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Market Update

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Posted: 8/16/2018 4:15 PM EDT

Stocks Manage Solid Advance on Earnings and Trade Developments

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U.S. stocks rebounded nicely after yesterday's decline amid some upbeat earnings reports from Dow member's Walmart and Cisco, while China announced that it plans to resume trade talks with the U.S. In other earnings developments, shares of J.C. Penny tumbled after the retailer posted a much larger-than-expected loss. Treasury yields ticked slightly higher and crude oil prices also nudged to the upside, while the U.S. dollar and gold dipped. In economic news, housing, employment and some regional manufacturing data came in mixed.

The Dow Jones Industrial Average (DJIA) jumped 396 points (1.6%) to 25,559, the S&P 500 Index gained 22 points (0.8%) to 2,841, and the Nasdaq Composite was 32 points (0.4%) higher at 7,807. In moderate volume, 706 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.45 to $65.46 per barrel and wholesale gasoline lost $0.01 to $1.99 per gallon. Elsewhere, the Bloomberg gold spot price dipped $1.23 to $1,173.61 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 96.63.

Dow member Walmart Inc. (WMT $99) reported a Q2 loss of $0.29 per share, or earnings-per-share (EPS) of $1.29 ex-items, versus the FactSet estimate of a $1.22 per share profit, as revenues rose 3.8% year-over-year (y/y) to $128.0 billion, above the projected $126.0 billion. Q2 U.S. same-store sales grew 4.5% y/y, north of the estimated 2.3% gain, the strongest growth in more than ten years led by grocery, apparel and seasonal, and supported by traffic and ticket growth. WMT raised its full-year EPS guidance. Shares rallied.

Dow component Cisco Systems Inc. (CSCO $45) posted fiscal Q4 EPS of $0.81, or $0.70 ex-items, compared to the forecasted $0.69, as revenues increased 6.0% y/y to $12.8 billion, roughly in line with expectations. CSCO issued Q1 EPS and revenue guidance that exceeded the Street's estimates. Shares traded nicely higher.

J.C. Penney Company Inc. (JCP $2) announced a Q2 loss of $0.32 per share, or a shortfall of $0.38 per share ex-items, versus the expected loss of $0.06 per share, with revenues decreasing 7.5% y/y to $2.8 billion, mostly in line with estimates. Q2 same-store sales grew 0.3% y/y, below the projected 1.0% gain. The company said it took necessary actions to markdown and clear excessive inventory positions across many of its categories, which encompasses more than just seasonal product or fashion misses. As such, JCP slashed its full-year EPS and same-store sales outlooks, adding that it will continue to take actions to right-size its inventory, better curate its assortment and most importantly, provide a solid foundation that it can continue to build upon as it moves forward. Shares fell sharply.

Housing construction activity mixed, jobless claims unexpectedly dipped

Housing starts (chart) for July rose 0.9% month-over-month (m/m) to an annual pace of 1,168,000 units, below the Bloomberg forecast of a 1,260,000 unit rate. June starts were revised lower to an annual pace of 1,158,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, grew 1.5% m/m to an annual rate of 1,311,000, versus expectations of a 1,310,000 pace, and compared to June's upwardly revised 1,292,000 rate.

Weekly initial jobless claims (chart) declined by 2,000 to 212,000, versus estimates calling for 215,000, with the prior week's figure revised higher by 1,000 to 214,000. The four-week moving average rose by 1,000 to 215,500, while continuing claims fell by 39,000 to 1,721,000, south of estimates of 1,740,000.

The Philly Fed Manufacturing Index (chart) in August fell more than expected but remained at a level depicting expansion (a reading above zero), dropping to 11.9 from 25.7 in July, compared to estimates of a decline to 22.0.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article,Second Hand News: Facing a Second Derivative Economic Inflection Point?, U.S. economic growth is strong; but it’s time to look at the signs we may be facing a "second derivative" change, or inflection point in growth. Liz Ann adds that complacency abounds—about growth, volatility, inflation and trade, while pointing out that when it comes to the relationship between economic fundamentals and stock market behavior, "better or worse matters more than good or bad."

Treasuries dipped following the data, with the yields on the 2-year and 10-year notes ticking 1 basis point higher to 2.62% and 2.87%, respectively, while the 30-year bond yield was flat at 3.03%. Schwab's Chief Fixed Income Strategist, Kathy Jones offers a look at bond investing in her latest article, Are Your Bond Holdings Too Short?.

Tomorrow, the U.S. economic calendar will yield the Index of Leading Economic Indicators, with economists projecting a 0.4% m/m advance for July, following the 0.5% gain seen the month prior. Rounding out the day will be the preliminary University of Michigan Consumer Sentiment Index for August, which is expected to tick higher to 98.0 from July's final read of 97.9.

Europe rebounds on earnings, Asia mostly lower after paring losses

European equities rebounded broadly, with technology issues leading the way after falling yesterday as China's Tencent Holdings' disappointing earnings report unnerved the sector globally. China's announcement that it plans to resume stalled trade talks with the U.S. later this month bolstered the global mood. Earnings on both sides of the pond also helped aid global sentiment. U.K. retail sales for July easily topped forecasts to also support the positive backdrop. The euro and British pound rose versus the U.S. dollar, while bond yields in the region finished mixed but tilted to the upside. However, Italian markets bucked the trend after being closed yesterday, when the global market slipped on the escalated concerns regarding the Turkish economic/currency crisis. With the markets choppy on data, trade headlines and the Turkish turmoil, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Five Global Investing Risks to Watch, in which he notes that a global recession would be a big risk for stocks, and while the global economic cycle is aging, we don’t foresee a global recession taking place in 2018—although that risk may rise in 2019. Jeff reminds us that having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome is a key to successful investing.

Stocks in Asia finished mostly lower amid lingering concerns about the potential impact of the Turkish economic/currency crisis, especially on emerging markets. Sentiment in the technology sector remained unnerved after the Chinese internet company Tencent Holdings posted a surprise drop in profits and slower-than-expected revenue growth. However, markets came off the worst levels of the day after China announced that it intends to restart stalled trade talks with the U.S. later this month. Schwab's Jeffrey Kleintop, CFA, offers a look at the global landscape in his article, 2018 Global Mid-Year Outlook: From Sugar High to High Tariffs?. Japanese equities dipped, with the yen gaining ground despite a smaller-than-expected rise in the nation's July exports. Stocks trading in mainland China and in Hong Kong declined. Indian securities were lower and South Korean shares fell, with both markets returning to action following yesterday's holiday closures. Australian stocks finished nearly unchanged even after the country reported an unexpected decline in its employment change for last month.

The international economic docket for tomorrow will be light, yielding the unemployment rate from South Korea, CPI from the Eurozone and the current account from Italy.

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