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Markets Close Mixed on Second Wave Fears

The U.S. markets closed mixed following a back and forth day, but still finished the week in positive territory. An increase in reported COVID-19 cases in the United States and China has sparked fears of a second wave of the pandemic and put downward pressure on the markets despite recent upbeat economic data and the continued flood of global monetary and fiscal policy relief measures. A Bloomberg report suggesting China plans to boost U.S. agriculture products drove the market early, while crude oil prices rallied, buoying the energy sector. Treasury yields were little changed, the U.S. dollar was higher, and gold gained ground. CarMax posted mixed results but offered upbeat commentary, while Ventas slashed its quarterly dividend by 43%. Apple announced it would be closing stores in several of the states experiencing upticks in COVID-19 cases, further contributing the second wave of coronavirus uneasiness. Europe and Asia both extended a solid weekly advance with major indices closing higher.

The Dow Jones Industrial Average fell 209 points (0.8%) to 25,871, the S&P 500 Index decreased 18 points (0.6%) to 3,098 and the Nasdaq Composite gained 3 points to 9,946. In heavy volume, 1.0 billion shares were traded on the NYSE and 4.4 billion shares changed hands on the NASDAQ. WTI crude oil pushed $0.91 higher to $39.75 per barrel and wholesale gasoline was $0.01 higher at $1.27 per gallon. Elsewhere, the Bloomberg gold spot price advanced $19.98 to $1,742.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.2% at 97.62. For the week, the markets finished solidly higher, as the DJIA added 1.0%, the S&P 500 gained 1.9%, and the Nasdaq Composite increased 3.7%.

CarMax Inc. (KMX $92) reported Q1 earnings-per-share (EPS) of $0.03, compared to the $0.04 FactSet estimate, as revenues fell 39.8% year-over-year (y/y) to $3.2 billion, above the Street's forecast of $2.7 billion. The company's comparable store sales of used cars fell 41.8% y/y, with performance significantly impacted by the COVID-19 pandemic, but the drop was smaller than the forecasted 51.3% decline. KMX noted that sales have progressively improved since hitting a trough in early April, with many stores generating positive comparable store sales. The company added that looking ahead, it is encouraged by recent trends experienced in late May and June, with used unit sales continuing to gain strength, web traffic rising y/y and reaching new highs, and leads to its customer experience centers returning to pre-COVID-19 levels. Shares traded lower.

Ventas Inc. (VTR $36) saw pressure after the senior housing, research and innovation, and healthcare real estate investment trust (REIT) announced a 43% reduction in its quarterly dividend to $0.45 per share. VTR noted its commitment to maintaining a strong balance sheet, liquidity and financial flexibility in response to the COVID-19 pandemic and associated macro uncertainty.

Despite today’s back and forth action, U.S. stocks still were able to get back on the weekly winning track, bouncing back after last week's tumble that stymied a three-week rally. The equity markets resumed an upward trajectory that has the Nasdaq back to near all-time highs and the S&P 500 within striking distance of positive territory for the year, bolstered by three-main catalysts.

Economic data, although well off of pre-COVID 19 levels, has shown signs of improvement as the U.S. joins the globe in reopening the world's largest economy. Retail sales for May posted a record monthly gain, rebounding from the historic drops seen in the prior two months, while regional manufacturing activity improved noticeably for June, headlined by the surprising surge into positive territory for output in the key region of Philadelphia. Housing data also continued to paint a positive picture, with homebuilder sentiment unexpectedly jumping back to a level depicting good conditions and mortgage applications extending a recent rise as purchase activity adding to a string of gains. The Index of Leading Economic Indicators (LEI) for May recovered more than expected, bolstered by the continued moderation in jobless claims, though the level of new weekly unemployment claims remained painfully high.

Moreover, the continued sharp rally off of the March lows for the stock markets continued to be bolstered by the backdrop of the flood of global monetary and fiscal policy relief measures, with Fed Chairman Jerome Powell testifying to Congress that the Central Bank will continue to provide unprecedented support until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. The Fed's reiterated pledge to support the economic recovery and proper functioning of the financial markets came as it launched purchases of corporate bonds this week and was accompanied by boosted asset purchase programs from the Bank of England and as the Bank of Japan increased its lending program for struggling companies. Reports this week that the White House is mulling a $1.0 trillion infrastructure spending program also seemed to bolster sentiment.

The final layer of support came from the continued progress from the Health Care sector on finding an answer to the COVID-19 pandemic, bolstered by this week's study out of the U.K. that showed a low-dose steroid treatment, known as Dexamethasone, could help save lives of patients who are seriously ill with coronavirus. These three catalysts helped overshadow resurfacing concerns regarding a second wave of the coronavirus as new cases were reported in parts of the U.S. and in China, resulting in China reinstating some containment efforts in certain areas.

Given the rapidly changing investor and market sentiment, and more markets signaling a change in the landscape, with an apparent shift to a more positive cyclical phase, Managing Director and Senior Investment Strategist with Charles Schwab Investment Advisory, Inc., David Kastner, CFA, made some adjustments to our tactical recommendations. David notes that we are upgrading Financials to outperform, reflecting its current macroeconomic, valuation, fundamental and relative strength characteristics, while making changes to three other sectors, as well: We're upgrading Materials to marketperform, while downgrading Health Care to marketperform and Utilities to underperform. For a look at the rationale of these moves check out the latest installment of Schwab Sector Views: Changes Are Coming. David concludes by stressing that no matter what our view is on any of the sectors, remaining diversified is very important, as concentrating in too few sectors can dramatically affect the risk profile and performance of your portfolio. So if you do make any sector tilts in your portfolio, he suggests how keeping them small is a good way to maintain appropriate diversification and potentially enhance the performance of your portfolio.

For a look at the impact of the flood of monetary and fiscal support, check out Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, What's the Future Payback for the Stimulus? And Schwab's Chief Fixed Income Strategist Kathy Jones offers her commentary, Stimulus = Inflation? Why It May Be Different This Time.

Schwab's Chief Investment Strategist Liz Ann Sonders delivers her 2020 Mid-Year Outlook: U.S. Stocks and Economy, noting that the warp-speed nature of the pandemic and economic crisis helps explain the equally warp-speed nature of the stock market's behavior. She adds that although the stock market was suggesting a V-shaped recovery, the more likely scenario is rolling Ws and rampant speculation, especially in options trading, that represents the biggest short-term risk for stocks.

Stay on top of the markets during this unprecedented time by following experts from the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and by visiting www.schwab.com/volatility to see all the content Schwab offers on the unparalleled market action.

Treasury yields paused to end the week, with the economic calendar void of any major releases

Treasuries ticked higher to close out the week, with the economic calendar void of any major releases today, with the yield on the 2-year note dipping 1 basis point to 0.19%, while the yields on the 10-year note and the 30-year bond fell 2 bps to 0.70% and 1.46%, respectively.

This week the yield curve was relatively stable, while the U.S. dollar has been choppy and ticked higher, crude oil prices gained solid ground and gold prices were higher. Schwab's Kathy Jones offers her 2020 Mid-Year Outlook: Fixed Income, discussing the how interest rates are likely to stay low as markets try to bridge the economic gap to the new normal.

Next week, the economic calendar will deliver more housing data in the form of May existing and new home sales reports, while we will also get the final read on Q1 GDP. June preliminary reports from Markit on output from the manufacturing and service sectors are likely to garner attention, along with the final June University of Michigan Consumer Sentiment Index, due to the timeliness of the data. Other reports that could foster some market reaction include initial jobless claims for the week ended June 20th, the preliminary durable goods orders, regional manufacturing reports for June, and May personal income and spending figures.

Schwab's Chief Investment Strategist Liz Ann Sonders delivers her 2020 Mid-Year Outlook: Global Stocks and Economy, noting that the warp-speed nature of the pandemic and economic crisis helps explain the equally warp-speed nature of the stock market's behavior. She adds that although the stock market was suggesting a V-shaped recovery, the more likely scenario is rolling Ws and rampant speculation, especially in options trading, that represents the biggest short-term risk for stocks.

Asia and Europe close higher to extend weekly gains

European equities added to a weekly advance at the close, with the markets finding support from recent relatively upbeat economic data and progress on the fight against the COVID-19 pandemic out of the biotech sector, while the backdrop of massive monetary and fiscal relief continued to underpin conviction. However, the markets remained cautious as new cases in the U.S. and China remained in focus, keeping second wave concerns alive. Simmering U.S.-China trade tensions seem to be calming a bit amid a report from Bloomberg that China plans to accelerate purchases of U.S. agriculture products. In economic news, U.K. retail sales came in much better than expected for May but continued to show the impact of the pandemic, while the region's public sector net borrowing easily topped expectations for last month. The upbeat economic data is being met with a solid advance for crude oil prices, potentially suggesting the economic recovery is progressing.

The euro reversed lower, giving up an early advance versus the U.S. dollar as European Union (EU) leaders began negotiations on a 750 billion euro recovery fund today, while the British pound also saw pressure. The EU meeting ended as expected without an agreement, but it appears there is a consensus on the principle of the recovery fund. However, areas of contention are the ultimate size of the fund, the timing of repayments, the sources of funding for the package, how the funds will be allocated, and what economic reforms may be attached. German Chancellor Angela Merkel and European Central Bank President Christine Lagarde both warned of the high risks of a failure to reach an agreement. Leaders are expected to meet again next month, with France and Germany calling for an agreement to be made before the summer break, per Bloomberg. Bond yields in the region are mixed. Schwab's Jeffrey Kleintop offers his 2020 Mid-Year Outlook: Global Stocks and Economy, noting that in our 2020 Global Market Outlook, we cited many indicators pointing to heightened risk of a recession; now we highlight increasing signs of a recovery from one.

The U.K. FTSE 100 Index closed up 1.1%, France's CAC-40 Index and Germany's DAX Index each rose 0.4%, Switzerland's Swiss Market Index increased 0.8%, Spain's IBEX 35 Index gained 0.3%, and Italy's FTSE MIB Index advanced 0.7%.

Stocks in Asia finished broadly higher to close out the week that has seen the markets in the region gain ground as economic data has suggested improvement as economies reopen and support has come from the plethora of global stimulus measures, while optimism lingered as the Health Care sector continues the frantic pace to find a treatment for COVID-19. However, caution did limit weekly gains as the markets eye the rise of new cases in the world's two largest economies of the U.S. and China, which has caused some concerns to resurface regarding a potential second wave of the pandemic. The second wave uneasiness appeared to be tempered somewhat as Chinese health officials continued to suggest the outbreak in Beijing in not out of control. Japan's Nikkei 225 Index gained 0.6%, even as May consumer price inflation figures remained subdued and as the yen firmed a bit late in the day. China's Shanghai Composite Index rose 1.0% and the Hong Kong Hang Seng Index advanced 0.7%. South Korea's Kospi Index rose 0.4% and Australia's S&P/ASX 200 Index ticked 0.1% higher, while India's S&P BSE Sensex 30 Index rallied 1.5%.

The international economic calendar next week will be dominated by a plethora of preliminary June manufacturing and services PMI reports from key global economies, while China will deliver its decision on 1-year and 5-year loan prime rates, the Eurozone will report June preliminary Consumer Confidence, and Germany will announce June business sentiment.

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