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Stocks Continue Rout Amid Trade Anxiety

While off the worst levels of the day, U.S. equities finished lower, marking the largest weekly decline of 2019 and following yesterday's sharp drop, courtesy of escalated trade worries after the U.S. threatened a new round of tariffs on the remaining list of Chinese goods. Investors also sifted through the July nonfarm payroll report, with job growth roughly matching forecasts and wages continuing to tick higher, but the average workweek surprisingly declined. Treasury yields were lower and the U.S. dollar extended yesterday's slide, while crude oil prices were higher, trimming some of yesterday's tumble and gold finished lower in choppy trading. On the earnings front, Dow members Exxon Mobil and Chevron were lower after their quarterly results, and NetApp disappointed with its guidance.

The Dow Jones Industrial Average (DJIA) declined 98 points (0.4%) to 26,485, the S&P 500 Index decreased 22 points (0.7%) to 2,932 and the Nasdaq Composite fell 107 points (1.3%) to 8,004. In moderate volume, 881 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil moved $1.71 higher to $56.20 per barrel and wholesale gasoline was up $0.03 at $1.78 per gallon. Elsewhere, the Bloomberg gold spot price lost $4.15 to $1,441.03 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—shed 0.3% to 98.08. Markets were solidly lower for the week, as the DJIA decreased 2.7%, the S&P 500 Index fell 3.1% and the Nasdaq Composite tumbled 4.1%.

Dow member Exxon Mobil Corporation (XOM $72) reported Q2 earnings-per-share (EPS) of $0.73, or $0.61 ex-items, versus the $0.66 FactSet estimate, as revenues declined 6.0% year-over-year (y/y) to $69.1 billion, compared to the projected $63.6 billion, but were up 8.6% quarter-over-quarter (q/q). The company's upstream—exploration and production—earnings topped expectations, while its downstream—refining—profits were below estimates. XOM's earnings from its chemicals unit also missed estimates. Shares were lower.

Dow component Chevron Corporation (CVX $121) posted Q2 EPS of $2.27, versus the projected $1.76, with revenues falling 8.0% y/y to $36.3 billion, compared to the expected $40.1 billion. Upstream earnings were mostly in line, though its downstream profits came in shy of estimates. Shares finished to the downside.

NetApp Inc. (NTAP $46) fell over 20% after the storage and data management company warned that it expects fiscal Q1 EPS and revenues to be below previous forecasts, while lowering its full-year revenue guidance. NTAP cited a more cautious view of the macro environment at key accounts, while analysts expressed some concern about the potential for a more competitive environment.

July job growth roughly in line with forecasts, trade deficit narrows slightly

Nonfarm payrolls (chart) grew by 164,000 jobs month-over-month (m/m) in July, compared to the Bloomberg forecast of a 165,000 increase. The rise of 224,000 seen in June was revised to a gain of 193,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 148,000, versus the forecasted gain of 165,000, after rising by 179,000 in June, revised from the 191,000 increase that was initially reported. Notable job gains occurred in professional and technical services, health care, social assistance, and financial activities, while retail payrolls weakened for a six-month, per Bloomberg, construction employment was subdued and mining and logging jobs dipped.

The unemployment rate remained at June's 3.7% rate—holding near a 50-year low—versus forecasts to dip to 3.6%, with the labor force participation rate—the percentage of working-age people in the labor force—moving higher. Average hourly earnings were up 0.3% m/m, versus projections of a 0.2% increase, and matching June's upwardly-revised gain. Y/Y, wage gains were 3.2% higher, versus estimates to match June's unadjusted 3.1% gain. Finally, average weekly hours dipped to 34.3, compared to estimates to match June's 34.4 rate.

The trade balance (chart) showed that the deficit narrowed by a smaller rate than anticipated to $55.2 billion in June, compared to estimates of $54.6 billion. May's deficit was revised lower to $55.3 billion. Exports fell 2.1% m/m to $206.3 billion, while imports dropped 1.7% to $261.5 billion.

The final July University of Michigan Consumer Sentiment Index (chart) was unadjusted at the preliminary figure of 98.4, compared to estimates of 98.5. The index was slightly above June's 98.2 level. The 1-year inflation forecast dipped to 2.6% from June's 2.7% rate, and the 5-10 year inflation outlook rose to 2.5% from 2.3%.

Factory orders (chart) rose 0.6% m/m in June, versus expectations of a 0.7% increase, and compared to May's downwardly-revised 1.3% drop. Stripping out the volatile transportation component, orders ticked 0.1% higher, versus May's negatively-adjusted flat reading. Final durable goods orders (chart), preliminarily reported last week, were revised lower to a 1.9% m/m rise for June, and orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, were revised down to a 1.5% increase.

Today's host of data adds credence to the bifurcation we are seeing in the overall economy, with the consumer side remaining healthy but the business side of the ledger more cautious, likely largely due to uncertain trade situations, as discussed in Schwab's Director of Market and Sector Analysis Brad Sorensen's, CFA, latest Schwab Sector Views: Talking Transports.

Treasuries finished higher after yesterday's rally that came in the wake of Wednesday's rate cut by the Fed and after President Trump announced yesterday that he would impose a 10% tariff on $300 billion in Chinese goods not already subject to U.S duties effective September 1, escalating worries surrounding trade, and even though the U.S. and China are slated to meet again to resume talks in September. The yield on the 2-year note ticked 1 basis point (bp) lower to 1.71%, the yield on the 10-year note fell 4 bps to 1.85%, and the 30-year bond rate decreased 6 bps to 2.38%. For analysis of the Fed's rate cut, Schwab's Fixed Income Strategist, Collin Martin, CFA, notes in his article, Fed Cuts Rates, but Stumps Markets, the Fed cut rates, but the prospect of future cuts is less certain. He adds that while global growth concerns and low inflation support the policy move, the U.S. economy is still in relatively good shape, and this cut doesn't necessarily mean it's the start of a rate-cut cycle.

Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Tyrannosaurus Debt: A "Deep Dive" Look at Debt and its Burden(s), discussing how the national debt and deficits remain at worrisome levels, spawning questions of how economic growth will be affected and whether we will hit another wall.

Europe and Asia lower as trade worries ramp back up

European equities finished broadly lower, with the U.S. threat to impose tariffs on the remaining roster of Chinese goods reigniting trade war fears. The ramped-up trade concerns overshadowed a much stronger-than-expected Eurozone retail sales report for June, which came after global growth worries were exacerbated by a host of soft manufacturing reports out of China, the U.S., the Eurozone and the U.K. The euro ticked higher versus the U.S. dollar and the British pound was little changed, while bond yields in the region were lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, What Race Horses Are Telling Us About Rate Cuts, discussing four alternative indicators for the main driver of the global economy, the consumer, in the form of race horses, cars, plastic, and remittances. Jeff adds that it's a mixed picture, but overall global consumer demand remains solid, for now. Jeff concludes that central bank rate cuts may help lower financing costs for cars, but do little to address the manufacturing recession that threatens to weaken the labor market and undermine consumer spending.

Stocks in Asia finished mostly to the downside, with the global markets appearing unnerved by yesterday's new tariff threat on the rest of Chinese goods from the U.S., while global growth concerns also festered after Thursday's plethora of soft manufacturing data out of China, the U.S., the Eurozone and U.K. Japanese equities fell, with the yen gaining ground, and South Korean securities also traded to the downside, while stocks in mainland China and Hong Kong tumbled. Markets in Australia saw modest losses, but shares traded in India gained ground, reversing higher on a news report that suggested the government may ease foreign tax rules. Schwab's Jeffrey Kleintop, CFA, offers his article, Valuations Hold A Surprising Message For Stock Market Investors, in which he points out valuations suggest international stocks may produce above average, double-digit annualized total returns over the next 10 years, in contrast to below average, mid-single digit returns for U.S. stocks.

Stocks register worst week of 2019 on data, Fed and trade

U.S. stocks posted the largest weekly drop of the year amid a flood of economic and earnings data, a highly-anticipated Fed decision and a late-week escalation in trade war fears that caught the markets off guard. As the markets digested softer-than-expected global manufacturing data, along with another dose of solid U.S. consumer-related reports—personal income and spending rose and Consumer Confidence jumped—the Fed delivered a highly-expected first rate cut in over a decade, but Chairman Jerome Powell's comments following the decision appeared to temper expectations of another easing cycle. Amid the grappling with the mixed data and the Fed rate cut, President Donald Trump threatened to unleash tariffs on the remaining roster of Chinese goods after talks ended with no major breakthroughs, and despite the June trade truce at the G-20 summit and the expected resumption of negotiations next month.

Moreover, earnings season remained in high gear, and results continued to be relatively better than expected. About 3/4ths of the way through the season for the S&P 500, roughly 59% have topped revenue forecasts and nearly 77% have bested profit projections, per data compiled by Bloomberg. Most major market sectors fell on the week, led by tech stocks as the resurfaced trade worries, disappointing revenues and guidance from Qualcomm Incorporated (QCOM $71) and negative preannouncement from NetAppmore than offset Dow member Apple Inc's (AAPL $203) upbeat report. However, the defensively-natured utilities sector posted a solid gain and real estate stocks found support, likely aided by the drop in interest rates. Treasury yields fell sharply, with the rate on the 10-year note dropping about 20 bps to a level not seen since the latter half of 2016. The U.S. Dollar Index modestly extended a rally to highs not seen since mid-2017, before trimming gains amid the exacerbated trade worries, which also hampered crude oil prices, along with the global growth uneasiness.

Next week is poised to be relatively less robust, but trade uneasiness will likely linger, earnings season will continue down the home stretch and the economic calendar will bring key July reads on the services sector in the form of the ISM non-Manufacturing Index and Markit's Services PMI, followed by the rJOLTS Job Openings report and the Producer Price Index.

As noted in our latest Schwab Market Perspective: Canary in the Coal Mine…or Simply Clouds on the Horizon?, U.S. equities have trended higher, largely ignoring weakness in the manufacturing sector and cheering looser monetary policy, but the recent pullback could be a sign of things to come. While manufacturing and business indicators have weakened, the consumer remains solid, bolstered by a strong labor market. After cutting rates, the Federal Reserve held its dovish stance; but vulnerabilities remain for investors, including a worsening trade situation.

The international calendar will likely see more scrutiny next week as some key releases include: Australia—Reserve Bank of Australia monetary policy decision. China—Caixin PMI Services Index and trade balance. India—Reserve Bank of India monetary policy decision. Japan—Q2 GDP. Eurozone—Markit Services PMI and investor confidence, along with German factory orders, industrial production and trade balance. U.K.—Q2 GDP, Markit Services PMI, industrial/manufacturing production and trade balance.

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