Markets Score Second Solid Weekly Gain

U.S. equities finished out the final session of a shortened week mixed, but notched a second solid weekly gain, that has come on the heels of increased optimism of progress on the U.S.-China trade front, and after Federal Reserve Chairman Jerome Powell's speech in Switzerland offered mostly positive re-views of where the U.S. economy stands. Meanwhile, investors also digested a mixed August nonfarm payroll report that showed job gains were smaller than forecasts, but wage growth was solid. Treasury yields were lower after yester-day's jump and the U.S. dollar was little changed, while crude oil prices were modestly higher and gold tacked onto yesterday's plunge. In equity news, Lululemon gained solid ground on its earnings report and stronger-than-expected guidance, Costco Wholesale offered upbeat same-store sales and Docu-Sign rallied on its outlook.

The Dow Jones Industrial Average (DJIA) rose 69 points (0.3%) to 26,797, the S&P 500 Index added 3 points (0.1%) to 2,979 and the Nasdaq Composite declined 14 points (0.2%) to 8,103. In moderately-light volume, 735 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.22 higher to $56.22 per barrel and wholesale gasoline was up $0.02 at $1.57 per gallon. Elsewhere, the Bloomberg gold spot price declined $13.58 to $1,505.47 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 98.41. Markets were higher for the week, as the DJIA increased 1.5%, the S&P 500 Index gained 1.8% and the Nasdaq Composite advanced 1.8%.

Lululemon Athletica Inc. (LULU $203) reported Q2 earnings-per-share (EPS) of $0.96, north of the $0.89 FactSet estimate, as revenues rose 22.0% year-over-year (y/y) to $883 million, topping the projected $846 million. Q2 same-store sales grew 15.0% y/y, compared to the expected 12.2% gain. LULU issued stronger-than-expected Q2 guidance and raised its full-year outlook. Shares were nicely higher.

Costco Wholesale Corporation (COST $304) posted a 5.5% y/y gain in August same-store sales, exceeding the estimated 3.8% increase. Shares rose.

DocuSign Inc. (DOCU $56) announced a Q2 loss of $0.39 per share, or EPS of $0.01 ex-items, compared to the expected profit of $0.04 per share. Revenues rose 41.0% y/y to $236 million, topping the forecasted $221 million, while its billings growth jumped 47.0% versus the same period a year ago. The eSignature solutions com-pany issued Q3 and full-year revenue guidance that exceeded the Street's forecasts. Shares rallied.

August nonfarm payroll report mixed

Nonfarm payrolls (chart) grew by 130,000 jobs month-over-month (m/m) in August, compared to the Bloomberg forecast of a 160,000 increase. The rise of 164,000 seen in July was revised to a gain of 159,000 jobs. Excluding government hiring and firing,

private sector payrolls increased by 96,000, versus the forecasted gain of 150,000, after rising by 131,000 in July, revised from the 148,000 increase that was initially re-ported. The Labor Department said it saw notable jobs gains in health care and fi-nancial activities, while the mining sector lost jobs.

The unemployment rate remained at July's 3.7% rate, in line with forecasts, while

average hourly earnings were up 0.4% m/m, above projections to match July's unrevised 0.3% gain. Y/Y, wage gains were 3.2% higher, versus estimates of a 3.0% increase, and compared to July's upwardly-adjusted 3.3% gain. Finally, average weekly hours ticked higher to 34.4, matching estimates, from July's unrevised 34.3 rate. The labor force participation rate rose to 63.2% from 63.0% in July.

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. She adds that current economic conditions do not look recessionary, but risks are rising.

Treasuries were higher, as the yields on the 2-year and 10-year notes were down 2 basis points (bps) at 1.52% and 1.55%, respectively, while the 30-year bond rate fell 4 bps to 2.02%. For a look at the volatility in the fixed income markets, see Schwab's Chief Fixed Income Strategist Kathy Jones' latest article, Bond Market: Why Is Everything Upside Down?

In a speech in Switzerland on the economy and monetary policy, Federal Reserve Chairman Jerome Powell said that the Central Bank's pivot to lower interest rates has helped to sustain U.S. economic growth, and that as a result of the recent moves the "outlook is still a favorable one." He added that while he believes that "trade policy is causing some companies to hold back on investment", and that there continues to be quite a bit of uncertainty, he expects the difficulties to be contained and does not see the U.S. slipping into a recession.

Europe and Asia higher amid data, lingering trade hopes

European equities finished mostly higher, with the global markets remaining buoyed by increased optimism regarding trade after the U.S. and China announced they will resume talks in Washington early next month. However, a mixed read on August em-ployment in the U.S., along with a larger-than-expected drop in German industrial production for July kept gains in check. In other economic news, Q2 Eurozone GDP growth was revised modestly higher to a 1.2% y/y pace, which was down slightly from the 1.3% expansion posted in Q1. Heightened Brexit uncertainty continued to be a drag, as Prime Minister Boris Johnson's recent defeat in parliament dampened the possibility of a no-deal Brexit as an October 31st deadline looms, but it fostered uncertainty regarding the political path forward. The markets also awaited today's speech from U.S. Federal Reserve Chairman Jerome Powell in Zurich on the eco-nomic outlook and monetary policy. The euro ticked higher versus the U.S. dollar and the British pound fell after a recent rally, while bond yields in the region were mostly lower, with several key rates remaining in negative territory. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Negative Interest Rates And The Future Of Investing, discussing how Investors' increasing focus on income may lead to long-term shifts in portfolios that favor international stocks. U.K. stocks remain hamstrung by Brexit uncertainty after Prime Minister Boris Johnson was stymied by parliamentary votes this week, reducing concerns about a no-deal Brexit but also raising uncertainty regarding the political path forward.

Stocks in Asia finished higher to close out the week, with the global markets con-tinuing to find a boost from increased trade optimism as the U.S and China said they will resume talks in Washington early next month. Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, War (What is it Good For?), noting that although the consumer side of the economy has remained resilient, the fact that businesses and capital investment are squarely in the crosshairs of a worsening trade war, means we need to keep a close eye on the stability in the line that divides the manufacturing and consumer sides of the U.S. economy. However, the markets may have treaded with some caution ahead of today's employment report out of the U.S. and speech that followed from U.S. Federal Reserve Chairman Jerome Powell. Stocks in Japan moved higher, with the yen holding onto a recent slide that has come from the eased trade concerns and as economic data was mixed. Japan's household spending rose in July, though its earnings figures declined for the month. Mainland Chinese equities advanced with the nation offering further stimulus measures by reducing the amount of cash banks need to hold in reserve, while those traded in Hong Kong also gained ground, shrugging off a credit rating downgrade from Fitch, as telecommunications service supply issues rallied after Italy's new government exercised special powers to enter into supply deals with some of these companies. Elsewhere, Australian securities traded higher, South Korean listings rose, and shares in India increased, trimming a recent soft patch that had come from festering growth concerns.

Stocks post back-to-back weekly rallies

U.S. stocks followed up a four-week drop with a back-to-back weekly rally in a holiday-shortened week that began on a soft note with the U.S. and China both boosting tariffs on each other, while the ISM Manufacturing Index showed the first monthly contraction in three years. The U.S. manufacturing sector joined the Eurozone, China and U.K. in contraction territory to exacerbate global growth and recessions fears. However, stocks bounced back after some peripheral geopolitical risks eased somewhat as Hong Kong withdrew a controversial extradition bill that had sparked prolonged protests, Italy's new government took shape and U.K. parliamentary votes cooled concerns about a no-deal Brexit. The advance accel-erated after the U.S. and China announced that they will resume high-level trade talks in Washington early next month and the economic calendar delivered another dose of data that suggested the all-important U.S. consumer remains healthy, as the ISM non-Manufacturing rebounded much more than anticipated from a three-year low. Treasury yields jumped late in the week, unwinding the 2-year and 10-year inversion that had caused recession concerns to ramp up. Crude oil prices clawed back from an early-week tumble, while the U.S. dollar and gold cooled from recent rallies.

Next week, the economic calendar will bring a plethora of key releases for the markets to chew on. Inflation will be in focus, courtesy of the Producer Price Index, Consumer Price Index and Import Price Index. The consumer will likely continue to garner attention as August retail sales and the preliminary Septem-ber University of Michigan Consumer Sentiment Index are digested. Other re-leases worth mentioning include the NFIB Small Business Optimism Index and the JOLTS Job Openings report.

As noted in our latest Schwab Market Perspective: Storm Clouds Building, equity markets have stabilized and remain within their broad range established over the past six months, but risks remain.

Manufacturing sentiment and activity continue to be weak, but that malaise has not yet bled into the larger consumer segment of the economy. Not all trade news is gloomy, and certain international regions, like Japan, may provide some much-needed diversification in the current environment.

International reports that could move the markets next week include: China—trade balance, CPI and PPI and lending statistics. India—trade balance, CPI and industrial production. Japan—Q2 GDP, industrial production and core machine orders.

Eurozone—the European Central Bank monetary policy decision, industrial produc-tion, investor confidence and the trade balance, along with the German trade bal-ance. U.K.—monthly GDP, industrial/manufacturing production, and employment statistics.

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