Q3 Starts Off Positively, but Markets Notch Weekly Losses

U.S. equities started Q3 off on a high note, rallying from the lows of the day to finish in the plus column. However, it wasn't enough to keep the major indexes out of negative territory for the week. The moves came as the global markets continued to grapple with recession uncertainty, which has ramped up as monetary policies tighten and economic data has suggested slowing activity. The economic calendar showed that manufacturing activity continued to slow in June, while construction spending unexpectedly dipped in May. Treasuries rose, with yields at the short-end noticeably lower, and the U.S. dollar was higher, while crude oil prices gained solid ground and gold was nearly flat. In equity news, Micron Technology topped earnings estimates but its guidance came in well below expectations, Kohl's Corporation fell after calling off takeover negotiations with Franchise Group, and GM issued mixed guidance. Europe turned to the upside in late action to finish mostly higher, while Asia was broadly lower.

The Dow Jones Industrial Average gained 322 points (1.1%) to 31,097, the S&P 500 Index increased 40 points (1.1%) to 3,825, and the Nasdaq Composite advanced 99 points (0.9%) to 11,128. In moderate volume, 4.0 billion shares of NYSE-listed stocks were traded, and 4.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.67 to $108.43 per barrel. Elsewhere, the gold spot price inched $0.30 higher to $1,807.60 per ounce, and the Dollar Index gained 0.5% to 105.15. Markets were lower for the week, as the DJIA lost 1.3%, the S&P 500 decreased 2.2%, and the Nasdaq Composite fell 4.1%. Micron Technology Inc. (MU $52) reported adjusted fiscal Q3 earnings-per-share (EPS) of $2.59, above the $2.43 FactSet estimate, with revenues rising 16.4% year-over-year (y/y) to $8.6 billion, roughly in line with the Street's expectations. The company issued Q4 guidance that was well below forecasts. MU said, "Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in FY23. We are confident about the long-term secular demand for memory and storage and are well-positioned to deliver strong cross-cycle financial performance." Shares were lower.

Kohl's Corporation (KSS $29) fell nearly 20% after the retailer said it has ended negotiations with Franchise Group Inc. (FRG $32) regarding a potential takeover, noting the current financing and retail environment created significant obstacles to reaching an acceptable and fully executable agreement. FRG also traded solidly lower.

General Motors (GM $32) issued Q2 net income below the Street's forecast, noting that volumes were impacted by the timing of certain semiconductor shipments and other supply chain disruptions. However, GM reaffirmed its full-year guidance. Shares traded higher.

The equity markets have remained choppy as they wrestle with an aggressive Fed, which has signaled that restoring price stability is its number one goal and conceded that the path to a soft landing has become "more challenging."

Amid this market backdrop, Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Panic Is Not a Strategy—Nor Is Greed, how disciplined investing helps investors navigate through volatile environments. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.June manufacturing activity slows

The June Institute for Supply Management (ISM) Manufacturing Index (chart) showed manufacturing growth (a reading above 50) slowed more than expected. The index declined to 53.0 from May's 56.1 level, versus the consensus Bloomberg estimate of a decrease to 54.5. The softer-than-expected report came as new orders fell into contraction though production growth accelerated slightly, along with inventories. The contraction in employment accelerated, but supplier delivery times improved. Inflation pressures moderated but remained severely elevated, with prices paid decreasing to 78.5 from 82.2.

The ISM said, "The U.S. manufacturing sector continues to be powered—though less so in June—by demand while held back by supply chain constraints. Despite the Employment Index contracting in May and June, companies improved their progress on addressing moderate-term labor shortages."

The final June S&P Global U.S. Manufacturing PMI Index was revised higher to 52.7, compared to estimates calling for an unrevised 52.4 level. However, the index was below May's reading of 57.0, with a reading above 50 denoting expansion. S&P Global's report differs from the ISM as it surveys a more diverse range of companies regarding size.

S&P Global said, "The US manufacturing sector signaled subdued improvements in operating conditions during June. The headline PMI dropped to its lowest level since July 2020 amid a near-stagnation of factory output and a fall in new orders. The decrease in sales was the first since May 2020, with domestic and foreign client demand falling. As a result, firms utilized their current holdings of inputs and finished goods to supplement production, with input buying stagnating and supply chain delays easing. A reduction in new orders, combined with a sustained rise in employment led to greater success clearing backlogs of work, which increased at a notably weaker pace."

Construction spending (chart) dipped 0.1% month-over-month (m/m) in May, versus projections of a 0.4% gain and compared to April's upwardly-revised 0.8% rise. Residential spending rose 0.2%, while non-residential spending decreased 0.6%.

Treasuries were higher with yields choppy with the Fed aggressively tightening policy amid the backdrop of a slowing economy. For more on the Fed's actions check out our WashingtonWISE podcast, Fed Gets Aggressive: What's It Mean for Investors?, featuring Schwab's Chief Fixed Income Strategist Kathy Jones. Also, be sure to follow Kathy on Twitter:@KathyJones.

The yield on the 2-year Treasury note was down 10 basis points (bps) to 2.83%, the yield on the 10-year note decreased 8 bps to 2.89%, while the 30-year bond rate lost 1 bp to 3.12%.

Please note: All U.S. markets will be closed on Monday in observance of the Independence Day holiday.

Europe mostly higher to start new quarter

European equities finished mostly higher to begin Q3, even as the markets continued to contend with headwinds in terms of tightening monetary policies on both sides of the pond that has caused global recession concerns to flare up. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Recession: The Risk Is in the Reversal, where he discusses how investors often notice the overall direction of markets and how missed changes in asset classes under the surface could see a shark attack take a big bite out of unprepared portfolios. You can follow Jeff on Twitter: @JeffreyKleintop. The markets also digested economic data in the region, with Eurozone manufacturing growth for June being revised higher than initially reported, while U.K. manufacturing output for last month was revised to a slower pace of expansion than previously estimated. The biggest data point released today was the Eurozone consumer price inflation estimate for June, which accelerated to an 8.6% y/y gain, up from an 8.1% rise in May, compared to estimates of an 8.5% increase. The figure notched a fresh record high and is exacerbating monetary policy concerns. The euro and British pound traded solidly lower versus the U.S. dollar and bond yields across Europe and in the U.K. lost ground.

The U.K. FTSE 100 Index was unchanged, France's CAC-40 Index ticked 0.1% higher, Germany's DAX Index gained 0.2%, Spain's IBEX 35 Index rose 1.0%, Italy's FTSE MIB Index and Switzerland's Swiss Market Index traded 0.3% higher.

Asia lower to close out the week

Stocks in Asia finished broadly lower in the final session of the week, with the markets digesting some mixed economic data, while also continuing to contend with global recession concerns as monetary policies tighten in the U.S. and Europe to try to fight persistent inflation pressures. Japan's Q2 Tankan survey of large manufacturers showed sentiment fell much more than expected, while a private survey of Chinese manufacturing for June rose more than expected, moving back into expansion territory. Additionally, Australia's manufacturing output was revised to a faster pace of expansion than initially reported for June. China has eased some restrictions and announced stimulus measures to combat the economic impact of its COVID-induced lockdowns, and as such, its stock markets outperformed in Q2. Schwab's Jeffrey Kleintop discusses in his article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output.

Japan's Nikkei 225 Index led to the downside, falling 1.7%, with the yen firming slightly versus the U.S. dollar after a decisive drop seen in the past few months to lows not seen in 24 years as the Bank of Japan holds onto its ultra-loose monetary policy amid tightening in the U.S. and Europe. China's Shanghai Composite Index decreased 0.3%, Australia's S&P/ASX 200 Index declined 0.4%, India's S&P BSE Sensex 30 Index dipped 0.2%, and South Korea's Kospi Index traded 1.2% to the downside. Markets in Hong Kong were closed for a holiday.

Stocks end the first half of the year with a bearish toneU.S. stocks ended the week again amid downside pressure, posting the worst first half of the year in over 50 years. The markets remained hampered by rising recession concerns that have come as global central banks tighten monetary policies to try to arrest persistent inflation pressures. Economic data this week suggested conditions continued to slow, with Consumer Confidence falling to levels not seen in over a year, personal spending coming in softer than expected, and manufacturing slowing more than anticipated. Despite the continued drop in Treasury yields, the markets were defensive, with Utilities the lone sector registering gains for the week, while the heavyweight Consumer Discretionary, Communications Services, and Information Technology sectors led to the downside, posting noticeable declines. The U.S. dollar regained some upward momentum, along with crude oil prices, while gold lost some ground.

Next week, as the earnings season looms and will be shortened by the holiday, the economic calendar will likely take center stage. Notable reports due out next week will include: factory orders for May, June reads on the ISM's Services PMI, and S&P Global's final Services PMI, the minutes from the Fed's June monetary policy meeting, the trade balance for May, the job opening and labor turnover report (JOLTS) for May, and initial jobless claims for the week ended July 2. However, the headlining event of the week will likely be Friday's June nonfarm payroll report. Also, we will continue to get some Fedspeak, notably from notorious hawk St. Louis President James Bullard.

Next week's international economic calendar will also yield some data that could garner attention, with reports worth a mention including Australia—the Reserve Bank of Australia's monetary policy decision. China—Services PMI, and inflation statistics. India—Services PMI. Japan—household spending. Eurozone—retail sales and investor confidence, along with German trade balance, factory orders, and industrial production. Get Schwab's view on markets and the economy.

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