A Mixed End to the First Week of August

U.S. equities end mixed, but still post a weekly gain, after a better-than expected July labor report provided some optimism, but also uncertainty over what it could mean for future Fed tapering. The July nonfarm payrolls report was the day’s headlining event and added to some upbeat sentiment, as the report came in well above expectations and showed that the unemployment rate fell, however private sector jobs missed the mark. Investors appeared to have a mixed reaction to the report as questions quickly arose over the possible impact the report could have on the Fed’s tapering decisions. Meanwhile, another busy week on the earnings front wrapped up, as Expedia Group, News Corp. and Shake Shack all bested expectations, but Beyond Meat's quarterly loss was wider than forecasts. In other economic news, wholesale inventories were revised higher and consumer credit surged for the second month in a row. Treasuries were lower following the jobs report, putting upward pressure on yields, and the U.S. dollar accelerated to the upside, while gold tumbled and crude oil prices were also lower. Asia finished mixed in another lackluster session, while stocks in Europe finished mostly higher following the U.S. labor report.

The Dow Jones Industrial Average (DJIA) gained 144 points (0.4%) to 35,209, the S&P 500 Index added 7 points (0.2%) to 4,437, while the Nasdaq Composite decreased 59 points (0.4%) to 14,836. In moderate volume, 755 million shares were traded on the NYSE and 4.1 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.81 lower to $68.28 per barrel. Elsewhere, the gold spot price plunged $45.80 to $1,763.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.6% to 92.79. Markets were higher for the week, as the DJIA rose 0.8%, the S&P 500 moved 0.9% higher, and the Nasdaq Composite gained 1.1%.

Beyond Meat Inc. (BYND $124) announced a Q2 loss of $0.31 per share, versus the Street's forecast of a $0.24 per share shortfall, with the company blaming higher freight costs and investments made in supporting its expansion efforts. Revenues rose nearly 32% year-over-year (y/y) to $149.4 million, above the $140.8 million expectation. The plant-based protein maker expressed caution for the second half of the year citing uncertainties surrounding the Delta coronavirus variant. Shares were higher.

Expedia Group, Inc. (EXPE $149) reported a Q2 loss of $1.13 per share, compared to the $0.65 deficit projected by analysts. Revenues more than tripled to $2.1 billion and gross bookings rose to $20.8 billion, both ahead of analysts' expectations. While Chief Executive Officer Peter Kern said that the online travel booking company saw continued improvement in many global travel segments, he offered some caution citing the uncertainties surrounding the spread of the Delta coronavirus variant. EXPE was sharply lower.

News Corp. (NWSA $25) reported fiscal Q4 adjusted earnings-per-share (EPS) of $0.16, above the FactSet estimate of $0.05, on a 30.0% y/y increase in revenues to $2.49 billion, marginally exceeding the projected $2.24 billion. The media giant said sales across its newspaper unit rose 11%, as readers moved to online content and away from purchasing papers at newsagents. Shares traded lower.

Shake Shack Inc. (SHAK $90) posted a Q2 profit of $0.05 per share, compared to analysts' call for a $0.07 per share loss, as revenues doubled from a year ago to $187.5 million, above the FactSet estimate of $181.0 million. The restaurant chain offered guidance for the current quarter that bracketed analysts' consensus views. SHAK traded to the downside.

After a busy week and Q2 earnings season in the backstretch, of the 442 S&P 500 companies that have reported thus far, roughly 83% have topped revenue forecasts, and approximately 85% have bested earnings estimates, per data compiled by Bloomberg. Schwab's Chief Investment Strategist Liz Ann Sonders delivers her latest article, One Step Closer … to Peak Earnings Growth?. She points out that while earnings have already surprised to the upside in the second quarter, the magnitude of strength has been expected. Looking ahead, Liz Ann notes, earnings growth rates will likely continue to cool, as comparisons to the prior year inevitably become more difficult. She adds that as we have continued to point out, investors should focus not just on the earnings growth rate; but also what companies are saying with respect to inflationary pressures, profit margins, and forward guidance.

Find all our market commentary, including a discussion by Schwab experts on How to Make Rational Buy and Sell Decisions, on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

July nonfarm payroll report tops forecasts

Nonfarm payrolls (chart) rose by 943,000 jobs month-over-month (m/m) in July, compared to the Bloomberg consensus estimate of an 858,000 rise, and following June's upwardly-adjusted increase of 938,000. Excluding government hiring and firing, private sector payrolls increased by 703,000, versus the forecasted rise of 709,000, after increasing by an upwardly-revised 769,000 in June. The labor force participation rateticked higher to 61.7% from June's 61.6% rate, and matching forecasts.

The unemployment rate fell to 5.4% from June's 5.9% rate, compared to expectations of a decrease to 5.7%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—declined to 9.2% from the prior month's 9.8% rate. Average hourly earnings rose 0.4% m/m, ahead of projections for a 0.3% increase, and matching June's upwardly-adjusted 0.4% rise. Y/Y, wages were 4.0% higher, above the 3.9% forecast. Finally, average weekly hours matched June's upwardly-revised 34.8, versus estimates of a reading of 34.7 hours.

June wholesale inventories (chart) were revised higher to a 1.1% month-over-month (m/m) gain, versus the Bloomberg estimate calling for it to match May's unrevised 0.8% increase. Sales rose 2.0% after May's unadjusted 0.8% gain.

Consumer credit, released in the final hour of trading, showed consumer borrowing increased by $37.6 billion during June, well north of the $23.0 billion increase that was forecasted of economists polled by Bloomberg, while May’s figure was adjusted upward to an expansion of $36.7 billion from the originally reported $35.3 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose by $19.8 billion, a 7.2% y/y rise, while revolving debt, which includes credit cards, advanced by $17.8 billion, a 22.0% y/y rise.

Treasuries were lower following the jobs report, as the yield on the 2-year note was up 1 basis point (bp) at 0.21%, the yield on the 10-year note was 8 bps higher at 1.30%, and the 30-year bond rate gained 9 bps at 1.95%.

Treasury yields have declined sharply as of late, and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, If the Economy's So Strong, Why Are Bond Yields Falling?, how the steep drop in yields has defied conventional wisdom, as it looks to us like the market moves reflect the view that the peaks in growth and inflation in this cycle have passed, and the prospect of tighter policy by the Fed would dampen the outlook for the economy. She adds that while we agree with that assessment longer term, we believe yields are now too low relative to the economic outlook and are likely to rebound later this year. Kathy also talks about the mixed signals coming from the market in the latest WashingtonWise Investor podcast titled Confusing Economic Signals: What’s Going On?

Europe mostly higher following U.S. labor report

European equities closed mostly higher, as earnings continued to drive sentiment, and received an additional tailwind from a better-than-expected labor report out of the U.S. On the earnings front, AP Moller - Maersk A/S (AMKBY $14), the world's largest container shipping company, posted a 200% increase in profits from a year ago amid skyrocketing shipping rates as world economies bounce back from the COVID-19 pandemic. In economic news in the region, German industrial production surprisingly fell, versus economists' projections of a modest gain, France's trade deficit widened and housing prices in the U.K. increased slightly more than expected. The euro and the British pound were lower versus the U.S. dollar. Bond yields in the Eurozone and the U.K. gained ground.

Amid the persistent concerns regarding the implications of the Delta coronavirus variant, Schwab Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Where To Invest Now: COVID And Correlation, discussing how COVID-19 resurgences appear to be the primary driver of moves across many markets this year. Jeff adds that until the COVID-19 case count gets back under control, the yen may strengthen, the U.K. yield curve may flatten, and defensive lockdown-era leaders in the stock market may continue to outperform. Amid this uncertainty, Jeff says the key is diversification since many different types of stocks are making new all-time highs, but they are not moving in sync with each other.

The U.K. FTSE 100 Index was little changed, France's CAC-40 Index and Spain's IBEX 35 Index gained 0.5%, Germany's DAX Index was 0.1% higher, Italy's FTSE MIB Index advanced 1.3%, while Switzerland's Swiss Market Index was 0.2% lower.

Stocks in Asia were mixed in another quiet session, as investors awaited jobs data from out of the world's largest economy of the U.S. China's crackdown on large corporations, particularly tech, education and ecommerce remained in play. The Shanghai Composite Index lost 0.3% and the Hong Kong Hang Seng Index ticked 0.1% lower. 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. Economic news was in short supply to provide any sway, with Japan posting a decline in household spending, well short of expectations for an increase.

Japan's Nikkei 225 Index increased 0.3%, amid some weakness in the yen, and as investors continue to watch the rising cases of the Delta coronavirus in the nation. Australia's S&P/ASX 200 Index finished 0.4% higher after the Reserve Bank of Australia lowered its near-term growth forecasts, but upped those longer term. South Korea's Kospi Index moved 0.2% lower and India's BSE Sensex 30 Index lost 0.4%.

U.S. stocks kick off the first week of August higher

U.S. equities finished higher for the first week of August, as the markets received a boost from mostly encouraging economic data and another round of Q2 earnings reports. Upbeat sentiment from the week’s data helped the S&P 500 back toward record high territory and pushed nearly all sectors in the S&P 500 higher for the week. The Consumer Staples sector was the only sector to find itself in the red, while Financials and Utilities were the week’s biggest winners. Q2 earnings season entered the home stretch and helped to bolster some market optimism for an economic recovery as several companies topped expectations including General Motors Company (GM $55) and Under Armour Inc. (UAA $25). However, a measure of caution kept gains for the week in check as the ongoing spread of the Delta variant of coronavirus and China’s crackdown on big business hovered over the markets.

The week's economic calendar offered further encouraging data beginning with global manufacturing data early in the week, with the ISM ManufacturingIndex decelerating slightly in July, but remaining robust and in expansion territory. Furthermore, the ISMServices Index accelerated in July to its highest level on record, while factory orders increased. Meanwhile, jobs data was also in focus but produced mixed results, beginning with the private sector payrolls, as reported by ADP falling well short of forecasts, before culminating with Friday's decisively upbeat nonfarm payroll report. Moreover, initial jobless claims for the week ended July 31 continued its downward trajectory and came in at a level of 385,000. The Treasury yield curved steepened, after several weeks of yields falling, as some upbeat sentiment from encouraging economic reports permeated the markets, and the U.S. dollar ticked up, while crude oil and gold prices fell sharply.

Next week, the economic calendar is set to bring about another action-packed agenda, headlined by a round of inflation reports for July in the form of the Consumer Price Index (CPI), the Producer Price Index (PPI) and the Import Price Index. Meanwhile, employment is likely to remain in focus as the markets digest the releases of the NFIB Small Business Optimism Index, the job openings and labor turnover survey(JOLTS), and initial jobless claims for the week ended August 7th. Moreover, the markets will receive the preliminary look at nonfarm productivity and unit labor costs for Q2. The week will wrap up with the preliminary August University of Michigan Consumer Sentiment Index.

Next week's international economic calendar also has some data points that could foster some market reactions with reports worth noting including; Australia—business confidence and inflation expectations. China—lending statistics, CPI and PPI. South Korea—unemployment. India—CPI and industrial/manufacturing production. Japan—lending data, and the domestic price index. Eurozone—industrial production and trade balance, along with German economic sentiment and trade data. U.K.—Q2 GDP and industrial/manufacturing production.

With the markets likely to remain choppy, check out our article, How Traders Can Take Advantage of Volatile Markets, in which we discuss how the good news is that as volatility increases, the potential to make more money quickly also increases, but the bad news is that higher volatility also means higher risk. When volatility spikes, it may be possible to generate an above-average profit, but you also run the risk of losing a larger amount of capital in a relatively shorter period of time. We offer four steps to consider, which implemented with a disciplined approach can help you learn to manage volatility for your benefit—while helping you minimize risks.

Important Disclosures

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A Mixed End to the First Week of August

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