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Markets Lower, but Solidly Higher for Week

U.S. equities lost steam late in the day to finish lower, but were able to notch another week of solid gains, as yesterday's rally on increased optimism of rate cuts on the horizon following the Federal Reserve policy meeting was tempered by soft reads on manufacturing globally, as well as lingering tensions in the Middle East. Treasury yields rebounded from a recent slide that took the 10-year note to levels not seen since late-2016, and the U.S. dollar fell, while gold added to yesterday's rally, and crude oil prices were higher on the geopolitical anxiety and on the heels of a massive explosion and subsequent fire at a refinery in Pennsylvania.

The Dow Jones Industrial Average (DJIA) shed 34 points (0.1%) to 26,720, the S&P 500 Index ticked 4 points (0.1%) lower to 2,951, and the Nasdaq Composite fell 20 points (0.2%) to 8,032. In heavy volume as a result of quadruple-witching, 1.9 billion shares were traded on the NYSE and 2.8 billion shares changed hands on the Nasdaq. WTI crude oil advanced $0.36 to $57.43 per barrel and wholesale gasoline was up $0.06 at $1.82 per gallon. Elsewhere, the Bloomberg gold spot price traded $11.92 higher to $1,400.36 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.5% to 96.16. Markets were solidly higher for the week, as the DJIA was up 2.4%, the S&P 500 Index increased 2.2%, and the Nasdaq Composite was 3.0% higher.

CarMax Inc. (KMX $86) posted fiscal Q1 earnings-per-share (EPS) of $1.59, above the $1.49 FactSet estimate, on a 12% year-over-year (y/y) increase in revenues to $5.4 billion, also above the Street's estimates calling for $5.2 billion. Same store sales rose 13%, well above the 5% projection. The used-car retailer's CEO Bill Nash cited, in part, the strong response to its omni-channel rollout in Atlanta and Florida. Shares were nicely higher.

As we head to the second half of the year, Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, offers his latest Schwab Sector Views: 9.5 Thoughts for the Second Half, noting that the first half of 2019 was characterized by a couple of major reversals, with defensive and cyclical sectors taking turns leading the market. He adds that uncertainty about trade policy and interest rates seems set to continue, but those aren't the only issues that may affect second-half performance. Brad concludes that we'd like to make a more substantial sector call, and believe we will in the second half, but for now our Sector Views remain relatively neutral. As well, Schwab's Chief Investment Strategist Liz Ann Sonders offers her look ahead as we reach the midpoint of the year in her latest article U.S. Stocks/Market Mid-Year Outlook: Battle Symphony, indicating that leading indicators’ rate of change rolled over last September, suggesting slower growth ahead, and recession risk is rising, while noting a number of ongoing battles that may continue to drive volatility.

Existing home sales rebound, but manufacturing and services sector activity cools

Existing-home sales rebounded in May, increasing 2.5% month-over-month (m/m) to an annual rate of 5.34 million units, compared to the Bloomberg expectation of a rise to 5.27 million units and April's upwardly-revised 5.21 million rate. Sales of single-family homes were higher m/m, but down from year-ago levels, while purchases of condominiums and co-ops rose compared to last month and were down y/y. The median existing-home price rose 4.8% from a year ago to $277,700, and marking the 87th straight month of y/y gains. Unsold inventory came in at a 4.3-months pace at the current sales rate, up from 4.2 months a year ago. Sales rose in all regions, with the Northeast seeing the largest increase. National Association of Realtors Chief Economist Lawrence Yun said, “The purchasing power to buy a home has been bolstered by falling mortgage rates, and buyers are responding,” adding, that “solid demand along with inadequate inventory of affordable homes have pushed the median home price to a new record high.”

The preliminary Markit U.S. Manufacturing PMI Index showed growth unexpectedly slowed in June, declining to 50.1 from May's unrevised 50.5 figure, where it was expected to remain. In addition, the preliminary Markit U.S. Services PMI Index showed growth also surprisingly decelerated for the key U.S. sector this month, falling to 50.7 from May's 50.9 figure, and versus expectations of a rise to 51.0. Readings above 50 for both indexes denote expansion.

Treasuries were lower, as the yield on the 2-year note rose 2 basis points (bps) to 1.76%, while the yields on the 10-year note and the 30-year bond were up 6 basis points (bps) at 2.06% and 2.59%, respectively. Bonds yields bounced off recent declines, with the 10-year yield touching levels not seen since late-2016, that were exacerbated by Wednesday's decision by the Federal Open Market Committee (FOMC) not to raise the target for the fed funds rate, while opening the door for the possibility of a near-term rate cut. For a look at the bond markets in the wake of the recent drop in yields, check out Schwab's Chief Fixed Income Strategist Kathy Jones' Fixed Income Mid-Year Outlook: "Lower for Longer" is Back.

Europe and Asia mixed amid weak manufacturing data, geopolitical tension

European equities finished mixed, as increased anxiety over events surrounding the downing of a U.S. drone by Iran yesterday pressured sentiment after it was reported that President Trump authorized strikes against Iran and planes were in the air, but then called off the mission. Some soft economic data exacerbated the negative mood, as the Markit Composite PMI for the Eurozone rose to a seven-month high, courtesy of strength from the services sector, but manufacturing continued to struggle and be a drag on the index, with the component moving further in contraction territory and to a two-month low. In other economic news, public sector net borrowing in the U.K. fell and was below estimates. The euro was higher versus the U.S. dollar, while the British pound lost ground versus the greenback amid some focus on political events in the nation after a final vote in the battle to become the Conservative Party's leader and next Prime Minister brought the contest down to the final two candidates, with Brexit hardliner Boris Johnson continuing to garner the largest majority of votes. Bond yields in the region were higher. With volatility likely remaining for some time, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers some analysis for investors navigating the choppy global market environment in his commentary, Diversification: Finally Back After 20 Years. He points out that the lower correlation between the world's stock markets enhances the potential risk-reducing benefits of diversification.

Stocks in Asia were mixed following a rally yesterday on the global optimism that ensued following the Federal Reserve's monetary policy meeting, as tensions in the Middle East continued to linger in the wake of events surrounding the downing of a U.S. drone by Iran. Hopes of a trade deal between the U.S. and China remained, giving mainland Chinese equities a boost, as U.S. Trade Representative Robert Lighthizer is set to meet with Chinese Vice Premier Liu He early next week, ahead of the scheduled meeting between President Trump and Chinese President Xi Jinping at the G-20 summit in Japan. For a look at the trade front, Schwab's Jeffrey Kleintop, CFA, offers his commentary, U.S. Imports From China Plunge As Other Emerging Markets Fill The Gap. Stocks in Hong Kong, however, declined amid continued unrest in the nation in the wake of protests calling for the resignation of its leaders. Japanese equities fell amid strength in the yen, which remains near a 6-month high against the U.S. dollar, and after a read on manufacturing activity fell further into contraction territory and to a three-month low, while department store sales declined and consumer price inflation was marginally softer. South Korean listings declined amid worries about the nation's Q2 performance for companies following its latest export data, and Indian securities decreased amid the frictions in the region, and markets in Australia also finished lower.

Stocks post another weekly gain courtesy of the Fed

After beginning the week amid palpable caution with the Federal Open Market Committee's monetary policy meeting looming, U.S. stocks finished the week with solid gains after the FOMC left rates unchanged, but made significant changes to its statement, most notably removing its "patience" language, fueling already-high hopes of rate cuts in the near future. Sentiment was further energized by increased trade deal optimism following a tweet from President Trump that he will meet with Chinese President Xi at next week's G-20 summit. Equity news was light, with some M&A news starting the week, as Pfizer Inc. (PFE $43) inked a $10.6 billion deal to acquire Array BioPharma Inc. (ARRY $46) and Sotheby's (BID $56) announced an agreement to be acquired and taken private by BidFair USA, an entity wholly owned by media and telecom entrepreneur, Patrick Drahi, for roughly $3.7 billion. Facebook Inc. (FB $188) garnered some attention after the social media company's announcement of a new digital currency, called "Libra", drew scrutiny from a number of lawmakers. The economic calendar offered a hodge-podge of reports with a focus on housing, as housing starts declined, and homebuilder sentiment cooled, but existing home sales rebounded and posted a record high in median home prices, while the Leading Index was flat and reads on regional manufacturing tumbled.

Treasury yields continued their descent, further fueled to the downside following the Fed's monetary policy meeting, with the 10-year yield touching levels not seen since late-2016, but were able to recover somewhat at the end of the week. The U.S. dollar also lost some ground, while crude oil prices jumped amid tensions in the Middle East after Iran shot down a U.S. drone and narrowly avoided strikes authorized by President Trump in the final minutes. All sectors saw gains for the week, led by energy, industrial and information technology stocks.

Next week's economic calendar will offer a host of key reports, including , Consumer Confidence, new home sales, pending home sales, durable goods orders, the final read on Gross Domestic Product, personal income and spending, regional manufacturing reports, and culminating with the final read on the June University of Michigan Consumer Sentiment Index. However, the lion's share of attention may fall on the highly-anticipated meeting between President Donald Trump and Chinese President Xi Jinping at the G-20 summit in Osaka, Japan late in the week, with hopes of progress on a trade deal between the two nations running high.

As noted in our latest Schwab Market Perspective: Running in Place, the past 18 months have been marked by major swings, but ultimately little movement. Economic data has yet to reflect a significant impact from the trade war, but that’s unlikely to last if the stalemate drags on and/or if the next round of tariffs kick in. The burning question is whether the Fed has sufficient ammunition to offset a trade-related slowdown or recession. As well, geopolitical tensions have heated up, but market reactions to past escalations have been relatively limited.

The international economic calendar for next week will fairly light and include: Australia—lending statistics. Japan—Leading Index, trade balance, CPI, industrial production, employment data. Eurozone—consumer and business confidence and CPI, as well as the German IFO Business Climate Survey and CPI. U.K.—GDP.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions. 1 - IB1 Schwab or its affiliates has managed or co-managed a public offering of securities for this company in the past 12 months. 2 - SO2 Schwab and/or its officers own options, rights or warrants to purchase the securities of this company.


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