Consumer Sentiment Craters as Stocks Eke Out Gains

U.S. stocks finished another quiet session higher, but at arm's length of the flatline after August’s consumer sentiment unexpectedly fell to the lowest level since 2011. The drop in sentiment was widespread and came amid dampened confidence across all aspects of the economy, as the resurgence of COVID-19, in the form of the Delta variant was cited as a primary culprit. Cyclical/value stocks, which led weekly gains, largely reversed to the downside, while growth-related issues in the Information Technology and Communication Services sectors squeezed out gains. A solid Q2 earnings season continued to head down the home stretch, as Dow member Walt Disney rose in the wake of its stronger-than-expected results and DoorDash overcame early pressure that stemmed from its wider-than-expected loss and some cautious commentary. Treasuries rallied to apply noticeable downside pressure on yields and the U.S. dollar gave back the week's advance. Meanwhile, gold jumped, and crude oil prices dropped. Europe held onto early gains and closed higher, but Asia finished mixed as China and Hong Kong resumed a recent selloff.

The Dow Jones Industrial Average rose 16 points to 35,515, the S&P 500 Index gained 7 points (0.2%) to 4,468, while the Nasdaq Composite increased 7 points to 14,823. In moderate volume, 640 million shares were traded on the NYSE and 4.0 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.65 lower to $68.44 per barrel. Elsewhere, the gold spot price rallied $26.40 to $1,778.20 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.6% to 92.50. Markets were mixed for the week, as the DJIA advanced 0.9% and the S&P 500 rose 0.7%, while the Nasdaq Composite dipped 0.1%.

Dow member Walt Disney Company (DIS $181) reported adjusted fiscal Q3 earnings-per-share (EPS) of $0.80, above the $0.55 FactSet estimate, with revenues rising 45.0% year-over-year (y/y) to $17.0 billion, topping the Street's $16.8 billion forecast. The company said its Disney+ subscribers as of July 3 came in at 116 million, compared to the expected 114.5 million. The company also noted that results improved y/y at its Disney Parks, Experiences and Products segment due to reopening of its parks and resorts but it said it continues to be impacted by the suspension of cruise ship sailings and reduced operating capacities across many of its businesses in the segment. DIS also said COVID-19 had a negative impact at its Disney Media and Entertainment Distribution segment as higher advertising revenue was more than offset by higher sports programming costs. Shares finished higher.

DoorDash Inc. (DASH $195) reported an adjusted Q2 loss of $0.30 per share, wider than the $0.06 per share shortfall that the Street had projected, though revenues, which grew 83.0% y/y to $1.2 billion, came in above the expected $1.1 billion. The food delivery company said its gross order volume (GOV) rose 70.0% y/y to $10.5 billion, topping the estimated $9.8 billion. The company increased its full-year guidance for adjusted operating earnings and GOV, while noting that "our outlook anticipates a seasonal decline in new consumer acquisition and order rates in Q3." DASH said its outlook also anticipates increased levels of investment in new categories, international markets, and Platform Services in Q3 and Q4. "While we observed encouraging trends in H1 of 2021, we caution investors that significant uncertainty remains and consumer behavior could deviate from the expectations included in our guidance," the company added. Shares overcame early losses and traded higher.

With Q2 earnings season heading toward the finish line, of the 456 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. Y/Y earnings growth is tracking at 99.6% and revenue expansion is on pace to be up 27.7%. Schwab's Chief Investment Strategist Liz Ann Sonders delivers her 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 Liz Ann Sonders' latest article, Gimme Shelter: Housing's Surge at Turning Point?, on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

August consumer sentiment plunges, import price inflation cools more than expected

The August preliminary University of Michigan Consumer Sentiment Index (chart) plummeted to 70.2 versus the Bloomberg estimate calling for it to be unchanged at July's 81.2 reading. The index fell to the lowest level since December 2011 and below the April 2020 low of 71.8 as both the current conditions and the expectations components of the index fell sharply. The 1-year inflation forecast dipped to 4.6% from July's 4.7% rate, in line with forecasts, and the 5-10 year inflation forecast moved higher to 3.0% from the prior month's 2.8% level.

The University of Michigan said, "The losses in early August were widespread across income, age, and education subgroups and observed across all regions. Moreover, the losses covered all aspects of the economy, from personal finances to prospects for the economy, including inflation and unemployment. There is little doubt that the pandemic's resurgence due to the Delta variant has been met with a mixture of reason and emotion. Consumers have correctly reasoned that the economy's performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end."

The Import Price Index (chart) rose 0.3% month-over-month (m/m) for July, versus the Bloomberg consensus estimate of a 0.6% gain, and compared to June's upwardly-revised 1.1% rise. Versus last year, prices were up by 10.2%, compared to forecasts of a 10.5% increase and June's upwardly-adjusted 11.3% gain.

Treasuries rallied following the consumer sentiment report, as the yield on the 2-year note dipped 1 basis point (bp) 0.21%, while the yields on the 10-year note and 30-year bond each declined 7 bps to 1.29% and 1.94%, respectively.

The timing of when the Fed will begin to rein in its extremely loose monetary policy amid the backdrop of inflation pressures and signs of recovery in the labor market remains a key area of focus for the markets, and Schwab's Chief Fixed Income Strategist Kathy Jones and Senior Fixed Income Analyst, Christina Shaffer, offer their latest commentary, Fed Tapering: Will it Be Different This Time?. They note that although the prospect of the Federal Reserve tapering its bond purchases has unsettled markets in the past, we expect it to be more orderly this time around.

Europe higher to close out the week, Asia mixed as China and Hong Kong resume slides

European equities finished higher, even as the markets continued to grapple with the festering Delta variant uncertainty regarding the global economic impact, which led to the decisive drop in U.S. consumer sentiment to the lowest since 2011. Real Estate issues led the way as bond yields in the Eurozone and U.K. turned mostly lower. However, gains were likely held in check as Financials pared an early advance amid the reversal in bond yields. 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.

Economic data in the region was light, with the Eurozone trade surplus that widened more than expected in June being the lone major data point released today. The markets have seen growth stocks underperform amid the firming of bond yields as of late, while cyclically-natured sectors have moved higher, likely bolstered by this week's progress in the U.S. on a trillion dollar infrastructure spending package. The euro and British pound gained ground on the U.S. dollar, which noticeably trimmed a recent bounce.

The U.K. FTSE 100 Index and Italy's FTSE MIB Index were up 0.4%, France's CAC-40 Index and Spain's IBEX 35 Index rose 0.2%, and Germany's DAX Index and Switzerland's Swiss Market Index gained 0.3%.

Stocks in Asia finished mixed with China and Hong Kong markets resuming a recent slide, down for a second session after a three-day rebound earlier in the week as choppiness in the markets remain. The recent selloff has come amid lingering Delta variant uneasiness and the fallout from China's crackdown on big businesses. 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.

Uncertainty regarding the impact of the Delta variant seemed to continue to hamstring conviction, though cyclical stocks have found some support as of late, enhanced by the progress out of the U.S. on a trillion dollar infrastructure plan this week. Some signs of life in bond yields has also pressured growth-related sectors and a drop in the Information Technology sector in South Korea weighed on the Kospi Index, which fell 1.2%. The recent rise in the U.S. dollar also has garnered some attention. Japan's Nikkei 225 Index dipped 0.1%, with the yen gaining ground late in the session to trim a recent slide, while China's Shanghai Composite Index moved 0.2% lower and the Hong Kong Hang Seng Index fell 0.5%. However, Australia's S&P/ASX 200 Index advanced 0.5%, and India's S&P BSE Sensex 30 Index rallied 1.1%, following reports that showed the nation's industrial production growth slowed more than expected in June but consumer price inflation cooled more than expected for July.

S&P 500 and Dow continue to notch multiple record highs as cyclical/value stocks lead

The S&P 500 and Dow registered a string of record highs this week, while the Nasdaq lagged, as the Materials and Industrials sectors were major contributors despite festering Delta variant uncertainty. The Senate passed a trillion infrastructure spending bill to likely boost these cyclical/value stocks, while Q2 earnings season remained robust to aid the backdrop. Financials were also among the best performers as Treasury yields showed some signs of life throughout the week ahead of Friday's pullback on the surprisingly sharp drop in August consumer sentiment. The Information Technology and Real Estate sectors underperformed amid the pre-Friday upward move for interest rates. The markets took some comfort from a couple key inflation reports that suggested pricing pressures may be beginning to moderate, headlined by a larger-than-expected deceleration in consumer prices, which appeared to overshadow another hotter-than-expected report on wholesale prices. The economic calendar also showed jobless claims continued to decelerate and almost notched another pandemic low, and job openings recorded another record high of over 10 million to follow up last week's stronger-than-expected July nonfarm payroll report. The U.S. dollar trimmed a recent bounce, crude oil prices nudged higher in choppy trading, and gold lost some ground.

Next week, heavyweights from the retail sector, notably Dow members Walmart Inc. (WMT $150) and Home Depot Inc. (HD $331), as well as Target Corporation(TGT $261), will put the finishing touches on Q2 earnings season. Meanwhile, the week's economic calendar will also deliver some key data points that could move the markets, headlined by the July retail sales report and a look inside the Fed's monetary policy discussion, in the form of the minutes from its two-day meeting that concluded with its decision on July 28. The Fed left its interest rate and balance sheet policy unchanged but opened the door a bit more to tapering its bond purchases as discussed by Schwab's Liz Ann Sonders in her commentary, Work in Progress: Fed Stands Pat. Other reports on next week's docket that could garner some attention include August manufacturing reportsout of the New York and Philadelphia regions, the Fed's industrial production and capacity utilizationreport, the NAHB's read on homebuilder sentiment, building permits and housing starts, jobless claims for the week ended August 14, and the Leading Index. Federal Reserve Chairman Jerome Powell will participate in a town-hall discussion early in the week that will likely also command some attention.

Next week's international economic calendar is also poised to bring some reports that may contend for attention, with releases worth noting including: Australia—employment change. China—retail sales and industrial production. Japan—Q2 GDP, trade balance, core machine orders, and national consumer price inflation statistics. Eurozone—Q2 GDP, construction output, and consumer price inflation. U.K.—employment change, inflation figures, and retail sales.

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Consumer Sentiment Craters as Stocks Eke Out Gains

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