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Stocks Finish Friday Session Higher Amid Upbeat Data


U.S. stocks finished higher following positive news on the domestic economic front, but the gains were muted in the wake of the continued U.S. political and geopolitical uncertainty, and mixed August business activity reports overseas. Existing home sales notched a second-straight record jump and U.S. August manufacturing and services sector activity reports came in stronger than expected. Treasury yields were mixed and the U.S. dollar rebounded from a recent tumble, while gold and crude oil prices were lower. In light equity news, Deere & Company and Foot Locker both posted better-than-expected earnings results. Europe finished lower, while markets in Asia were higher.

The Dow Jones Industrial Average rose 191 points (0.7%) to 27,930, the S&P 500 Index advanced 12 points (0.3%) to 3,397, and the Nasdaq Composite increased 47 points (0.4%) to 11,312. In moderate volume, 873 million shares were traded on the NYSE and 3.9 billion shares changed hands on the NASDAQ. WTI crude oil shed $0.48 to $42.34 per barrel and wholesale gasoline lost $0.02 to $1.28 per gallon. Elsewhere, the Bloomberg gold spot price fell $8.40 to $1,938.86 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.5% to 93.23. Markets were mostly higher for the week, as the DJIA was flat, the S&P 500 increased 0.7% and the Nasdaq Composite jumped 2.7%.

Deere & Company (DE $202) reported fiscal Q3 earnings-per-share (EPS) of $2.57, versus the $1.26 FactSet estimate, as net sales of equipment declined 12.4% year-over-year (y/y) to $7.9 billion, north of the Street's forecast of $6.8 billion. The company touted support from its global workforce and dealer organization which helped it deliver "strong performance" in Q3 in the face of a serious global pandemic and uncertain market conditions. DE raised its 2020 guidance for net income. The company noted that although unsettled market conditions and related customer uncertainty are expected to have a moderating effect on key markets in the near term, it believes it is well positioned to help make its customers more profitable and sustainable. Additionally, DE noted that it is encouraged by the early benefits it is experiencing from its recently launched smart-industrial operating model. Shares were nicely higher.

Foot Locker Inc. (FL $28) posted Q2 EPS of $0.43, or $0.71 ex-items, compared to the projected $0.69, as revenues rose 17.1% y/y to $2.1 billion, roughly in line with forecasts. The company said despite the challenging backdrop of the pandemic, and social unrest, it achieved strong Q2 results, led by its digital business, while its same-store sales grew 18.6% y/y, versus the forecasted 18.0% increase. FL said given the uncertainty surrounding the evolving COVID-19 pandemic and its potential impact on the back-to-school season, team sports participation, and additional government stimulus packages, it does not plan to provide a 2020 outlook at this time after withdrawing its guidance in March. However, FL said as its global fleet of stores reopened, its customers responded with enthusiasm and energy to its assortments and visited its stores with a high intent to purchase. Additionally, the company announced that it reinstated its quarterly dividend program and declared a quarterly cash dividend of $0.15 per share. FL traded to the upside.

A much-anticipated new fiscal relief package remains uncertain as Congress continues to struggle to find common ground, keeping uncertainty in the markets elevated as some key emergency support measures 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. Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his article, Clock Ticks as Congress Struggles for Consensus on Next Aid Bill, noting how despite the slow pace of negotiations, we continue to think a deal will be struck this month.

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.

U.S. data pleases with existing home sales jumping and August business activity accelerating

Existing home sales rebounded at a record pace in July, jumping 24.7% month-over-month (m/m) to an annual rate of 5.86 million units—the strongest rate since 2006—compared to the Bloomberg expectation of a rise to 5.41 million units from June's downwardly-revised 4.70 million rate. Sales saw double-digit gains m/m in all four regions, while the Northeast was the only region to show a y/y decline. Sales of single-family homes and purchases of condominiums and co-ops were up m/m, and the former was higher y/y but the latter equaled last year's pace. The median existing home price was up 8.5% from a year ago to $304,100, marking 101 straight months of y/y gains and the first time in history prices breached the $300,000 level. Unsold inventory came in at a 3.1-months pace at the current sales rate, down noticeably from 3.9-months in June and the 4.2-months pace a year earlier. Existing home sales reflect contract closings instead of signings and account for a large majority of the home sales market.

National Association of Realtors Chief Economist Lawrence Yun said, "The housing market is well past the recovery phase and is now booming with higher home sales compared to the pre-pandemic days." Yun added that, "With the sizable shift in remote work, current homeowners are looking for larger homes and this will lead to a secondary level of demand even into 2021."

The preliminary Markit U.S. Manufacturing PMI Index for August improved to 53.6 from July's unrevised 50.9 figure, remaining above the demarcation point between expansion and contraction of 50 and north of the consensus estimate of 52.0. The preliminary Markit U.S. Services PMI Index showed output for the key U.S. sector increased to 54.8 from July's 50.0 figure, above forecasts of an improvement to 51.0.

Markit said this was the first rise in service sector activity since the start of the year, while goods manufacturers recorded the fastest increase in production since January 2019, led by stronger client demand, which fostered steeper expansion in new order inflows and a renewed increase in sales. Markit added that increased pressure on capacity and an associated upturn in outstanding business led to a further expansion of workforce numbers across private sector firms in August. Also, the rate of job creation accelerated among service providers, with manufacturers indicating the first rise in staff numbers since February.

The data bodes well for the unemployment picture, which has remained stubbornly and uncomfortably elevated due to the massive disruption of the COVID-19 pandemic. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Another Tricky Day: Dissecting July's Labor Market Report, how the July labor market report had talking points for both the economic bulls and bears, while Congress is on the hot seat to keep the recovery from faltering.

Treasuries were mixed, as the yield on the 2-year note rose 3 basis points (bps) to 0.17%, while the yield on the 10-year note dipped 1 bp to 0.64% and the 30-year bond rate declined 3 bps to 1.35%.

Bond yields have nudged higher as of late, courtesy of mostly stronger-than-expected economic data, which included signs of life on the inflation front, while the U.S. dollar has been choppy on the heels of a recent drop. Schwab's Chief Fixed Income Strategist Kathy Jones offers her latest article, Bond Real Yields: What's Happening Beneath the Surface, discussing the impacts of the drop in real yields into negative territory. Moreover, Managing Director and Senior Investment Strategist with Charles Schwab Investment Advisory, Inc., David Kastner, CFA, offers a look at the implications of the U.S. dollar's decline in his latest Schwab Sector Views: Which Sectors May Benefit From a Weaker Dollar?

Europe sees pressure as markets digest August business activity data, Asia higher

European equities traded lower, with the markets sifting through a host of August manufacturing and services data, while also keeping an eye on the political uncertainty in the U.S. and the recent uptick in new cases of COVID-19 in parts of the region. August manufacturing output in the Eurozone showed growth slowed unexpectedly, with strength in Germany being offset by a surprising drop to contraction territory out of France. On the services side, Eurozone activity fell more than expected but held slightly onto expansion territory. However, manufacturing and services sector output in the U.K. for this month both showed growth accelerated more than expected, with services sector growth jumping noticeably. Moreover, the U.S. economic calendar offered stronger-than-expected reads on August business activity and a record jump in July existing home sales. The continued elevated tensions between the U.S. and China also appeared to garner attention and stymie conviction. The euro and British pound fell versus the U.S. dollar, which has bounced after a recent tumble, while bond yields in the region were mixed. Global confidence matters and has been improving in real time, as discussed by Schwab's Jeffrey Kleintop in his latest article, Confidence Is Everything: 3 Things May Shake It. Jeff notes that three potential developments over the rest of the year could shake this confidence: the virus progression as schools and universities reopen, the ramifications of the U.S. election, and the outcome of post-Brexit trade talks.

The U.K. FTSE 100 Index and Spain's IBEX 35 Index were down 0.2%, France’s CAC-40 Index lost 0.3%, Germany's DAX Index declined 0.5%, Italy's FTSE MIB Index decreased 0.4%, and Switzerland's Swiss Market Index ticked 0.1% lower.

Stocks in Asia finished mostly to the upside to conclude the week, showing some resiliency in the face of mixed global economic data, festering U.S.-China tensions, rising new COVID-19 cases in some parts of the region, notably in South Korea, and the exacerbated political uncertainty in the U.S. After U.S. jobless claims jumped back above the 1 million mark yesterday, Japan reported an improvement in August manufacturing output but the contraction continued, while Australia's manufacturing growth for this month slowed slightly. However, both nations reported that services sector activity contracted, with Australia's output falling sharply. Japan's Nikkei 225 Index ticked 0.2% higher, even as the yen gained some ground, though Australia's S&P/ASX 200 Index dipped 0.1%. China's Shanghai Composite Index advanced 0.5% and the Hong Kong Hang Seng Index gained 1.3%. South Korea's Kospi Index moved 1.3% to the upside to trim a weekly tumble that came on the aforementioned rise in new COVID-19 cases, while India's S&P BSE Sensex 30 Index increased 0.6%. The U.S. dollar has been choppy as of late in the wake of a recent plunge to a two-year low and Schwab's Kathy Jones notes in her 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.

Stocks mostly higher, mega-caps continue rally, housing data robustly positive, uncertainties persist

U.S. stocks finished mostly higher with the rally returning for the mega-capitalization stocks that ushered in a return to record high territory for the S&P 500 and an extended record run for the Nasdaq. However, the Dow lagged behind, unable to find a tailwind from blow-out profit reports from retail heavyweights Home Depot Inc. (HD $279) and Walmart Inc. (WMT $132) as the sector put the finishing touches on a relatively stronger-than-expected earnings season. However, Target Corporation (TGT $155) highlighted this week's earnings docket, rallying sharply as their digital sales surged to bolster its results. The economic calendar painted a mixed picture, with regional manufacturing activity slipping a bit and weekly initial jobless claims jumping back above the 1 million mark, while housing data continued to blow past expectations as stronger-than-expected homebuilder sentiment and housing construction activity reports preceded Friday's historic surge in existing home sales. Information Technology, Consumer Discretionary and Communications Services sectors all moved higher this week, while the Energy, Financials, and Utilities sectors saw pressure. Conviction remained tested as new cases of COVID-19 rose in parts of Asia and Europe, U.S. political uncertainty continued to fester as the presidential election looms and an expected fiscal relief package remained elusive, and U.S.-China tensions persisted between the world's two largest economies. The U.S. dollar regained some footing late in the week after falling to a two-year low on Tuesday, while the Treasury yield curve flattened after last week's noticeable steepening. Gold extended last week's pullback from record highs and crude oil prices dipped.

With earnings season all but in the books, next week the economic calendar is likely to garner more attention. The Fed's Jackson Hole Economic Policy Symposium is likely to headline the week, on the heels of this week's dovish takeaway of the minutes from the Central Bank's July meeting and with Chairman Jerome Powell giving a speech on the monetary policy framework. Housing data will continue to pour in, courtesy of new home sales, MBA mortgage applications and pending home sales reports. The all-important U.S. consumer will also command some focus, with Consumer Confidence data being accompanied by personal income and spending figures and the final August read on consumer sentiment from the University of Michigan. The docket will be rounded out by the first revision (of two) of Q2 GDP after the preliminary read showed a record plunge, the preliminary durable goods orders report and more regional manufacturing releases.

Next week's international economic calendar will be relatively light, but some reports that may foster market reactions include: China—industrial profits. Eurozone—economic confidence, along with German business sentiment and retail sales reports.

As noted in our latest Schwab Market Perspective: Is the Worst Behind Us?, the deepest point of economic contraction looks to be behind us and we continue to affirm that much of the economic recovery is dependent on the virus—both its trajectory as well as progress on a vaccine or other therapeutic remedies. Yet despite a slowdown in the spread, some state and local governments have already halted or reversed their reopening plans, while businesses and consumers continue to decide how soon to reopen and how much to go out, respectively—all substantial risks to the recovery. Fortunately, even staggered reopening efforts across the country have brought back a considerable number of jobs. However, payrolls are still nearly 13 million below the pre-pandemic peak and investor sentiment is looking a bit frothy—making stocks increasingly vulnerable to a pullback associated with any negative virus- or economic-related catalyst.

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