnings results likely to remain relevant next week as key heavyweights from the retail sector put the finishing touches on the season, next week's economic calendar will also likely continue to garner attention. Housing data will be prevalent, courtesy of July housing starts and building permits figures, along with the existing home sales report for July and an August read on homebuilder sentiment. Also, manufacturing data will remain in focus, with August regional reports out of New York and Philadelphia being following by Markit's August preliminary Manufacturing PMI. Other reports that have the potential to move the markets include the minutes from the Federal Reserve's July meeting, initial jobless claims for the week ended August 15th, Markit's August preliminary Services PMI, and the July Leading Index.

Next week's international economic calendar will likely be dominated by a host of global August manufacturing and services PMI reports. However other data points due out next week that could command focus include: China—1-year and 5-year prime rate settings. Japan—Q2 GDP, July trade figures and core machine orders—a gauge of capital investment—for June. Eurozone—consumer price inflation statistics for July and August consumer confidence. U.K.—July inflation and retail sales reports.

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.

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