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  • Charles Schwab and Co.

Stocks Finish Volatile Week in the Green

The U.S. equity markets capped a rollercoaster week with gains in today's session, paring some of the weekly losses that have come courtesy of ramped-up global growth concerns. As well, some stabilization in global bond yields that saw a brief inversion of a key portion of the Treasury yield curve and a drop in the 30-year bond rate below 2.0% for the first time in history may also have lent some support. Treasury yields were mixed and the U.S. dollar was nearly flat, while crude oil prices nudged higher and gold fell, paring some of its recent rally. Economic news diverged, with housing construction activity data mixed and consumer sentiment falling. Meanwhile, on the equity front, some trailing earnings reports were in focus, with Deere & Company missing the Street's forecasts, Nvidia beating expectations, and Applied Materials offering upbeat results.

The Dow Jones Industrial Average (DJIA) rose 307 points (1.2%) to 25,886, the S&P 500 Index increased 41 points (1.4%) to 2,889 and the Nasdaq Composite advanced 129 points (1.7%) to 7,896. In moderate volume, 859 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.40 higher to $54.47 per barrel and wholesale gasoline was up $0.02 at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price lost $10.96 to $1,512.33 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 98.18. Markets were lower for the week, as the DJIA decreased 1.5%, the S&P 500 Index fell 1.0% and the Nasdaq Composite declined 0.8%.

Deere & Company (DE $149) reported fiscal Q3 earnings-per-share (EPS) of $2.81, or $2.71 ex-items, versus the $2.83 FactSet estimate, as revenues declined 3.0% year-over-year (y/y) to $9.0 billion, below the projected $9.4 billion. DE lowered its full-year equipment sales and net income guidance. The company noted the high degree of uncertainty that continues to overshadow the agricultural sector, while concerns about export-market access, near-term demand for commodities such as soybeans, and overall crop conditions, have caused many farmers to postpone major equipment purchases. However, DE added that general economic conditions remain positive and are contributing to strong results for its construction and forestry business. Shares were higher despite the miss, with some analysts citing its lowered guidance as better than feared.

Nvidia Corporation (NVDA $160) posted Q2 EPS of $0.90, or $1.24 ex-items, compared to the forecasted $1.15, with revenues declining 17.0% y/y to $2.6 billion, roughly in line with expectations. The semiconductor company noted a solid increase in sales of its gaming chips, and noticeable gain in its gross margin. Shares rallied.

Applied Materials Inc. (AMAT $47) announced fiscal Q3 profits of $0.61 per share, or $0.74 ex-items, versus the expected $0.70, with revenues decreasing 14.0% y/y to $3.6 billion, above the forecasted $3.5 billion. The company issued Q4 EPS guidance that was in line with projections, while its revenue outlook had a midpoint slightly above estimates. However, the chip equipment company did say it was not ready to call the bottom of the cycle and it does not expect a recovery in the memory market in 2019, adding that it sees that happening in 2020. Shares were solidly lower.

Housing construction activity data mixed, consumer sentiment falls

Housing starts (chart) for July fell 4.0% month-over-month (m/m) to an annual pace of 1,191,000 units, below the Bloomberg forecast of 1,256,000 units. June starts were revised lower to an annual pace of 1,241,000. However, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, jumped 8.4% m/m to an annual rate of 1,336,000, versus expectations of a 1,270,000 pace, and compared to June's upwardly-revised 1,232,000 rate.

The August preliminary University of Michigan Consumer Sentiment Index (chart) dropped to 92.1 from July's read of 98.4, and below the 97.0 expectation. This was the lowest level since January as both the current conditions and expectations components of the index fell. The 1-year inflation forecast rose to 2.7% from 2.6%, and the 5-10 year inflation forecast increased to 2.6% from the previous 2.5% rate.

Treasuries were mixed, as the yield on the 2-year note ticked 2 basis points (bps) lower to 1.48%, while the yield on the 10-year note advanced 2 bps to 1.55%, and the 30-year bond rate rose 3 bps to 2.01%. The global markets remained skittish as recent mixed data has exacerbated global growth uncertainty and the relentless pressure on bond yields, while briefly inverting the yields on the 2-year and 10-year Treasury notes and taking the 30-year bond rate below 2.0% for the first time in history, fostering recession concerns to ramp up. Moreover, political uncertainty in Europe and Hong Kong continued to fester and expectations that the Fed will cut rates further this year remained elevated. For more on the recent market volatility, check out our latest article, Stocks Plunge as Bond Market Sends Recession Warning Signal.

Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Recession Watch (or Distant Early Warning?), noting that economic cycles always end in recession; the tricky part is accurately forecasting them ahead of time. Liz Ann points out that there are flashpoints at present that suggest the risk is rising and/or already high; but the jury is still out. She adds that clearly, whether this is yet another mid-cycle slowdown or the beginning of a recession matters a lot to the stock market. For now, Liz Ann declares the market's "bet" that this is a slowdown, not a recession, but continued weakness could be a "tell," given that historically the worst performance for the stock market has come in the six months leading into recessions


Europe higher, Asia mixed to cap off bumpy week

European equities finished higher, as the persistent pressure on bond yields appeared to pause somewhat to cool ramped-up global recession concerns. The U.K. markets advanced following a delayed open following a technical glitch, and Italian markets rose following yesterday's holiday break. The euro was little changed versus the U.S. dollar and the British pound gained solid ground, with the economic calendar a bit light, as the lone release showed the Eurozone trade surplus shrank more than expected in June. Bond yields in the region were modestly higher. The markets continued to grapple with global growth uncertainty and mixed headlines regarding the U.S.-China trade war. As volatility has ramped up as of late, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Tariffs: Manufacturing A Recession, discussing that additional trade tariffs may prolong and deepen the global downturn in manufacturing, with negative consequences for stocks. Jeff concludes that by staying as far as possible from the successive waves of U.S.-China trade barriers might offer a relative growth advantage for companies based in Europe and Japan.

Stocks in Asia diverged with the markets continuing to grapple with U.S.-China trade talks, which are expected to resume in the coming weeks amid mixed headlines, along with global growth concerns as recent soft data out of China and the Eurozone has been countered by upbeat U.S. consumer reports. Japanese equities ticked higher, with the yen continuing to pause from a recent rally, while Australian securities finished little changed, and stocks in mainland China and Hong Kong moved higher. Meanwhile, shares in South Korea declined and markets in India nudged to the upside, with both markets returning to action following yesterday's holiday breaks. Schwab's Jeffrey Kleintop, CFA, offers his article, What Race Horses Are Telling Us About Rate Cuts, discussing four alternative indicators for the main driver of the global economy and assessing how interest rate cuts might impact them.

Stocks post third-straight weekly drop in wild week

Stocks registered a third week in a row in red figures as volatility ramped up, with the Dow posting daily triple-digit moves, as global growth concerns heated up following some softer-than-expected lending and industrial production figures out of China and a contraction in Q2 GDP for Germany. Also, political unrest in Hong Kong and Europe also appeared to keep the markets skittish. The recession worries resulted in the continued plunge in global bond yields to further exacerbate sentiment, with the yields on the 2-year and 10-year Treasury notes briefly inverting and the 30-year bond rate falling below 2.0% for the first time in history. However, the stock markets trimmed losses after the U.S. delayed certain tariffs on Chinese goods to December 15th and exempted certain other tariffs to ease trade fears, but China did threaten retaliation if the fourth tranche of levies take place. The domestic economic calendar was mostly better than expected to lend support, as retail sales posted the fifth-straight monthly gain, Q2 productivity gained ground, consumer price inflation ticked higher, small business optimism improved and regional manufacturing showed solid expansion. Meanwhile, Dow member Walmart Inc's (WMT $113) stronger-than-forecasted Q2 results and increased guidance helped counter sharp drops in shares of Macy's Inc. (M $16) and Dow component Cisco Systems Inc. (CSCO $47) on the heels of their results. With Q2 earnings season all but in the books as 93% of the S&P 500 companies have reported, about 56% have topped revenue estimates and roughly 76% have exceeded profit projections, per data compiled by Bloomberg. As Treasury yields tumbled, gold continued a rally to a six-year high, while the U.S. dollar and crude oil prices nudged higher in choppy trading.

Next week, the markets will digest some key reports on the economic docket, highlighted by existing and new home sales, the minutes from the Fed's July 31st meeting, Markit's Manufacturing and Services PMIs, and the Index of Leading Economic Indicators. However, the headlining event will likely be the late-week annual Fed symposium in Jackson Hole, Wyoming, that will culminate with Chairman Jerome Powell's speech on Friday. The gathering comes amid ratcheted-up expectations that the Central Bank will deliver more rate cuts amid the turmoil in the global markets.

Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, offers his latest Schwab Sector Views: The Business Cycle: Is It Different This Time?, noting that the "business cycle" describes the rise and fall of economic activity, and has historically been a good indicator for sector performance. However, Brad adds that there appear to be some changes within the sector universe and the economic environment that may be rendering some of those traditional relationships obsolete. He concludes that investors have to be willing to react to the situation as it is, not as it was or as we hope it to be, which requires patience and discipline.

The international economic calendar will be relatively light with reports including: Japan—consumer price inflation figures, along with Manufacturing and Services PMIs. Eurozone—the Consumer Price Index, construction output, Markit's Manufacturing and Services PMIs and consumer confidence.

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