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Stocks Mixed on China Tensions and Fiscal Stalemate


U.S. equities finished mixed, but the major indexes were able to post gains for the week, as a stronger-than-expected July non-farm payroll report came up against the negative sentiment surrounding stalled talks in Congress on a fiscal deal, as well as the heightened tensions between the U.S and China. President Donald Trump signed executive orders banning Americans from doing business with TikTok and WeChat, and it has been reported that the U.S. is set to impose sanctions on Hong Kong's leader Carrie Lam. Treasury yields were higher as bond prices dipped and the U.S. dollar rebounded noticeably, while gold and crude oil prices were lower. In equity news, T-Mobile and Zillow Group rallied following their quarterly results, Uber Technologies saw a mixed impact of the COVID-19 pandemic, and Biogen rose after getting favorable news from the FDA on its investigational Alzheimer's treatment. Europe finished mostly higher and markets in Asia were mixed.

The Dow Jones Industrial Average rose 47 points (0.2%) to 27,433, the S&P 500 Index increased 2 points (0.1%) to 3,351, while the Nasdaq Composite declined 97 points (0.9%) to 11,011. In moderate volume, 808 million shares were traded on the NYSE and 4.2 billion shares changed hands on the NASDAQ. WTI crude shed $0.73 to $41.22 per barrel and wholesale gasoline lost $0.02 to $1.21 per gallon. Elsewhere, the Bloomberg gold spot price tumbled $32.71 to $2,030.83 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.7% to 93.41. Markets finished higher for the week, as the DJIA rose 3.8%, the S&P 500 increased 2.5% and the Nasdaq Composite advanced 2.5%.

T-Mobile US Inc. (TMUS $115) reported Q2 earnings-per-share (EPS) of $0.09, compared to the $0.12 FactSet estimate, as revenues rose 54.8% year-over-year (y/y) to $17.7 billion, above the Street's forecast of $17.6 billion. The company's postpaid net subscriber additions came in well above analysts' forecasts and its previous guidance. The company noted negative impacts from costs related to its merger with Sprint and COVID-19-related expenses, but it said it overtook AT&T Inc. (T $30) as America's #2 wireless provider. Shares of TMUS rallied.

Uber Technologies Inc. (UBER $33) posted a Q2 loss of $1.02 per share, wider than the Street's forecast of a shortfall of $0.89 per share, as revenues dropped 29.0% y/y to $2.2 billion, north of the expected $2.1 billion. The company noted the COVID-19 pandemic's negative impact on its ride-hailing business but said its Uber Eats food delivery business saw a strong tailwind. Shares finished lower.

Biogen Inc. (BIIB $306) finished solidly higher after the U.S. Food and Drug Administration (FDA) accepted its Biologics License Application (BLA) with priority review for its investigational treatment of Alzheimer's disease.

Zillow Group Inc. (ZG $80) jumped over 10% after the company reported an adjusted Q2 loss of $0.17 per share, compared to the expected shortfall of $0.48 per share, with revenues growing 28.0% y/y to $768 million, above the projected $615 million. The online homebuying company said its results firm up its belief that powerful tailwinds in both real estate and technology are rapidly converging. However, ZG issued Q3 revenue guidance that was below expectations, primarily due to lower revenues out of its home segment driven by lower inventory of homes for sale in Q3 as a result of the pause in Zillow Offers purchasing activity during Q2. ZG added that it expects strong revenue growth in its IMT and mortgages segments for Q3, accelerating above its pre-COVID-19 internal expectations.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Running on Faith: Are Stocks Discounting Too Powerful an Earnings Recovery?, we are in the heart of second quarter earnings season, with the "beat rate" above average thanks to an extremely low bar. She also points out that stocks' substantial run since the March lows has been price-to-earnings ratio (P/E)-driven, not EPS-driven, and concentration, courtesy of the "big five" represents potentially-significant risk; but there are fundamental differences between 2000 and 2020.

The markets continue to eye the stalemate on Capitol Hill regarding the size and scope of an expected next wave of fiscal relief measures as emergency benefits have expired. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Stock Market Reaction to Expiring COVID-19 Programs, how 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.

For timely commentary, you can follow the experts from the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and you can visit www.schwab.com/volatility to find more analysis and strategies on the current market environment.

July job growth rises more than expected

Nonfarm payrolls (chart) increased by 1,763,000 jobs month-over-month (m/m) in July, compared to the Bloomberg forecast of a 1,480,000 rise, and following June's downwardly-adjusted gain of 4,791,000. Excluding government hiring and firing, private sector payrolls grew by 1,462,000, versus the forecasted rise of 1,200,000 after advancing by a negatively-revised 4,737,000 in June. The labor force participation rate dipped to 61.4% from June's 61.5% rate, versus an expected increase to 61.8%. The Department of Labor said notable job gains occurred in leisure and hospitality, government, retail trade, professional and business services, other services and health care. However, the report did note that in government, employment declines occurred earlier than usual this year due to the pandemic, resulting in unusually large July increases in local government education and state government education and the July gain in federal government reflected the hiring of temporary workers for the 2020 Census.

The unemployment rate fell to 10.2% from June's 11.1% rate, versus forecasts of a decline to 10.6%. Average hourly earnings rose 0.2% m/m, versus projections of a 0.5% decline and compared to June's negatively-revised 1.3% drop. Y/Y, wages were 4.8% higher, above estimates of a 4.2% increase. Finally, average weekly hours ticked lower to 34.5 from June's upwardly-revised 34.6 rate, and compared to forecasts of 34.4 hours.

June wholesale inventories (chart) were revised positively to a 1.4% m/m drop, versus expectations to be unrevised at a 2.0% fall, and compared to May's unadjusted 1.2% decline. Sales jumped 8.8% after May's 5.7% gain.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $9.0 billion during June, slightly less than the $10.0 billion forecast of economists polled by Bloomberg, while May's figure was adjusted from the originally-reported decline of $18.3 billion to a $14.4 billion shortfall. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $11.3 billion, a 4.3% increase y/y, while revolving debt, which includes credit cards, declined by $2.3 billion, a 2.8% y/y decrease.

Treasuries were lower, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.13%, while the yields on the 10-year note and the 30-year bond rose 3 bps to 0.56% and 1.23%, respectively.

Treasury yields remain choppy as the markets grapple with uncertainties regarding the sustainability of the economic recovery amid flared-up new cases of COVID-19, the fiscal fight in Congress and exacerbated U.S.-China tensions, but the Fed has continued to stress its willingness to use all of its tools to combat the pandemic's severe disruption as discussed by Schwab's Liz Ann Sonders in her article, Policy of Truth: Fed Holds Rates Steady Amid Somber Outlook.

Europe closed mostly higher on data, Asia mixed

European equities finished the day mostly higher, as the markets digested the stronger-than-expected employment figures out of the U.S. Signs that global economic activity is recovering continues, with the upbeat U.S. data being accompanied by Chinese trade figures that came in well above estimates. Moreover, Germany reported larger-than-expected increases in its June exports and industrial production. However, conviction seemed to be stymied by escalated U.S.-China tensions and the elusive agreement among U.S. lawmakers on an expected next wave of fiscal relief measures. The euro and British pound saw pressure as the U.S. dollar rebounded from a recent drop. Bond yields in the region were mixed. Global stock market valuations have rebounded to above those of prior market peaks as discussed by Schwab's Jeffrey Kleintop in his latest article, How Have Recent Developments Impacted Long-Term Returns?. Jeff notes that in the near-term, this is typical and is not anticipated to act as a drag on returns, but over the long-term, a high P/E ratio has historically had a negative impact on returns.

The U.K. FTSE 100 Index and France’s CAC-40 Index both ticked 0.1% higher, Germany's DAX Index gained 0.7%, Italy's FTSE MIB Index increased 0.2% and Switzerland's Swiss Market Index was little changed, while Spain's IBEX 35 Index was down 0.1%.

Stocks in Asia finished mixed as the markets grapple with escalating U.S.-China tensions after President Donald Trump signed executive orders prohibiting Americans from doing business with ByteDance's TikTok platform and Tencent Holdings Ltd's (TCTZF $67) WeChat service. However, China reported much stronger-than-expected July trade figures and Japan's household spending activity came in better than forecasted to continue the theme as of late of a global economic recovery. The markets awaited today's key employment data for July out of the U.S. The U.S. dollar rebounded overnight from a recent soft patch that has lent support to some emerging markets. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, U.S. Dollar Outlook: What Could a Weaker Dollar Mean for Your Portfolio?, how the U.S. dollar has been showing signs of weakening, a trend that may underscore the importance of global diversification. Kathy adds that movements in currencies can have a large impact on returns in global bonds and a weaker dollar removes one of the headwinds to returns in foreign-currency-denominated bonds. In separate commentary she discusses Are Emerging-Market Bonds Worth the Risk?

Japan's Nikkei 225 Index declined 0.4%, with the yen holding steady, while South Korea's Kospi Index finished 0.4% higher and India's S&P BSE Sensex 30 Index was little changed. China's Shanghai Composite Index fell 1.0% and the Hong Kong Hang Seng Index dropped 1.6%. Australia's S&P/ASX 200 Index traded 0.6% to the downside.

Stocks continue to grind higher as data paints global recovery picture

U.S. stocks continued to rally, with the Nasdaq moving above the 11,000 level for the first time, despite headwinds of exacerbated U.S.-China tensions, the recent rise in global COVID-19 cases and as U.S. lawmakers struggled to find common ground on an expected new fiscal relief package. Earnings season continued to roll down the back stretch and maintained earnings "beat rates" above longer-term averages. Of the 443 companies in the S&P 500 that have reported results thus far, roughly 64% have bested revenue forecasts and approximately 84% have topped earnings forecasts, per data compiled by Bloomberg. Moreover, global economic reports this week aided the backdrop and continued to suggest a recovery in activity, headlined by a host of July global manufacturing and services sector PMI reports, and culminating with Friday's upbeat U.S. nonfarm payroll figures. The markets rose broadly, with Communications Services, Information Technology and Consumer Discretionary sectors leading the way, while value and cyclically-sensitive sectors, Industrials, Energy, Materials and Financials also contributed to the weekly advance. Treasury yields ticked higher after hitting historic low levels earlier in the week, while the U.S. dollar remained choppy in the wake of a recent soft patch. Crude oil prices increased and gold prices continued a record run, jumping north of the $2,000 mark for the first time.

Looking ahead to next week, as earnings season heads toward the home stretch, the economic calendar is likely to garner more attention. Inflation data will be prominent, courtesy of the releases of the Producer Price Index (PPI), the Consumer Price Index (CPI) and the Import Price Index. Employment data could also carry some weight, with the June JOLTS Job Openings report and initial jobless claims for the week ended August 8th hitting the tape. The Fed's industrial production and capacity utilization release for last month may also foster a market reaction, along with the July NFIB Small Business Optimism Index. However, data on the consumer is likely to headline the docket, in the form of the July retail sales report and the August preliminary University of Michigan Consumer Sentiment Index.

International reports due out next week that deserve a mention include: Australia—employment change. China—CPI and PPI, lending statistics, industrial production and retail sales. India—CPI and PPI, trade balance and industrial production. Japan—machine tool orders. Eurozone—industrial production, trade balance and Q2 GDP, along with German investor confidence. U.K.—employment change, manufacturing/industrial production, trade balance and Q2 GDP.

As Schwab's Liz Ann Sonders notes in her aforementioned Running on Faith article, looking at the stock market’s internal conditions, some of the skepticism regarding the stock market's resilience seems valid and the top five stocks in the S&P 500 (by market capitalization) have grown to more than 22% of the index, a degree of concentration that represents potentially significant risk. She adds that earnings results have bested extremely low expectations and in normal environments, trends and rates of change tend to matter more than levels when comparing economic data and stock market behavior, but in today’s world, level matters when trying to gauge how long it’s going to take to recover the lost economic output. She continues to recommend that investors remain disciplined, especially with regard to periodic rebalancing/profit-taking, concluding by saying remember, successful investing is not about what you know (or don’t know), but what you do.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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