Markets End the Week on a Positive Vibe

U.S. equities finished higher, with better-than-expected reads on personal income and spending, as well as consumer sentiment, adding additional touches to a picture of economic recovery. The data came as the markets continued to adjust to yesterday's shift in policy by the Fed that suggested it will tolerate higher inflation to ensure the employment picture brightens. Treasuries ended little changed after a noticeable steepening of the curve yesterday and the U.S. dollar fell, while crude oil prices were little changed even as Hurricane Laura impacted regions on the Gulf Coast, and gold was sharply higher. In equity news, Ulta Beauty and Workday rallied on their quarterly results, Dow member Coca-Cola traded higher after announcing a reorganization plan, but Gap saw only a modest gains, as its positive Q2 performance was overshadowed by its announcement that it plans to close stores. In other economic news, regional manufacturing unexpectedly declined but continued to show expansion, the trade deficit widened more than expected and wholesale inventories dipped. Europe finished mixed with the euro and British pound rallying versus the greenback, while markets in Asia were mixed.

The Dow Jones Industrial Average rose 162 points (0.6%) to 28,654, the S&P 500 Index advanced 23 points (0.7%) to 3,508, and the Nasdaq Composite increased 70 points (0.6%) to 11,696. In moderate volume, 785 million shares were traded on the NYSE and 3.0 billion shares changed hands on the NASDAQ. WTI crude oil shed $0.07 to $42.97 per barrel and wholesale gasoline gained $0.03 to $1.25 per gallon. Elsewhere, the Bloomberg gold spot price jumped $35.47 to $1,965.01 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.7% to 92.34. Markets were solidly higher for the week, as the DJIA rose 2.6%, the S&P 500 increased 3.3% and the Nasdaq Composite gained 3.4%.

Ulta Beauty Inc. (ULTA $237) reported Q2 earnings-per-share (EPS) of $0.14, above the $0.06 FactSet estimate, with revenues falling 26.3% year-over-year (y/y) to $1.2 billion, just shy of the Street's forecast of $1.3 billion. ULTA said while the pandemic continues to impact its business, it is encouraged by improving sales trends as it reopened stores after closing its stores in Q1. ULTA said while it believes the near-term operating environment will continue to be dynamic and challenging, it remains optimistic about long-term opportunities. Shares were nicely higher.

Gap Inc. (GPS $17) posted a Q2 loss of $0.17 per share, compared to the Street's expected shortfall of $0.41 per share, as revenues declined 18.0% y/y to $3.3 billion, north of the projected $2.9 billion. GPS said same-store sales were 13.0% higher y/y, with online net sales jumping 95.0%. GPS said given the high level of uncertainty in the current environment, it is not providing fiscal year net sales or earnings outlooks at this time. The company also said as part of its ongoing fleet optimization efforts it now expects to close over 225 Gap and Banana Republic stores globally in 2020, net of openings, with additional closures expected in 2021. Shares were slightly higher.

Workday Inc. (WDAY $243) announced a Q2 loss of $0.12 per share, or EPS of $0.84 ex-items, versus the expected profit of $0.66 per share, with revenues rising 19.6% y/y to $1.1 billion, just above the projected $1.0 billion. The human resources and finance enterprise cloud-based applications company said it was a strong quarter despite the environment. The company noted continued demand for its products as more organizations realize how mission critical cloud-based systems are in supporting their people and businesses through continuous change. WDAY raised its full-year guidance for subscription revenue. Shares rallied over 10%.

Dow member Coca-Cola Company (KO $49) announced strategic steps to reorganize its business, which will cut its current 17-unit business structure down to 9 business units. KO said the restructuring plan will result in an undetermined number of both involuntary and voluntary job cuts. Shares traded higher.

The S&P 500 continues to grind higher, notching a string of all-time highs, and seeing the rally since March foster an "official" bull market as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her latest article, High Hopes: S&P 500 Hits All-Time High Amid Pandemic/Recession. She points out that this was the fifth time in history that the market hit an all-time high while the economy was still in a recession. However, Liz Ann notes that market breadth has been underwhelming; while the concentration of the largest five stocks remains a risk.

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.

Personal income and spending top forecasts, consumer sentiment revised higher

Personal income (chart) rose 0.4% month-over-month (m/m) in July, versus the Bloomberg forecast of a 0.2% dip, following June's favorably-revised 1.0% fall. Moreover, personal spending gained 1.9%, above the forecasted 1.6% rise and versus the prior month's upwardly-adjusted 6.2% gain. The July savings rate as a percentage of disposable income was 17.8%. The PCE Deflator rose 0.3% m/m, versus expectations of a 0.4% increase and June's upwardly-adjusted 0.5% rise. Compared to last year, the deflator was 1.0% higher, matching estimates and compared to June's upwardly-adjusted 0.9% gain. Excluding food and energy, the PCE Core Index rose 0.3% m/m, below expectations of a 0.5% gain and versus June's upwardly-revised 0.3% rise. The index was 1.3% higher y/y, versus estimates of a 1.2% increase and compared to June's upwardly-adjusted 1.1% gain.

The August final University of Michigan Consumer Sentiment Index (chart) was revised higher to 74.1, versus expectations for an unadjusted preliminary reading of 72.8. The positive revision came as both the current conditions and expectations components of the survey were adjusted to better levels than initially-reported. Both portions of the survey were higher versus July, along with the overall index, which improved from the prior month's 72.5 level. The 1-year inflation forecast ticked higher to 3.1% from July's 3.0% rate, and the 5-10 year inflation forecast also edged higher to 2.7% from the prior month's 2.6% pace.

The Chicago PMI unexpectedly declined but remained at a level depicting expansion (a reading above 50). The index decreased to 51.2 in August from July's 51.9 level, and versus forecasts calling for a rise to 52.6.

The advance goods trade balance showed that the July deficit widened much more than expected, coming in at $79.3 billion, versus estimates calling for it to widen to $72.0 billion from June's unadjusted deficit of $70.6 billion.

Preliminary wholesale inventories dipped 0.1% m/m for July, compared to expectations of a 0.9% decrease, and versus June's downwardly-revised 1.3% drop.

Treasuries were little changed, as the yields on the 2-year and 10-year notes were flat at 0.15% and 0.74%, respectively, while the 30-year bond rate ticked 1 basis point higher to 1.52%.

Bond yields were choppy after yesterday's noticeable yield curve steepening in the wake of Federal Reserve Chairman Jerome Powell's speech at the closely-monitored Jackson Hole Economic Policy Symposium. Powell unveiled the Fed's new policy framework and, as widely expected, indicated that the Fed has decided to average inflation, rather than a simple 2.0% point target, meaning it would allow inflation to go above its 2.0% target and stay there for an extended period of time to offset the years it has been below 2.0%. In other words, the Fed is signaling that it will not raise rates to curtail inflation if and when inflation starts to rise. The shift suggests that the Central Bank is prepared to keep rates lower for longer, prioritizing the healing in the employment picture as unemployment remains painfully high.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, Federal Reserve Announces Inflation Goal Shift: What It Means for Investors, the reasoning behind the Fed's change in policy is the evidence that the relationship between the unemployment rate and inflation has changed. Kathy concludes that the Fed's policy announcement has reinforced our view that we look for the Fed to keep short-term interest rates low for several more years, and the U.S. dollar to weaken further over time. The U.S. dollar is seeing noticeable pressure today and 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 mixed on data and currency moves in the wake of Fed's shift

European equities finished mixed, with the Financials sector seeing a noticeable gain, despite the euro and British pound rising solidly versus the U.S. dollar. The greenback has seen pressure as the global markets adjust to yesterday's policy shift from the U.S. Central Bank to targeting an average pace of inflation with a focus on keeping rates low to try to combat the elevated levels of unemployment. Bond yields in the region were mixed, mirroring the dose of economic data in the region that showed German consumer confidence unexpectedly fell for September, Spain's retail sales dropped, and France's Q2 GDP contracted at a double-digit pace, but Eurozone economic confidence improved more than expected for this month. The data preceded the stronger-than-expected U.S. personal income and spending and consumer sentiment figures. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, Confidence Is Everything: 3 Things May Shake It, how the virus progression as schools and universities reopen, the ramifications of the U.S. election, and the outcome of post-Brexit trade talks are potential developments that could threaten confidence that has fueled the resiliency in the global equity markets.

The U.K. FTSE 100 Index was down 0.6%, France’s CAC-40 Index declined 0.3%, Germany's DAX Index decreased 0.5% and Switzerland's Swiss Market Index dropped 0.7%, while Italy's FTSE MIB Index was little changed and Spain's IBEX 35 Index gained 0.6%.

Stocks in Asia finished mixed as the markets digested the implications of yesterday's monetary policy shift by the Fed in the U.S. that changed how it targets inflation and suggested rates are likely to remain lower for longer as it tries to combat the high levels of unemployment. Also, the markets reacted to the surprising resignation of Japan's longest-serving Prime Minister Shinzo Abe due to health reasons, while paying attention to the recent string of mostly positive global economic data that has painted a recovery picture. The late-day slide in the U.S. dollar also likely garnered attention 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. Japan's Nikkei 225 Index fell 1.4% and Australia's S&P/ASX 200 Index dropped 0.9%. However, China's Shanghai Composite Index rebounded 1.6% and the Hong Kong Hang Seng Index gained 0.6%. Rounding out the day, South Korea's Kospi Index rose 0.4% and India's S&P BSE Sensex 30 Index advanced 0.9%.

Stocks continue to grind out record highs, growth stocks get company

Stocks closed out another strong week, with the Nasdaq and S&P 500 continuing to see uncharted territory, while the Dow moved closer to positive territory for the year despite some volatility associated with this week's announced shakeup of the blue-chip index. Communications Services and Information Technology issues remained at the head of the pack, while some of the beaten down sectors, notably Financials, joined the rally as participation broadened. Abbott Laboratories (ABT $111) 15-minute COVID-19 test received backing from the U.S. Food and Drug Administration (FDA) to keep progress on the pandemic fight rolling and aid sentiment, along with the FDA's Emergency Use Authorization of an investigational convalescent plasma COVID-19 treatment. Moreover, the Fed's shift in policy to prioritize the recovery of the labor market and tolerate a potential rise in inflation also seemed to provide a bullish backdrop, and fostered some noticeable steepening of the yield curve to boost gains for the Financials sector.

Economic data also continued to paint a recovery picture, with Friday's upbeat consumer-related reports being preceded by durable goods orders—notably the business investment component of the report—jumping more than expected and new home sales surging to extend the recent string of robust housing figures. The U.S. dollar was choppy on the week but remained near two-year lows, gold rebounded and crude oil prices nudged higher as the markets assessed the impact of Hurricane Laura on the Gulf Coast. The markets continued to show resiliency in the face of the persisting fiscal relief stalemate among lawmakers, the looming presidential election, and festering U.S.-China tensions.

Next week, the economic calendar has the potential to foster some market reactions, beginning with Tuesday's August manufacturing reports from the Institute for Supply Management (ISM) and Markit. The reports will be followed by Wednesday's release of the Fed's Beige Book—an anecdotal look at business activity across the nation used as a tool to prep for the next two-day monetary policy meeting scheduled to end September 16th. As the week matures we will get the August non-manufacturing reports from the ISM and Markit, the trade balance and initial jobless claims for the week ended August 29th. However, the week will be headlined and culminate on Friday with a look at the August jobs picture, courtesy of the nonfarm payroll report, with employment gains forecasted to be near 1.5 million jobs.

The international economic week is also poised to bring data points that could move the markets, highlighted by a plethora of manufacturing and services PMIs across the globe, headlined by reads out of China and Europe. Other reports/events due out that deserve a mention include: Australia—Reserve Bank of Australia monetary policy decision and Q2 GDP. India—Q2 GDP. Japan—industrial production, retail sales, and Q2 capital spending. Eurozone—consumer price inflation statistics, unemployment rate and retail sales, along with German factory orders.

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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Markets End the Week on a Positive Vibe

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