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Markets Continue to Rebound
U.S. equities finished solidly in the green, carrying over Friday's bounce to the new week, as the persistent worries surrounding the Delta variant seemed to have moderated somewhat, with Pfizer gaining full FDA approval of its coronavirus vaccine, co-developed with BioNTech. However, the end-of-the-week speech from Fed Chairman Jerome Powell at the Fed's key Jackson Hole monetary policy symposium looms, with the markets continuing to grapple with the timing, size, and scale of the Central Bank's tapering of monthly asset purchases. Growth-related sectors—Information Technology, Consumer Discretionary and Communications Services—aided in the move higher, while Energy led the way, paring a recent tumble, as crude oil prices regained some footing following a plunge as of late. Value/cyclical issues—Financials, Materials and Industrials—also rebounded. Treasuries were little changed after the yield curve flattened last week, and the U.S. dollar pared a recent rally, while gold rallied. In economic news, August manufacturing and services sector growth slowed but remaining solidly in expansion territory, and existing home sales rose for a second-straight month. The equity front was relatively quiet, but Pfizer also announced an agreement to acquire the rest of the shares of Trillium Therapeutics that it did not already own. Europe finished higher to trim last week's slide, with August business activity data in the Eurozone and the U.K strong, while markets in Asia also gained ground.
The Dow Jones Industrial Average rose 216 points (0.6%) to 35,336, the S&P 500 Index gained 38 points (0.9%) to 4,480, and the Nasdaq Composite increased 228 points (1.6%) to 14,943. In moderate volume, 764 million shares were traded on the NYSE and 3.8 billion shares changed hands on the Nasdaq. WTI crude oil jumped $3.50 to $65.64 per barrel. Elsewhere, the gold spot price rallied $22.10 to $1,806.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.6% to 92.98.
Pfizer Inc. (PFE $50) gained ground amid reports that the U.S. Food & Drug Administration (FDA) fully approved the company's coronavirus vaccine that it developed with BioNTech SE (BNTX $382). Shares of BNTX rose nearly 10%. Separately, PFE announced an agreement to acquire the outstanding shares not already owned of clinical stage immune-oncology company Trillium Therapeutics Inc. (TRIL $18) for $18.50 per share in cash, in a transaction with an implied equity value of nearly $2.3 billion. TRIL surged almost 190%.
Stocks continued to rebound from last week's decline, showing some resiliency in the face of a host of uncertainties, notably the festering Delta variant, Fed taper timing, and ramped-up geopolitical concerns. The markets were a bit defensive last week, but these sectors— Health Care, Utilities, Consumer Staples and Real Estate—underperformed today as cyclically-natured sectors—Materials and Industrials—bounced.
Financials also recovered somewhat from last week's decline that came amid the continued flattening of the Treasury yield curve, but the Information Technology and Consumer Discretionary sectors led today's rebound, along with Energy as crude oil prices chipped away at last week's tumble.
Amid this backdrop, Director and Senior Investment Strategist with the Schwab Center for Financial Research, David Kastner, CFA, offers his latest Schwab Sector Views: Too Early for Defensive Positioning, noting how despite recent bouts of sector leadership rotation, we don't expect defensive sector outperformance to last.
Find all our market commentary on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.
August business activity slows but remains solid, existing home sales
The preliminary Markit U.S. Manufacturing PMI Index for August declined to 61.2 from July's unrevised 63.4 figure but remained solidly in expansion territory as denoted by a reading above 50. The Bloomberg consensus estimate called for the index to dip to 62.0. The preliminary Markit U.S. Services PMI Index showed growth (above 50) for the key U.S. sector decelerated more than expected, declining to 55.2 from July's 59.9 figure, and compared to forecasts of a dip to 59.2.
Markit said, "Private sector companies across the U.S. signaled a further strong upturn in business activity during August, however, the pace of growth slowed to an eight-month low. Capacity pressures, material shortages and the spread of the Delta variant reportedly weighed on the output expansion."
Existing home sales increased 2.0% month-over-month (m/m) in July to an annual rate of 5.99 million units, versus expectations of 5.83 million units, after June's upwardly-revised 5.87 million rate. Existing home sales rose m/m in three of the four major regions, with the fourth remaining level. Compared to last year, two regions saw gains, one witnessed a decline and one was unchanged.
This was the second-straight monthly gain as sales of single-family homes were up m/m but dipped year-over-year (y/y). Purchases of condominiums and co-ops were down m/m but were solidly higher compared to a year ago. The median existing home price was up 17.8% from a year ago to $359,900, marking the 113th straight month of y/y gains as every region recorded price increases. Unsold inventory was at a 2.6-months pace at the current sales rate, up slightly m/m but down sharply from the from the 3.1-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, "We see inventory beginning to tick up, which will lessen the intensity of multiple offers." Yun added that, "Much of the home sales growth is still occurring in the upper-end markets, while the mid- to lower-tier areas aren't seeing as much growth because there are still too few starter homes available. The report also said we should not expect to see home prices drop in the coming months but there is a chance that they will level off as inventory continues to gradually improve. Yun also noted that, "In the meantime, some prospective buyers who are priced out are raising the demand for rental homes and thereby pushing up the rental rates."
Treasuries were little changed, as the yields on the 2-year and 10-year notes, along with the 30-year bond were flat at 0.22%, 1.25% and 1.87%, respectively. The U.S. dollar pared a recent rally that took the greenback to highs not seen since last fall.
The Treasury yield curve has flattened and the U.S. dollar has rallied as of late with the economic calendar offering mixed reads to extend the uncertainty regarding the timing of Fed tapering, while the Delta variant has also continued to foster uneasiness.
Tomorrow's economic calendar will hold new home sales, forecasted to have increased 3.6% m/m to an annual rate of 700,000 units. The Richmond Fed Manufacturing Index will also be released, expected to tick lower to a level of 24 for August from July's 27 mark, with a reading above zero denoting expansion in activity.
Europe kicks off the week in positive fashion, Asia also broadly higher
European equities rebounded from last week's decline, with cyclically-natured sectors—Materials and Industrials—recovering from recent pressure seen amid the festering Delta variant uncertainty regarding the global economic impact. Financials also contributed to the advance with bond yields in the Eurozone and the U.K. gaining ground. Energy issues, which have taken the brunt of the selling pressure amid the persistent global economic uncertainty, led to the upside as crude oil prices clawed back from last week's tumble. A host of global August manufacturing and services sector reports were digested, while the markets also looked ahead the U.S. Fed monetary policy symposium slated for the second half of the week. Eurozone manufacturing growth slowed slightly but remained comfortably in expansion territory, while its services sector growth dipped by a smaller amount than expected. U.K. manufacturing expansion came in stronger than expected, while services sector growth slowed at a slower pace than anticipated. The euro and British pound were higher versus the U.S. dollar.
Schwab Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in our latest Schwab Market Perspective: The Next Phase, how the rebound in earnings has lowered stock market valuations slightly from their peak of a year ago, as measured by ratio of price and earnings estimates for the next 12 months (forward P/E ratio), but the relative undervaluation of international stocks has widened. Jeff discusses how the result of the wide gap in valuations between U.S. and international stocks, with similarly strong earnings growth across regions combined with more-attractive valuations, could provide a basis for international stock market outperformance.
The U.K. FTSE 100 Index and Germany's DAX Index rose 0.3%, France's CAC-40 Index increased 0.9%, Italy's FTSE MIB Index and Switzerland's Swiss Market Index gained 0.5%, and Spain's IBEX 35 Index was up 0.6%.
Stocks in Asia finished broadly higher following a recent drawdown that has been fostered by global market uneasiness regarding the uncertain extent of the economic impact of the festering Delta variant, which has weighed on cyclically-natured sectors, notably Energy, Materials, and Industrials. Meanwhile, the markets bounced back after being hampered by China's ramped-up regulatory crackdown on big businesses, mainly the Technology sector. Schwab's Jeffrey Kleintop, CFA, offers his latest article, Is China’s Bear Market an Opportunity?, noting that China’s stock market pullback this year has been in line with the average annual drawdown. However, the recent drop seems to be driven by a regulatory crackdown, not an economic slowdown, with the market not responding to the economic outlook, but to the policy uncertainty. The pullback in the U.S. dollar from a recent rally likely aided the resiliency, along with the bounce in crude oil prices, which fell sharpy last week amid the supply/demand uncertainty amid the aforementioned market uneasiness. The markets shrugged off global August business activity reports that showed Japan's and Australia's manufacturing and services sector output both decelerated, with manufacturing growth slowing in both regions, while contractions continued for services activity.
Japan's Nikkei 225 Index rallied 1.8%, with the yen giving back some of last week's gains, China's Shanghai Composite Index advanced 1.5% and the Hong Kong Hang Seng Index gained 1.1%. South Korea's Kospi Index moved 1.0% higher, while both Australia's S&P/ASX 200 Index and India's S&P BSE Sensex 30 Index traded 0.4% to the upside.
The only item of note on tomorrow's international economic calendar is German Q2 GDP.
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