U.S. equities finished out a bumpy week mixed, dashing hopes of a three-peat for all the major indexes to post weekly gains, as a recent pullback in tech shares pushed the Nasdaq into negative territory for the week. The persistent rise in new COVID-19 cases appeared to be the main culprit in the lack of conviction, despite a recent string of upbeat global economic data and further progress out of the Health Care sector on finding an answer to the pandemic. In economic news, June housing construction activity improved in June but at a slightly slower pace than expected, and July consumer sentiment unexpectedly deteriorated. On the earnings front, Netflix posted stronger-than-expected subscribers in Q2 but its guidance fell short, while J.B. Hunt Transport reported better-than-expected Q2 results. Treasury yields were higher as bond prices slipped and the U.S. dollar fell, while crude oil prices dipped and gold gained ground. Europe finished mixed, while markets in Asia were mostly higher.
The Dow Jones Industrial Average declined 63 points (0.2%) to 26,672, while the S&P 500 Index increased 9 points (0.3%) to 3,225, and the Nasdaq Composite advanced 29 points (0.3%) to 10,503. In moderate volume, 869 million shares were traded on the NYSE and 4.3 billion shares changed hands on the NASDAQ. WTI crude was down $0.18 at $40.75 per barrel and wholesale gasoline lost $0.01 to $1.22 per gallon. Elsewhere, the Bloomberg gold spot price was $13.41 higher at $1,810.57 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.4% to 95.94. Markets finished mixed for the week, as the DJIA advanced 2.3%, the S&P 500 rose 1.3%, but the Nasdaq Composite fell 1.1%.
Netflix Inc. (NFLX $493) reported Q2 earnings-per-share (EPS) of $1.59, below the $1.82 FactSet estimate, as revenues rose 24.9% year-over-year (y/y) to $6.2 billion, north of the Street's forecast of $6.1 billion. NFLX's total streaming subscriber additions of 10.1 million easily exceeded estimates. The company said in Q1 and Q2, it saw significant pull-forward of its underlying adoption leading to huge growth in the first half of this year. As a result, NFLX expects less growth for the second half of 2020 compared to the prior year. NFLX issued Q3 revenue and subscriber additions that missed expectations, while its EPS outlook topped forecasts. Shares were lower.
J.B. Hunt Transport Services Inc. (JBHT $137) posted Q2 EPS of $1.14, topping the expected $0.84, with revenues declining 5.0% y/y to $2.2 billion, above the estimated $2.0 billion. The transportation company said it saw volume declines in its intermodal and integrated capacity solutions, and it experienced fewer stops in final mile services, while the results were partially offset by an increase in truckloads compared to the prior year period. Revenues from its intermodal and truck segments bested forecasts though its dedicated and integrated capacity revenues came in below estimates. JBHT offered a cautious tone regarding its outlook that is garnering some attention on the Street. Shares ae trading higher.
Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, All Right Now: But a Long Way to Go to Recover, the ongoing surge in COVID-19 cases in many newer U.S. hot spots continues to point to more of a "rolling Ws"-type recovery vs. a continuation of the V-type recovery seen in many shorter-term looks of economic data. She adds that even without a full-scale shutdown of the economy—either at the federal or state/local level—economic activity is likely to be volatile and subject to consumers’ and businesses’ fears about the virus impacting activity and behavior. But Liz Ann points out that the news is not all grim as although uneven, the recovery is unlikely to fully peter out—especially given ongoing support from the Federal Reserve and likely-additional support from Congress.
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July consumer sentiment surprisingly slips, housing construction activity slightly below forecasts
The July preliminary University of Michigan Consumer Sentiment Index (chart) declined to 73.2 versus the Bloomberg expectation of a slight rise to 79.0 from June's 78.1 reading. The surprising slide for the index came as the current conditions component deteriorated more than projected and the expectations portion of the survey unexpectedly fell. The 1-year inflation forecast rose to 3.1% from June's 3.0% rate, and the 5-10 year inflation forecast increased to 2.7% from the prior month's 2.5% level.
Housing starts (chart) for June rose 17.3% month-over-month (m/m) to an annual pace of 1,186,000 units, below forecasts of 1,190,000 units, and compared to May's upwardly-revised pace of 1,011,000 units, from the initially-reported 974,000 units. Moreover, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, gained 2.1% m/m to an annual rate of 1,241,000, south of expectations of 1,293,000 units, and compared to May's downwardly-revised 1,216,000 rate.
Treasuries were lower following the data and as the stock markets remained choppy, as the yield on the 2-year note nudged 1 basis point (bp) higher to 0.15%, the yield on the 10-year note gained 2 bps to 0.63%, and the 30-year bond rate was up 3 bps at 1.33%.
Schwab's Chief Fixed Income Strategist Kathy Jones offers her 2020 Mid-Year Outlook: Fixed Income, noting how interest rates are likely to stay low as markets try to bridge the economic gap to the new normal. Also, Kathy discusses the impact of the flood of monetary and fiscal support in her commentary, Stimulus = Inflation? Why It May Be Different This Time, while Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, addresses in the article, What's the Future Payback for the Stimulus?
Europe mixed on data and virus caution, Asia mostly higher
European equities were mixed, as the markets digested the recent bout of positive global economic data, with a sharp rebound in Eurozone construction spending figures today adding to the list, though concerns remained regarding the persistent surge in new COVID-19 cases. Earnings results in the region were also mostly positive, as Daimler AG ((DDAIF $45) pre announced a smaller-than-expected loss to boost its shares, and Ericsson (ERIC $11) rallied after the communications equipment company said its earnings were bolstered by increased spending by phone companies. The markets also monitored today's start to a meeting between European Union leaders regarding a proposed 750 billion euro stimulus package. The euro traded higher versus the U.S. dollar, but the British pound was little changed, while bond yields in the region were 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. However, Jeff adds that investor caution may still be warranted as stocks have priced in a recovery during the second quarter, leaving the potential for the pace or success of the recovery to disappoint. He concludes that new cycles usually come with new market leadership, and new market leadership by sector, style and geography could emerge in the second half of the year, catching some investors by surprise.
The U.K. FTSE 100 Index was up 0.6%, France's CAC-40 Index was down 0.3%, Germany's DAX Index advanced 0.4%, Spain's IBEX 35 Index decreased 0.5%, Italy's FTSE MIB Index advanced 0.3%, and Switzerland's Swiss Market Index dipped 0.2%.
Stocks in Asia finished mostly to the upside to close out the week, with the markets digesting this week's mostly positive economic data and further progress on the Health Care front on finding an answer to the COVID-19 pandemic. However, U.S.-China tensions continue to simmer and U.S. data has suggested the unemployment situation remains hampered by the virus disruption, and new COVID-19 cases continue to spike. China's Shanghai Composite Index ticked 0.1% higher, rebounding slightly from yesterday's tumble, and the Hong Kong Hang Seng Index rose 0.5%. Australia's S&P/ASX 200 Index gained 0.4%, South Korea's Kospi Index advanced 0.8% and India's S&P BSE Sensex 30 Index rallied 1.5%. However, Japan's Nikkei 225 Index declined 0.3%, with the yen rebounding somewhat from yesterday's decline. Schwab's Liz Ann Sonders notes in her article, Pause: Stocks' June Consolidation Continues, that the wild swings in the markets have emboldened some investors and traders; while leaving others in a state of confusion. Liz Ann adds that we've been recommending that investors remain at their long-term strategic equity allocations; but "react" to the larger swings by considering rebalancing more frequently. This allows portfolios to "stay in gear" by trimming into strength and adding into weakness; vs. trying to time short-term peaks and troughs (which is always extremely difficult).
Stocks mixed on the week
U.S. stocks finished mixed for the week as the markets appeared to harvest some profits from the sharp rally in the Information Technology sector that has taken the Nasdaq back to record highs, and from some of the high-flying mega market capitalization stocks. Investors seemed to scoop up some of the underperforming value and cyclically-sensitive stocks, as global economic data continued to point to a recovery and headlines suggested further progress on finding a treatment/vaccine for the COVID-19 virus. China's Q2 GDP growth, industrial production and lending activity all came in stronger than projected. Moreover, the world's largest economy of the U.S. saw June retail sales rebound more than expected for a second-straight month, industrial production for last month grow at a faster pace than forecasted, homebuilder sentiment surge and regional manufacturing expansion accelerate more than expected. However, jobless claims continued to moderate but remained uncomfortably elevated and consumer price inflation came in hotter than anticipated.
The S&P 500 moved ever-so-close to positive figures for the year as Dow member Johnson & Johnson (JNJ $150) reiterated its commitment to deliver a vaccine on a not-for-profit basis for emergency pandemic use, globally, and Moderna Inc. (MRNA $89) announced positive results from a study of its potential virus vaccine. However, conviction seemed a bit constrained by the persistent rise in new COVID-19 cases, which prompted some key states to roll back or pause some of their reopening measures, notably in California, as well as escalating U.S.-China tensions. Poll results as the Presidential election looms also added a layer of volatility to the markets. Finally, Q2 earnings season unofficially kicked off with heavyweights from the Financials sector posting results that were bolstered by a second-consecutive quarter of robust trading activity, though commentary regarding the all-important U.S. consumer was cautious and provisions for credit losses continued to rise noticeably.
Industrials, Materials, Health Care, Energy and Financials sectors led to the upside, while Information Technology, Consumer Discretionary and Communications Services saw pressure. The U.S. dollar extended a recent soft patch and Treasury yields remained pressured, while crude oil and gold prices were little changed. For potential tactical moves investors may consider, check out our latest Schwab Sector Views: Looking for Direction, and for timely commentary on how long the resiliency in the stock markets can last, see our latest installment of the Schwab Market Perspective: Watching the Shape of the Recovery.
With earnings season set to kick into a higher gear next week with a heavy focus on the Technology sector, the economic calendar will likely take a back seat but the docket is poised to deliver some data points that could garner some attention. Existing home sales for June will get the ball rolling, followed by initial jobless claims for the week ended July 18th, the Leading Index for last month, Markit's preliminary July Manufacturing and Services PMIs, and new home sales.
The international front next week will likely be dominated by the developments out of the weekend summit of European Union leaders on a potential new stimulus package, as well as a host of preliminary global Manufacturing and Services PMIs for July. Additionally, China will announce its 1-year and 5-year prime loan rates, Japan will post trade figures, and the U.K. will report on retail sales.
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