U.S. stocks closed the day lower after a bright start to the week that saw the S&P 500 get back to positive territory for the year gave way to increased uneasiness surrounding an escalation in tensions between the U.S. and China. The ordered closure of a U.S. consulate in China overshadowed upbeat global and domestic manufacturing and services data and a 13-year high in new home sales. Earnings season continued in earnest, headlined by Dow members Intel, Verizon Communications and American Express. Treasury yields were little changed and the U.S. dollar lost ground, while crude oil prices were higher and gold continued its bullish run. European equities finished solidly lower on the negative sentiment.
The Dow Jones Industrial Average declined 182 points (0.7%) to 26,470, while the S&P 500 Index decreased 20 points (0.6%) to 3,216, and the Nasdaq Composite dropped 98 points (0.9%) to 10,363. In moderate volume, 711 million shares were traded on the NYSE and 4.2 billion shares changed hands on the NASDAQ. WTI crude moved up $0.22 at $41.29 per barrel and wholesale gasoline gained $0.02 to $1.26 per gallon. Elsewhere, the Bloomberg gold spot price was $14.25 higher at $1,901.69 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.3% to 94.41. Markets finished lower for the week, as the DJIA declined 0.8%, the S&P 500 fell 0.3%, and the Nasdaq Composite lost 1.3%.
Dow member Intel Corporation (INTC $51) reported an adjusted Q2 profit of $1.23 per share, above the $1.11 consensus estimate, on a 20% year-over-year (y/y) increase in revenues to $19.7 billion, and higher than the $18.6 billion expected by the Street. However, shares saw pressure as INTC announced delays in the release of its 7-nanometer chips after it discovered issues in the manufacturing process that resulted in lower yields, while trying to play "catch-up" with rival Advanced Micro Devices Inc. (AMD $69) which already has 7-nanometer products.
Fellow Dow component Verizon Communications Inc. (VZ $57) posted a Q2 profit of $1.13 per share, or an adjusted $1.18 per share, versus the $1.15 FactSet estimate, as revenues fell 5.3% y/y to $30.4 billion, but beating the Street's $29.9 billion forecast. VZ cited the impacts to its wireless service revenues as a result of the coronavirus outbreak, as well as lower sales in advertising and search results from its media unit. Shares were higher.
Dow member American Express Company (AXP $95) reported a surprise profit for Q2, but a larger-than-expected decline in revenue for the period. Net income for the period was $257 million, or $0.29 per share, well above the $0.08 per share loss that analysts had projected. Revenues tumbled 29% y/y to $7.68 billion, whereas forecasts were calling for sales of $8.07 billion, as a drop in business travel and dining out as a result of lockdowns during the pandemic slowly improved amid the re-openings of the economy. Chief Executive Officer Stephen Squeri said, "Spending volumes, which declined to their lowest point this quarter in April, gradually improved in May and June, with small businesses being the most resilient." Shares were modestly higher.
Mattel Inc. (MAT $11) posted a loss of $0.31 per share for Q2, or $0.26 ex-items, compared to the FactSet estimate calling for a loss of $0.34 per share. Revenues fell 15% y/y to $732 million, above the projected $678 million. The toy maker said online sales were strong in all regions, with North America up 3%, primarily on increased sales of Barbies, action figures and games. MAT said its supply chain continued to perform well despite the temporary closures of its plants as a result of the COVID-19 pandemic, saying "Currently all of our factories are open with minimal disruption to operations, as we enter the peak production season." MAT traded to the downside.
Honeywell International Inc. (HON $149) reported Q2 earnings-per-share (EPS) of $1.53, or $1.26 ex-items, above the FactSet estimate of $1.21. Revenues fell 19% from a year ago to $7.48 billion, but ahead of analysts' forecasts of $7.29 billion. The diversified industrial company said it expects challenges in sales as a result of the COVID-19 pandemic to continue, particularly in the aerospace and oil and gas businesses. Shares were lower.
Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Pause: Stocks' June Consolidation Continues, 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).
For up-to-date commentary from our experts, 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.
July business activity back in expansion territory, new home sales notch 13-year high
The preliminary Markit U.S. Manufacturing PMI Index for July improved to 51.3 from June's unrevised 49.8 figure, moving above the demarcation point between expansion and contraction of 50 for the first time since the start of the pandemic, but shy of the Bloomberg consensus estimate calling for a rise to 52.0. The preliminary Markit U.S. Services PMI Index showed output for the key U.S. sector increased to 49.6 from June's 47.9 figure, south of forecasts of an improvement to 51.0. Markit said private sector firms noted stabilization in business activity at the beginning of Q3, but growth was hindered by a decline in new orders, and new business was weighed down by challenges associated with the re-introduction of lockdown measures.
New home sales (chart) jumped to their highest level since July of 2007, rising 13.8% month-over-month (m/m) in June to an annual rate of 776,000, above forecasts calling for a rise to 700,000 units from May's upwardly-revised 682,000 unit level. The median home price was up 5.6% y/y at $329,200. New home inventory fell to a rate of 4.7 months of supply at the current sales pace from 5.5 months in May. June's stronger-than-expected increase came as sales in all regions were higher m/m and y/y. New home sales are based on contract signings, offering a timelier read on housing activity compared to the larger contributor of existing home sales, which are based on closings.
Treasuries were little changed following the data, as the yields on the 2-year note and 30-year bond were unchanged at 0.15% and 1.23%, respectively, and the yield on the 10-year note rose 1 basis point to 0.58%. 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. Meanwhile, Director of Fixed Income Cooper Howard notes that while state and local budgets are likely to remain under stress, it doesn’t mean investors should completely avoid munis in his article 2020 Mid-Year Outlook: Municipal Bonds, and Fixed Income Strategist Collin Martin offers his commentary 2020 Mid-Year Outlook: Corporate Bonds.
Europe and Asia closed lower despite upbeat economic data out of the Eurozone
European equities ended the day lower, as a slew of upbeat economic data in the region and out of the U.S. was countered by the escalation in tensions between the U.S. and China. Preliminary manufacturing and services activity reports across the region exceeded expectations, with the Eurozone Composite PMI climbing to a 25-month high. As well, U.K. Manufacturing and Services PMIs were above expectations and the nation posted a far smaller-than-expected decline in retail sales and consumer confidence that was in line with forecasts. The euro and the British Pound were higher versus the U.S. dollar, while bond yields in the region were higher.
In his latest article, Stock Market Reaction to Expiring COVID-19 Programs, Schwab's Chief Global Investment Strategist Jeffrey Kleintop notes that stock markets around the world welcomed the COVID-19 fiscal stimulus programs; but now those programs are starting to expire. If not extended or replaced, the fading support for the unemployed raises the risk of weakening economic momentum, turning the V-shaped recovery into a W. He concludes that international stocks have outperformed U.S. stocks during six of the past eight weeks, including last week, and that one of the reasons may be the looming expiration of labor support programs and the different impact this could have on the unemployed in the U.S. compared with Europe.
The U.K. FTSE 100 Index declined 1.4%, France's CAC-40 Index was down 1.5%, Germany's DAX Index was 2.0% lower, Italy's FTSE MIB Index lost 1.9%, and Switzerland's Swiss Market Index fell 1.7%, while Spain's IBEX 35 Index slid 1.2%.
Stocks in Asia finished sharply lower, as tensions between the U.S. and China ratcheted higher. In the wake of the U.S. State Department's order that the Asian nation close its consulate in Houston, the Chinese government announced that it ordered the U.S. to shutter its consulate in Chengdu. In addition, prior to that announcement, Secretary of State Mike Pompeo blasted China in a speech, urging the Chinese people, and calling on allied nations, to change the direction of the country's Communist Party. The escalation comes after the U.S. accused two Chinese hackers of stealing secret information from U.S. companies involved in coronavirus research. China's Shanghai Composite Index tumbled 3.9% and the Hong Kong Hang Seng Index lost 2.2%. Australia's S&P/ASX 200 Index declined 1.2% with financial and energy issues leading the way, while India's S&P BSE Sensex 30 Index was little changed. Finally, South Korea's Kospi Index shed 0.6%, as the negative sentiment from yesterday's GDP report that showed the largest decline in output since the financial crisis in 2008 and, technically, the first recession since 2003, carried over. Markets in Japan remained closed for a holiday.
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.
Stocks lower for the week
U.S. stocks finished out a bumpy week with losses, with the Nasdaq leading to the downside, as investors looked to collect on some profits from the sharp rally in the tech sector of late that has taken the Index back to record highs. Meanwhile, simmering U.S.-China tensions ratcheted higher late in the week after the two nations exchanged orders to close consulates in each respective country, further pressuring technology stocks. Q2 earnings season kicked into a higher gear, with mixed results, headlined by a number of Dow components and technology firms. The economic calendar took a back seat to the slew of earnings and got off to a slow start, but the docket delivered upbeat reads on housing with existing home sales jumping at a record pace and new home sales notching a 13-year high, while the Leading Index indicated continued recovery in economic activity, but initial jobless claims moved higher for the first time in 17 weeks.
The S&P 500 was able to move into positive territory for the year since the beginning of the pandemic before succumbing to losses later in the week. The Industrials, Consumer Discretionary, Materials, Energy and Financials sectors led to the upside, while Information Technology and Communications Services were the drags on the major indexes. The U.S. dollar extended a recent soft patch and Treasury yields remained pressured, while crude oil prices were choppy and gold remained in rally mode. 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.
While earnings season will rev-up and likely remain the focus next week, the economic calendar will be far more robust than this week and will offer a number of potential market moving items. Consumer Confidence and the first look at Q2 Gross Domestic Product (GDP) may be the headlining events, along with the conclusion of the Fed's two-day monetary policy meeting and subsequent interest rate decision. More housing data is on deck, courtesy of pending home sales and MBA Mortgage Applications for the week ended July 24, while personal income and spending, durable goods orders and regional manufacturing activity will also be part of the docket.
Next week's international economic calendar will also be busy with key reports/events including: Australia—CPI, PPI and building permits. China—manufacturing and non-manufacturing PMIs. Japan—the All Industry Activity Index, the Leading Index, industrial production and trade figures. Eurozone—consumer confidence, employment figures, GDP and CPI, along with the German IFO business climate assessment, GDP and retail sales. U.K.—housing prices.
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