Bulls Remain in Charge

U.S. equities finished in the green, notching additional weekly gains and record highs, with continued rate cut expectations fueling the rally courtesy of the Congressional monetary policy testimony by Fed Chairman Jerome Powell, which was further aided by tame inflation numbers. Treasury yields were unchanged and the U.S. dollar was lower, while gold rose and crude oil prices were mixed. In equity news, Illumina cut its guidance and offered a Q2 warning, while shares of Johnson & Johnson suffered following a report of a criminal probe by the U.S. Justice Department.

The Dow Jones Industrial Average (DJIA) jumped 244 points (0.9%) to 27,332, the S&P 500 Index gained 14 points (0.5%) to 3,014, and the Nasdaq Composite rose 48 points (0.6%) to 8,244. In light volume, 670 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.01 higher to $60.21 per barrel and wholesale gasoline was down $0.01 at $1.98 per gallon. Elsewhere, the Bloomberg gold spot price increased $11.08 to $1,414.89 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.2% to 96.83. Markets were higher for the week, as the DJIA increased 1.5%, the S&P 500 Index gained 0.8% and the Nasdaq Composite rose 1.0%.

Illumina Inc. (ILMN $305) fell after the life science equipment company issued preliminary Q2 results that were below expectations and reduced its full-year guidance, citing softer-than-expected revenue from its population genomics initiatives and weakness in its direct-to-consumer market. ILMN said, "We are obviously disappointed with our Q2 financial results. Our preliminary analysis suggests that these challenges are transitory and do not reflect a macro change to the fundamentals of our business."

Shares of Johnson & Johnson (JNJ $134) came under pressure after Bloomberg reported that the U.S. Justice Department was opening a criminal investigation as to whether it lied about the possible cancer risks of its talcum power. The probe comes as the health-products company is already battling thousands of lawsuits pertaining to its baby powder that contained talc, as well as its alleged part in the opioid crisis.

Wholesale price inflation a bit hotter than expected

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in June matched May's 0.1% month-over-month (m/m) gain, above the Bloomberg forecast of a flat reading. The core rate, which excludes food and energy, was 0.3% higher m/m, above expectations calling for it to match May's unadjusted 0.2% increase. Y/Y, the headline rate was 1.7% higher, north of projections of a 1.6% rise and compared to May's unadjusted 1.8% increase. The core PPI rose 2.3% y/y last month, topping estimates of a 2.1% gain and matching May's unrevised rise.

Treasuries were flat, as the yields on the 2-year and 10-year notes, along with the 30-year bond, were unchanged at 1.85%, 2.12% and 2.64%, respectively. For a look at the bond markets check out Schwab's Chief Fixed Income Strategist Kathy Jones' Fixed Income Mid-Year Outlook: "Lower for Longer" is Back, in which she notes that we feel fixed income returns should remain positive in the second half of the year, but probably won't repeat the first half's sharp gains. Also, check out our 2019 Mid-Year Outlook: Rate Expectations, where we discuss that recession risk is rising, but markets expect central banks to keep it at bay by cutting short-term interest rates and address if it will it be enough to keep the stock market rally going. Bond yields on the mid-to-long end of the curve have gained ground on the week and the U.S. dollar has pared a recent run, with the markets grappling with last week's strong Labor Report and the recent U.S.-China trade truce, along with this week's Congressional monetary policy testimony from Fed Chairman Jerome Powell that revived rate cut expectations.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Another Last Goodbye: U.S. Stocks' Roller Coaster 18 Months, the S&P 500 has made little headway, but with a lot of interim lows and highs. Liz Ann points out that cyclicals led the market during last year's first half, but have since given way to more defensive leadership. She adds that over the past 18 months we have been recommending that investors remain tactically neutral to U.S. stocks, and use the market's ongoing ascents and descents to rebalance around longer-term strategic equity targets. Liz Ann concludes that late-cycle phases bring heightened risks; and notwithstanding the latest march to new highs, we continue to recommend investors don't get out over their (water) skis.

Europe and Asia mixed following data and amid Fed rate cut expectations

European equities were mixed, as the markets digested some mixed global economic data, another profit warning out of the auto sector, and as U.S. rate cut expectations lingered on the heels of this week's Congressional monetary policy testimony from Fed Chairman Jerome Powell. China reported a smaller-than-expected drop in exports and an upbeat read on total credit issued, but the nation's imports fell more than anticipated. Moreover, Eurozone industrial production came in much stronger than expected for May. The euro was little changed versus the U.S. dollar and the British pound was higher, along with bond yields in the region. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Valuations Hold A Surprising Message For Stock Market Investors, in which he points out that valuations suggest international stocks may produce above average, double-digit annualized total returns over the next 10 years, in contrast to below average, mid-single digit returns for U.S. stocks.

Stocks in Asia finished mixed amid preserved rate cut expectations in the U.S. following the two-day Congressional monetary policy testimony from Fed Chairman Powell this week, focus on ongoing U.S.-China trade talks and some mixed economic data in the region. Japanese equities rose, with the yen trimming yesterday's decline, while South Korean securities also increased, continuing to chip away at a recent drop that came amid elevated trade tensions with Japan. Mainland Chinese stocks and those traded in Hong Kong advanced, with the markets digesting some June economic data released late in the session. China's U.S. dollar exports fell by a smaller amount than expected but imports dropped much more than anticipated, and new yuan loans missed estimates, though aggregate financing—a gauge of total credit issued—came in well above forecasts. A larger-than-expected drop in Singapore's Q2 GDP seemed to cause some concerns, and markets in Australia and India traded lower. Just as the Indian markets were closing, the nation reported stronger-than-expected industrial production growth for May and June consumer price inflation that was a bit hotter than expected.

Schwab's Jeffrey Kleintop, CFA, offers his Global Stocks Mid-Year Outlook, in which he points out that in the second half of 2019, stock markets around the world will likely have to contend with slowing global economic growth as leading indicators point to an increasingly vulnerable world economy that may be worsened by shocks from trade tariffs and other factors. Jeff adds that the potential for reversals in long-term market performance trends may catch unprepared investors by surprise, suggesting investors should ensure they have an appropriate amount of broad international exposure, including both emerging and developed markets, in their portfolios to potentially benefit from opportunities for performance and diversification.

Stocks back to record highs as Fed Chief Powell solidifies rate cut expectations

U.S. stocks moved back to record high levels, with the S&P 500 and Dow breaching the 3,000 and 27,000 marks, respectively, with the bulk of the buoyancy coming from Fed Chairman Jerome Powell's semiannual Congressional monetary policy testimony. He revived rate cut expectations that had been tamped down by last week's stronger-than-expected June nonfarm payroll report, noting that crosscurrents, such as trade tensions and global growth worries have been weighing on economic activity and the outlook, while inflation pressures remain muted. Powell reiterated that the Fed will "act as appropriate to sustain the expansion." The resuscitated rate cut expectations followed the recent trade truce between the U.S. and China and did not waver even as June reads on consumer and producer price inflation came in a bit warmer than anticipated. The energy sector led an advance for most of the major sectors, with crude oil prices extending a recent rally amid growing geopolitical tensions and another set of bullish oil inventory data, and exacerbated by a growing storm in the Gulf of Mexico. However, health care issues saw some pressure even after a midweek jump for pharmacy benefit management stocks on the White House's decision to withdraw a proposal to eliminate rebates from government drug plans. Financials dipped slightly despite some steepening of the Treasury yield curve, with the banking sector set to kick Q2 earnings seasoninto gear next week.

While the ramping up of earnings season will likely command the most attention, next week's economic calendar will also yield some potential market-moving data points, with a focus on the consumer and the housing market. June retail sales will be followed by the preliminary July University of Michigan Consumer Sentiment Index, while the July NAHB Housing Market Index will be complemented by June housing starts and building permits figures. Moreover, with Fed focus elevated and recession uncertainty festering, industrial production and capacity utilization and the Index of Leading Economic Indicators could garner some scrutiny, along with the release of the Beige Book—an anecdotal look at business activity across the nation used as a monetary policy tool to prepare for the Fed's July 31st decision. Leading up to the meeting, Fedspeak will be prevalent next week, headlined by Chairman Powell's speech in Paris.

As noted in our latest Schwab Market Perspective: Running in Place, if the trade stalemate lingers and/or the next round of tariffs on Chinese imports kicks in, the damage to the economy is likely to escalate. The burning question remains about the sufficiency of monetary policy ammunition as an offset to weak growth. The month-long inversion of the yield curve has been adding to that angst. Absent a comprehensive trade deal, it’s difficult to imagine that executives will be confident enough to expand capital spending, which had been one of the primary rationales for 2018’s corporate tax cut. In addition, Wall Street’s analysts have yet to reflect the recent escalation in the trade war in their estimates for corporate earnings. Given that consensus estimates are already near-zero for the next two quarters (Refinitiv), an additional haircut to those expectations could mean an earnings recession.

International economic reports due out next that may impact the markets include: Australia—employment change. China—Q2 GDP, industrial production and retail sales. India—trade balance. Japan—trade balance and consumer price inflation figures. Eurozone—trade balance and consumer price inflation data, along with German investor confidence. U.K.—employment change, inflation statistics and retail sales.

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Bulls Remain in Charge

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