Stocks Tumble for the Day and Week

U.S. equities finished solidly lower and further pushed the major indexes into the red on a weekly basis, with tech stocks leading the way after Dow member Microsoft announced it will close its physical stores as a result of the rise in COVID-19 cases. Meanwhile, financials also saw pressure after the Fed's banking sector stress test results adopted restrictions on dividends and share buybacks. Moreover, Dow component Nike posted disappointing results, consumer spending rebounded less than expected for May, and June consumer sentiment was revised downward. However, Gap surged after announcing a partnership with Kanye West. Treasury yields were lower as bond prices rose, the U.S. dollar was little changed, while crude oil prices were modestly lower and gold was higher. Europe relinquished early gains and finished mostly lower, while markets in Asia were largely higher.

The Dow Jones Industrial Average fell 730 points (2.8%) to 25,016, the S&P 500 Index decreased 75 points (2.4%) to 3,009 and the Nasdaq Composite declined 260 points (2.6%) to 9,757. In heavy volume, 3.1 billion shares were traded on the NYSE and 6.8 billion shares changed hands on the NASDAQ. WTI crude oil inched $0.23 lower to $38.49 per barrel and wholesale gasoline lost $0.04 to $1.16 per gallon. Elsewhere, the Bloomberg gold spot price advanced $7.06 to $1,770.85 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 97.45. For the week, the markets finished solidly lower, as the DJIA tumbled 3.3%, the S&P 500 lost 2.9%, and the Nasdaq Composite shed 1.9%.

Dow member Nike Inc. (NKE $94) reported a fiscal Q4 loss of $0.51 per share, compared to the FactSet estimate calling for earnings-per-share (EPS) of $0.09, as revenues fell 38.0% year-over-year (y/y) to $6.3 billion, south of the Street's forecast of $7.3 billion and its gross margin was also lower. The footwear and athletic apparel maker said its Q4 results were significantly impacted by global physical store closures, where 90% if its NIKE-owned stores were closed for roughly eight weeks aimed at health, safety and slowing the spread of the COVID-19 pandemic, while it accelerated its connection and engagement with consumers leveraging the strength of its digital ecosystem. NKE added that its wholesale partners largely followed the same pattern and as a result, product shipments to wholesale customers were down nearly 50% resulting in lower total revenue and higher inventory. The company added that as of today, 90% of NIKE-owned stores are open across the globe, retail traffic continues to improve week-over-week with higher conversion rates as compared to the prior year. Shares were solidly lower.

After being a main catalyst to yesterday's afternoon rally as regulators eased restrictions pertaining to the Volcker Rule, opening up increasing the sector's dealings with hedge and private equity funds, the banking sector gave back some of those gains as the markets digested the results of the Federal Reserve Board's stress tests of the group. The Board noted that in light of the results, it took several actions to ensure large banks remain resilient despite the economic uncertainty from the coronavirus event. For Q3, the Board is requiring large banks to preserve capital by suspending share repurchases and capping dividend payments, while also requiring banks to re-evaluate their longer-term capital plans more frequently, as all large banks will be required to resubmit and update their capital plans later this year to reflect current stresses. The aim of the higher frequency of re-evaluation is to help firms re-assess capital needs and maintain strong capital planning practices during this period of uncertainty. The Board added that it will conduct additional analysis each quarter to determine if adjustments to this response are appropriate. Vice Chair Randal Quarles noted that, "The banking system has been a source of strength during this crisis," while noting that "the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks."

The strong regulatory mandated balance sheets resulting from the financial crisis in 2008-2009 helped the banking sector enter this crisis on strong footing. Moreover, the massive amount of monetary policy measures to bolster liquidity could help mitigate many risks facing the sector, and if the recent trend higher in interest rates and the overall market rally continues, this could help support the Financials sector. Read more on our recently upgraded outlook for the Financials sector and other tweaks to our tactical views, in Managing Director and Senior Investment Strategist with Charles Schwab Investment Advisory, Inc., David Kastner's, CFA, latest installment of Schwab Sector Views: Changes Are Coming.

David concludes by stressing that no matter what our view is on any of the sectors, remaining diversified is very important, as concentrating in too few sectors can dramatically affect the risk profile and performance of your portfolio. So if you do make any sector tilts in your portfolio, he suggests how keeping them small is a good way to maintain appropriate diversification and potentially enhance the performance of your portfolio.

Gap Inc. (GPS $12) jumped nearly 20% after announcing a partnership with Kanye West that includes plans to introduce West's YEEZY Gap line to its stores and online in 2021. Under the terms of the deal, YEEZY will receive royalties and potential equity related to sales achievement.

Dow component Microsoft Corporation (MSFT $196) announced a strategic change in its retail operations, including closing Microsoft Store physical locations. MSFT said its retail members will continue to serve customers from its corporate facilities and remotely providing sales, training and support, while continuing to invest in digital storefronts on Microsoft.com and stores in Xbox and Windows. The company said it expects to take a pre-tax charge of approximately $450 million, or $0.05 per share, in the current quarter. Shares were lower.

For a look at the impact of the flood of monetary and fiscal support, check out Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, What's the Future Payback for the Stimulus, and Schwab's Chief Fixed Income Strategist Kathy Jones offers her commentary, Stimulus = Inflation? Why It May Be Different This Time.

Stay on top of the markets during this unprecedented time by following experts from the Schwab Center for Financial Research (SCFR) on Twitter at

@SchwabResearch, and by visiting www.schwab.com/volatility to see all the content Schwab offers on the unparalleled market action.

Personal spending misses estimates, June consumer sentiment surprisingly revised lower

Personal income (chart) fell by 4.2% month-over-month (m/m) in May, versus the Bloomberg forecast of a 6.0% drop, following April's upwardly-revised 10.8% jump. Personal spending rose 8.2%, below the forecasted 9.3% rise and the prior month's favorably-adjusted 12.6% tumble. The May savings rate as a percentage of disposable income was 23.2%, down from April's negatively-adjusted 32.2% surge. The PCE Deflator ticked 0.1% higher m/m, versus expectations of a flat reading and compared to the prior month's unrevised 0.5% decrease. Compared to last year, the deflator was 0.5% higher, in line with estimates and compared to April's upwardly-adjusted 0.6% rise. Excluding food and energy, the PCE Core Index also nudged 0.1% higher m/m, compared to expectations of a flat reading and versus April's unrevised 0.4% decline. The index was 1.0% higher y/y, versus estimates of a 0.9% gain and matching April's unadjusted increase.

The June final University of Michigan Consumer Sentiment Index (chart) was unexpectedly revised lower to 78.1, versus expectations for an upward adjustment to 79.2, from the preliminary 78.9 reading. The negative revision came as both the current conditions and expectations components of the survey were adjusted to lower levels than initially-reported. However, both portions of the survey were higher versus May, along with the overall index, which improved from the prior month's 72.3 level and April's record monthly drop to 71.8. The 1-year inflation forecast dipped to 3.0% from May's 3.2% rate, and the 5-10 year inflation forecast also edged lower to 2.5% from the prior month's 2.7% pace.

Treasuries were higher on the data and amid the pressure on the stock markets, as the yield on the 2-year note declined 1 basis points (bps) to 0.17%, the yield on the 10-year note decreased 2 bps to 0.65%, and the 30-year bond rate fell 5 bps to 1.37%. Schwab's Kathy Jones offers her 2020 Mid-Year Outlook: Fixed Income, discussing how interest rates are likely to stay low as markets try to bridge the economic gap to the new normal.

Europe mostly lower amid rising COVID cases, Asia mostly higher

European equities were mostly lower, as some resiliency early on faded in the face of the drop in U.S. stocks amid continued worries over the recent spike in COVID cases, and as some reads on consumer sentiment and spending out of the world's largest economy missed expectations. Stocks on this side of the pond appeared to find some early support from the backdrop of the flood of global monetary and fiscal policy responses to the pandemic and recent data in the region that has showed signs of improvement, notably this week's manufacturing and services PMIs that showed a return to expansion in certain areas of France and the U.K. The euro and the British pound were lower versus the U.S. dollar and bond yields in the region were mixed. Schwab's Jeffrey Kleintop offers his latest commentary, What A COVID-19 Second Wave Means For Investors, noting that a second wave of global COVID-19 is getting a lot of media attention, but the appearance of a global second wave of cases is primarily driven by the different timing of first waves across countries—rather than second waves within countries. Jeff adds that the falling trend in deaths may be the more important factor to watch since the trend in stocks and earnings expectations are more closely aligned with deaths than cases. He concludes that a second wave of deaths could lead to a second wave of declines for the economy, corporate earnings and the stock market.

The U.K. FTSE 100 Index was up 0.2%, while France's CAC-40 Index dipped 0.2%, Germany's DAX Index traded 0.7% lower, Switzerland's Swiss Market Index declined 0.5%, Italy's FTSE MIB Index traded 0.6% lower, and Spain's IBEX 35 Index dropped 1.3%.

Stocks in Asia finished mostly to the upside to finish a mixed week, with the markets grappling with the rising COVID cases out of the world's largest economy of the U.S., which has fostered increased uncertainty, while economic data has shown improvement and the markets remain buoyed by the massive amount of global monetary and fiscal stimulus measures. Japan's Nikkei 225 Index rose 1.1%, despite some firming of the yen late in the day and June inflation data out of Tokyo that continued to show price increases are subdued. South Korea's Kospi Index also gained 1.1% and Australia's S&P/ASX 200 Index rallied 1.5%. India's S&P BSE Sensex 30 Index moved 0.9% to the upside, though Hong Kong's Hang Seng Index dropped 0.9% in a return to action following yesterday's holiday break. However, volume remained lighter than usual with Chinese markets remaining 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.

Stock momentum stalls

U.S. stocks came into the week riding an upward wave that had the Nasdaq back to notching record highs and the S&P 500 trading within shouting distance of positive territory for the year. However, the positive momentum stalled and the equity markets fell for the week, putting the S&P 500 on a course for a down month. Concerns persisted that the rising COVID-19 cases in the U.S. may stymie progress as the world's largest economy reopens, valuation clarity remained elusive in the wake of the sharp surge off the March lows, geopolitical tensions appeared to begin to flare back up, and the looming Presidential election added another layer of uncertainty. These negative catalysts conspired to counter the plethora of global stimulus responses, the Health Care sector's crusade to find an answer to the pandemic, and the flood of mostly upbeat global manufacturing and services sector reports that continued the recent theme of recovering economic activity.

As such, the markets pulled back broadly, with the energy sector leading to the downside, along with financials—which found additional pressure after the Fed's stress test results—but tech stocks relatively outperformed as the sector continued to illustrate resiliency despite the increased market headwinds. The U.S. dollar regained footing after an early-week stumble on the increased market cautiousness, the Treasury yield curve flattened, and gold posted a third-straight weekly gain.

Next week will be shortened by the Independence Day holiday observance, which will have all U.S. markets closing early on Thursday and remaining shuttered on Friday. However, the economic week is poised to deliver a robust docket of data points that could move the markets. The week will start slowly but heat up on Tuesday with Congressional testimony from Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin, which will be preceded by morning releases of the Chicago PMI and Consumer Confidence for June. The data will continue to pour in on Wednesday, with the June ISM Manufacturing Index and the minutes from the Fed's June monetary policy meeting, which roiled the markets due to the dovish tone that was delivered in its statement, economic projections and Chair Powell's presser. The week will likely culminate with some fireworks as weekly initial jobless claims for the week ended June 27th will be accompanied by the June nonfarm payroll report.

Along with the June global manufacturing and services picture being further developed, courtesy of PMIs out of China, the international economic calendar will also provide some reports worth noting. Australia will deliver its May trade figures, while Japan will release its preliminary May industrial production data and retail sales for last month, along with the timely release of the Q2 Tankan Large Manufacturing Index, giving us a look at sentiment among the nation's largest manufacturers. In Europe, the Eurozone consumer price inflation estimate for this month will be released, accompanied by June reports on economic and business activity sentiment, while Germany will announce May retail sales and June unemployment figures.

Schwab's Chief Investment Strategist Liz Ann Sonders delivers her 2020 Mid-Year Outlook: U.S. Stocks and Economy, noting that the warp-speed nature of the pandemic and economic crisis helps explain the equally warp-speed nature of the stock market's behavior. She adds that although the stock market was suggesting a V-shaped recovery, the more likely scenario is rolling W's and rampant speculation, especially in options trading, which represents the biggest short-term risk for stocks. Liz Ann concludes by saying, "Chuck Schwab often says that investing is by its nature an act of optimism. I couldn't agree more. There is reason for optimism that we will emerge from this crisis and forge a stronger path ahead. But be mindful of the emotions of fear and greed—stay disciplined, especially around diversification and periodic rebalancing. Long-term investment success does not require precisely picking market tops and bottoms. That’s gambling on moments in time; while investing should always be a process over time."

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Stocks Tumble for the Day and Week

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