Markets Post Solid Weekly Gain Following Powell's Speech

U.S. equities finished the session solidly higher, as well as on a weekly basis, adding to a rebound that has the markets back to record high territory. The rally came on the heels of the highly-anticipated speech from Federal Reserve Chairman Jerome Powell, to where he held off on giving a specific start date for tapering its monthly asset purchases, but kept the door open for it to start sometime in Q4. The gains were broad-based, with value/cyclical sectors—Financials, Energy, Industrials and Materials—leading the way, while growth-related issues—Information Technology, Communications Services, and Consumer Discretionary—also contributed. Treasuries gained ground, putting downward pressure on yields, and the U.S. dollar finished lower following Powell's remarks, while gold and crude oil prices traded higher. In other economic news, personal income and spending data was mixed, August consumer sentiment was revised lower, the trade deficit narrowed more than expected, and wholesale inventories rose at a smaller rate than anticipated. In equity news, Gap rose following its stronger-than-expected Q2 results and raised guidance, while some disappointing Q4 metrics and disclosure of some accounting issues punished shares of Peloton. Stocks in Europe were able to overcome some early pressure and finish higher, while markets in Asia were mixed as a choppy week came to a close.

The Dow Jones Industrial Average advanced 243 points (0.7%) to 35,456, the S&P 500 Index gained 39 points (0.9%) to 4,509, and the Nasdaq Composite increased 184 points (1.2%) to 15,130. In moderate volume, 736 million shares were traded on the NYSE and 3.9 billion shares changed hands on the Nasdaq. WTI crude oil moved $1.32 higher to $68.74 per barrel. Elsewhere, the gold spot price jumped $25.90 to $1,821.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.4% lower to 92.68. Markets were higher for the week, as the DJIA added 1.0%, the S&P 500 rose 1.5%, and the Nasdaq Composite increased 2.8%.

Gap Inc. (GPS $26) reported adjusted Q2 earnings-per-share (EPS) of $0.70, above the FactSet estimate of $0.46, with revenues of $4.2 billion rising 29.0% year-over-year (y/y) and up 5.0% versus pre-covid 2019 levels, exceeding the Street's forecast of $4.1 billion. The company said it saw the highest Q2 sales in over a decade amid continued strength at Old Navy and Athleta, while momentum gained at Banana Republic. GPS also highlighted stepped-up marketing investments, improved brand management, and technology enhancements. The company said its Q2 same-store sales were up 3.0% y/y and 12.0% above the same period in 2019. As such, GPS raised its full-year guidance. Separately, the company announced an agreement to acquire ecommerce startup and online application company Drapr, which has developed 3D virtual technology to allow customers to try on clothing online. Shares were higher.

Peloton Interactive Inc. (PTON $104) posted a slightly smaller-than-expected adjusted fiscal Q4 operating loss, and revenues of $937 million, which were up 54.0% y/y, and above the projected $929 million. The exercise bike and subscription company said its Q4 ending connected fitness subscriptions grew 114% and paid digital subscriptions were up 176% compared to the same period a year ago. However, the company's gross margin came in well below the Street's forecast and its full-year operating profit forecast came in well below expectations, while it announced that an audit of fiscal 2021 revealed a "material weakness" in the internal controls that govern its financial reporting. The company noted that this accounting issue did not result in a material misstatement if its financial statements or disclosures, nor will result in any restatements of historical results. PTON also reported that it received a subpoena from the Department of Justice regarding its recent treadmill recall. Shares finished lower.

Schwab's Chief Investment Strategist Liz Ann Sonders delivers her latest article, You Take My Breadth Away: Market's Underlying Deterioration, discussing how as summer winds down, we soon head into September—historically the worst month for stocks in terms of average performance. She notes that aside from seasonality, there are several risks with which the market is confronting … including deteriorating breadth, fading monetary and fiscal stimulus, peak earnings/economic growth rates, and of course the Delta variant. Individually or collectively, though, they should not be taken as a "get out" message. For stock pickers out there, we would recommend a focus on quality via factor screening; both within growth and value indexes.

Amid this backdrop, Director and Senior Investment Strategist with the Schwab Center for Financial Research, David Kastner, CFA, offers his latest Schwab Sector Views: Too Early for Defensive Positioning, noting how despite recent bouts of sector leadership rotation, we don't expect defensive sector outperformance to last.

Find all our market commentary on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

Personal income and spending report mixed, Fed Chief Powell suggests progress toward goals

Personal income (chart)rose 1.1% month-over-month (m/m) in July, versus the Bloomberg forecast of a 0.3% increase, following June's upwardly-revised 0.2% gain. Personal spending grew 0.3%, below estimates of a 0.4% gain and compared to the prior month's upwardly-adjusted 1.1% increase. The July savings rate as a percentage of disposable income was 9.6%.

The PCE Deflator increased 0.4% m/m, matching expectations and down from June's unadjusted 0.5% increase. Compared to last year, the deflator was 4.2% higher, above estimates of a 4.1% rise and June's unadjusted 4.0% gain. Excluding food and energy, the PCE Core Index rose 0.3% m/m, in line with expectations and versus June's upwardly-adjusted 0.5% rise. The index was 3.6% higher y/y, matching estimates and June's upwardly-adjusted gain.

The August final University of Michigan Consumer Sentiment Index (chart) was revised slightly higher to 70.3, but below expectations for it to be revised to 70.8 from the preliminary reading of 70.2. The upward revision came as a modest upward adjustment on the current conditions component of the survey was met with an unexpected downward adjustment to the expectations portion. The overall index was solidly lower versus July's 81.2 level, as sentiment regarding both expectations and current conditions fell. The 1-year inflation forecast came in at 4.6%, down slightly from July's 4.7% rate, but the 5-10 year inflation forecast ticked higher to 2.9% from the 2.8% level in the prior month.

The advance goods trade balance showed that the July deficit shrank more than expected, coming in at $86.4 billion, versus estimates calling for it to decrease to $90.9 billion from June's upwardly-adjusted shortfall of $92.1 billion.

Preliminary wholesale inventories rose 0.6% m/m for July, compared to expectations of a 1.0% gain, and versus June's upwardly-revised 1.2% rise.

The markets digested the highly-anticipated speech from Federal Reserve Chairman Jerome Powell at the Fed's key virtual monetary policy symposium, with the markets looking for some insight into the timing of the Central Bank's tapering of monthly asset purchases against the backdrop of mixed economic data and the ultimate impact of the Delta variant.

Powell noted he views that the "substantial further progress" test has been met for inflation and there has also been "clear progress toward maximum employment." He added that at its July meeting, he and most participants were of the view that if the economy evolved broadly as anticipated it could be appropriate to start reducing the pace of asset purchases this year. Powell pointed out that the intervening month since its last meeting has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. As such, "We will be carefully assessing incoming data and the evolving risks," he said, pointing out that even after asset purchases end, elevated holdings of longer-term securities will continue to support accommodative financial conditions.

Powell also stressed that, "The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis." Although Powell did not signal a definitive start date for reining in its asset purchases, or "tapering," he did appear to keep expectations intact that it could begin sometime in Q4.

Treasuries were higher following Powell's remarks, as the yield on the 2-year note decreased 3 basis points (bps) to 0.22%, while the yields on 10-year note and the 30-year bond declined 4 bps to 1.31% and 1.93%, respectively. The U.S. dollar finished noticeably to the downside following the speech.

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?, noting 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 overcomes early pressure following Fed Chief's speech, Asia mixed

European equities overcame early losses to finish higher, as a mixed week crossed the finish line that saw positive developments out of the U.S. on the vaccine approval front lift cyclically-natured sectors and stymie a recent bounce for defensively-natured issues. Real Estate, Information Technology and Energy issues all moved higher to contribute to the afternoon rebound, while Financials were able to recover from early pressure that came amid bond yields in the Eurozone and the U.K. paring recent gains. In economic news, French consumer sentiment unexpectedly declined for August, while Italian consumer and manufacturing sentiment for this month also deteriorated. The euro and British pound gained solid ground on the U.S. dollar, which took a decisive downturn following the highly-anticipated speech from Federal Reserve Chairman Jerome Powell in the U.S. Powell held off on providing a start date for the Central Bank to reduce its monthly asset purchases, but did keep expectations of a taper commencement at some point in Q4.

Schwab Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in our latest Schwab Market Perspective: The Next Phase, how the rebound in earnings has lowered stock market valuations slightly from their peak of a year ago, as measured by ratio of price and earnings estimates for the next 12 months (forward P/E ratio), but the relative undervaluation of international stocks has widened. Jeff discusses how the result of the wide gap in valuations between U.S. and international stocks, with similarly strong earnings growth across regions combined with more-attractive valuations, could provide a basis for international stock market outperformance.

The U.K. FTSE 100 Index and Spain's IBEX 35 Index were up 0.3%, France's CAC-40 Index and Switzerland's Swiss Market Index moved 0.2% higher, Germany's DAX Index rose 0.4%, and Italy's FSE MIB Index advanced 0.6%.

Stocks in Asia finished mixed as choppiness in the markets continued, ahead of today's key speech from U.S. Federal Reserve Chairman Powell, while markets in Hong Kong and China remained volatile on the heels of China ramping up regulatory crackdowns. 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. In economic news in the region, Japan's August core consumer price inflation in Tokyo came in a bit hotter than expected but remained subdued, while China's industrial profits slowed but remained solidly higher y/y in July. Additionally, Australia's retail sales fell more than expected for last month.

Japan's Nikkei 225 Index declined 0.4%, with the yen choppy, while China's Shanghai Composite Index rose 0.6%, adding to the week's recovery from the recent selloff. The Hong Kong Hang Seng Index finished little changed and South Korea's Kospi Index nudged 0.2% to the upside. Australia's S&P/ASX 200 Index finished nearly unchanged and India's S&P BSE Sensex 30 Index advanced 0.3%, remaining near all-time highs.

Stocks put down their defenses to notch another weekly gain and more record highs

The markets rebounded from last week's drop with the S&P 500 and Nasdaq continuing to notch fresh record highs. Concerns regarding the festering Delta variant appeared to ease somewhat as some recent data seemed to suggest the spike in cases may be peaking. Moreover, the markets appeared to continue to come to terms with the Fed beginning to taper its monthly asset purchases sometime in Q4. Fed Chairman Jerome Powell kept that possibility alive but held off on signaling a definitive start date, as he continued to believe the spike in inflation will fade and as the Delta variant remained a risk.

Defensively-natured sectors—Real Estate, Health Care, Utilities and Consumer Staples—underperformed this week after last week's outperformance, while value/cyclical sectors—Financials, Materials and Industrials—were among the best performers. Energy stocks were the standout sector, snapping back from last week's tumble as crude oil prices remained volatile, bouncing back sharply following last week's plunge. The heavyweight growth-related sectors—Information Technology, Communications Services and Consumer Discretionary—also moved nicely higher to contribute to the gains.

The economic calendar offered mixed reads, with Markit's preliminary Manufacturing and Services PMIs for August slowing more than expected but still comfortably in expansion territory, existing and new home salescoming in above forecasts in July after a couple of rough monthly patches, jobless claims remaining near pandemic lows, and personal income rising more than expected but spending registering a slower pace than projected for last month. The U.S. dollar gave back some of a recent rally, the Treasury yield curve steepened, and gold gained ground.

Next week, the economic calendar will remain in focus as we will get August reports on Manufacturing and Services PMIs from both the ISM and Markit, which will be preceded by the Conference Board's August Consumer Confidence report. However, given the hyper-focus on the Fed and when it may begin to taper its asset purchases, Friday's August nonfarm payroll report will likely garner the most scrutiny and could potentially be a market mover.

Next week's international economic calendar is also poised to bring some reports that may contend for attention, with releases worth noting including: Australia—Q2 GDP and trade balance. China—Manufacturing and Services PMIs. Japan—retail sales, industrial production, and Q2 capital spending. Eurozone—retail sales, consumer price inflation, and consumer and economic sentiment, as well as Germanretail sales and unemployment change.

With the markets likely remaining choppy as sector leadership could continue to swing on a frequent basis, check out Schwab's Senior Manager of Trading Services Education, Kevin Horner's article, Combining Fundamental and Technical Analysis, for a look at how to marry fundamental and technical analysis in your trading strategy.

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Markets Post Solid Weekly Gain Following Powell's Speech

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