Stocks Put Positive Finishing Touches to Choppy Week

 

U.S. stocks finished higher with the technology sector extending a recent surge that returned the Nasdaq back to record highs, while equities that have been punished by uneasiness regarding the persistent rise in new COVID-19 cases in the U.S. rebounded. Gilead Sciences contributed to the rebound of economic "reopening" stocks after it announced more positive results from a study of its COVID-19 treatment candidate known as Remdesivir. WD-40 missed quarterly expectations, Ford Motor Company warned of supply shortages out of Mexico, United Airlines reportedly reached a tentative deal on furloughs and retirement packages, and Carnival Corporation provided a relatively upbeat business update. Treasury yields reversed modestly higher as bond prices gave up early gains and the U.S. dollar dipped amid the upbeat virus treatment data, which appeared to counter some of the disappointment from a read on wholesale price inflation. Gold was lower and crude oil prices traded higher. Europe advanced on upbeat data in the region, while Asia fell as China snapped a string of rallies.

  

The Dow Jones Industrial Average rose 369 points (1.4%) to 26,075, the S&P 500 Index increased 33 points (1.1%) to 3,185, and the Nasdaq Composite advanced 70 points (0.7%) to 10,617. In moderate volume, 876 million shares were traded on the NYSE and 3.5 billion shares changed hands on the NASDAQ. WTI crude was up $0.93 at $40.55 per barrel and wholesale gasoline advanced $0.03 to $1.28 per gallon. Elsewhere, the Bloomberg gold spot price declined $4.20 to $1,799.35 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—dipped 0.1% to 96.64. Markets finished higher for the week, as the DJIA advanced 1.0%, the S&P 500 rose 1.8%, and the Nasdaq Composite rallied 4.0%.

 

Gilead Sciences Inc. (GILD $76) garnered attention after the biotech company released additional results from a Phase 3 trial of its COVID-19 treatment candidate known as Remdesivir that showed improved mortality risk. Shares advanced.

 

WD-40 Company (WDFC $194) reported fiscal Q3 earnings-per-share (EPS) of $1.06, below the $1.08 FactSet estimate, with revenues declining 14.0% year-over-year (y/y) to $98.0 million, south of the projected $108.0 million. The company said it total sales during the quarter were negatively impacted by the disruptions related to the COVID-19 pandemic. Shares were solidly lower.

 

Ford Motor Company (F $6) warned that the coronavirus has led to shortages of parts from suppliers in Mexico. Shares traded higher despite the news as the auto sector gained ground. 

 

United Airlines Holdings Inc. (UAL $33) was in focus after reports from CNBC that the carrier and the pilots union have reached a tentative deal on furloughs and retirement packages after the company earlier this week informed about 36,000 U.S-based employees of the possibility of layoffs. UAL has not commented on the report. UAL overcame early pressure and finished higher.

      

Carnival Corporation (CCL $16) rose on Gilead's upbeat virus treatment study results and as the company provided a business update, noting that it expects to resume guest operations in a phased manner, with German ports set to resume next month and Italy anticipated to follow. CCL's Chief Executive Officer said on a conference call that, "We expect demand to be more than adequate to fill ships in a staggered restart," adding that there is a lot of pent-up demand.

 

U.S. stocks were choppy on the week, with the markets continuing to find support from recent global economic data that has suggested recoveries in business activity from the severe disruption of the COVID-19 pandemic and the unprecedented backstop of monetary and fiscal policy support. However, sentiment seemed a bit uneasy amid a backdrop of surging cases in the world's largest economy of the U.S., which has been partially offset by the frantic pace out of the biotech sector to find a treatment/vaccine for the virus. Moreover, resurfacing political uncertainty as the November Presidential election looms also fostered some of this week's volatility, along with some confusion regarding the timing of a another round of fiscal relief measures—and what the size and scope may be—as some programs instituted to support the impact of the pandemic are nearing expiration.

 

As such, equities related to economic reopenings, such as travel, leisure and hospitality, and cyclical issues weighed on the markets, while the technology sector and the mega market capitalization stocks continued to decisively outperform, leading the Nasdaq back to record high territory. Financials were also fickle as bond yields—a key contributor to profitability for lenders—have slipped as demand for bonds gain momentum, putting upward pressure on bond prices. Caution toward the financial sector may have been due to the upcoming Q2 earnings season, with results from the largest U.S. banks expected to take center stage next week, on the heels of the recent round of Fed stress testing of the sector that resulted in restrictions on dividends and share repurchases for the group.

  

Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his article, What A COVID-19 Second Wave Means For Investors, how the falling trend in deaths may be the more important factor to watch since the trend in stocks and earnings expectations are more closely aligned with deaths than cases. Jeff also offers his latest article, Making Sense Of The Market (And Where We Can't), discussing how investors are often most uncomfortable when it seems that the stock market isn't making any sense whether it's heading up or down. However Jeff points out that we've been able to make some sense of global earnings and stock market performance, re-openings and relative stock market performance across countries, and we expect to be able to make sense of the dividend divide fairly soon. He concludes by adding that while these are uncertain times and there can be no guarantees, it may be comforting to know that the markets are making some sense.

 

For commentary from our experts amid the market volatility, follow the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and visit www.schwab.com/volatility to see all the content Schwab offers on the unparalleled market action.

 

Wholesale price inflation misses

 

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in June declined 0.2% month-over-month (m/m), versus the Bloomberg consensus forecast calling for it to match May's unrevised 0.4% gain. The core rate, which excludes food and energy, decreased 0.3% m/m, below estimates of a 0.1% increase and compared to May's unadjusted 0.1% dip. Y/Y, the headline rate was 0.8% lower, compared to projections of a 0.2% decline and matching the prior month's unadjusted fall. The core PPI rose 0.1% y/y last month, south of estimates of a 0.4% increase and May's unrevised 0.3% gain.

 

Treasuries gave up early gains and dipped slightly despite the data and amid the choppiness in the stock markets, with the yield on the 2-year note little changed at 0.15%, while the yield on the 10-year note gained 2 basis points (bps) to 0.63%, and the 30-year bond rate ticked 1 bp higher to 1.33%.

 

Treasury yields declined this week, along with the U.S. dollar, but gold extended a rally and touched a near nine-year high and crude prices were little changed. The moves came as the markets grappled with the volatility in the stock market and the implications of the persistent rise in COVID-19 cases, along with the backdrop of the flood of monetary and fiscal policy relief measures and progress on finding an answer to the pandemic.

 

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 Jeffrey Kleintop addresses the topic in the article What's the Future Payback for the Stimulus?.

  

Next week's economic docket will bring some key reports that could compete with the unofficial start to Q2 earnings season for market attention, courtesy of more inflation data in the form of the Consumer Price Index and the Import Price Index, as well as the Fed's June industrial production and Beige Book reports.

Moreover, initial jobless claims for the week ended July 11th, regional manufacturing reports from New York and Philadelphia, June small business optimism, and housing reports in the form of July homebuilder sentiment and June housing construction activity are poised to garner focus. However, data points surrounding the all-important U.S. consumer could make the most headlines with the markets trying to gauge the progress on the economic reopening, as we will get June retail sales and the preliminary July consumer sentiment report from the University of Michigan.

 

Europe higher after data and positive virus treatment news, while Asia falls as China pauses

  

European equities finished higher, though gains were likely held in check by the lingering uncertainty regarding the ultimate impact of the persistent rising COVID-19 cases, notably in the U.S. Economic data in the region showed industrial production out of France and Italy rebounded in May from tumbles in the prior month to bolster recently increased optimism of reopening progress. Also, some news on the potential for a COVID-19 treatment out of the U.S. could have also helped stocks move higher. The euro and British pound gained ground on the U.S. dollar and bond yields in the region traded mixed. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Pause: Stocks' June Consolidation Continues, that she has been highlighting the warp speed nature of this crisis—with a "full" market cycle having been condensed into a few months. She adds that the wild swings 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).

 

The U.K. FTSE 100 Index was up 0.8%, France's CAC-40 Index gained 1.0%, Germany's DAX Index and Spain's IBEX 35 Index rose 1.2%, Italy's FTSE MIB Index increased 1.3%, and Switzerland's Swiss Market Index traded 0.9% higher.

 

Stocks in Asia finished broadly lower to finish a choppy week, with the uneasy sentiment regarding the rising new COVID-19 cases out of the key U.S. economy appearing to dampen conviction heading into the weekend. China's Shanghai Composite Index fell 2.0% to snap the sharp surge seen as of late, exacerbated by state media reports that tried to calm the markets down from the recent rally. Earlier this week China's state media promoted bullish market posturing, which was a catalyst to the strong weekly gains seen, along with recent data suggesting recovering economic activity and the plethora of stimulus measures. As the markets were closing, China reported stronger-than-expected June lending figures. Japan's Nikkei 225 Index dropped 1.1% to turn slightly negative for the week as the yen saw some strength amid the global market uneasiness. The Hong Kong Hang Seng Index fell 1.8%, trimming a weekly advance that came despite heightened tensions in the wake of the recently imposed security law on Hong Kong by China. Australia's S&P/ASX 200 Index declined 0.6%, South Korea's Kospi Index traded 0.8% lower and India's S&P BSE Sensex 30 Index moved 0.4% to the downside.

 

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.

 

Next week's international economic calendar will be robust and has the potential to move markets with key reports/events including: Australia—June employment change. China—Q2 GDP, and June reports on the trade balance, industrial production and retail sales. India—inflation statistics and trade balance. Japan—the Bank of Japan's monetary policy decision. Eurozone—European Central Bank monetary policy decision, May industrial production and June inflation figures, along with German investor confidence for July. U.K.—May GDP, industrial production and trade reports, as well as June inflation data.

 

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