Schwab Market Update | August 6, 2020

Schwab Market Update

Hopes of a Fiscal Package Emerge, but Caution Apparent

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U.S. equities finished higher, with tech shares leading the way, as investors took some solace in headlines that progress was being made for Congress to reach a deal on an expected new fiscal relief package. Moreover, a better-than-expected read on weekly initial jobless claims lent some support, but gains remained somewhat muted with the markets cautious ahead of tomorrow's key July labor report. Treasury yields were mixed and the U.S. dollar ticked lower, while crude oil prices lost modest ground in choppy action and gold posted another record high. In equity news, Costco Wholesale delivered much stronger-than-expected July sales figures, ViacomCBS topped estimates, and Bristol-Myers Squibb bested revenue forecasts and received a favorable court ruling pertaining to its blood-thinning treatment Eliquis. Elsewhere, MetLife missed the Street's quarterly expectations. Europe finished lower despite some upbeat data and following the Bank of England's unchanged monetary policy, while markets in Asia were mixed.

The Dow Jones Industrial Average rose 185 points (0.7%) to 27,387, the S&P 500 Index increased 21 points (0.6%) to 3,349, and the Nasdaq Composite gained 110 points (1.0%) to 11,108. In moderate volume, 806 million shares were traded on the NYSE and 4.0 billion shares changed hands on the NASDAQ. WTI crude lost $0.24 to $41.95 per barrel and wholesale gasoline was up $0.01 at $1.23 per gallon. Elsewhere, the Bloomberg gold spot price advanced $18.66 to $2,037.87 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.6% lower to 92.84.

Costco Wholesale Corporation (COST $343) reported that its July same-store sales rose 13.2% year-over-year (y/y), well above the FactSet estimate calling for a 6.1% gain. Sales in the U.S., Canada and other international markets were all up double digits, while its E-commerce sales surged over 75%. Shares traded higher.

MetLife Inc. (MET $37) reported Q2 earnings-per-share (EPS) of $0.07, or $0.83 ex-items, versus the Street's projection of $0.90, as revenues declined 19.0% y/y to $14.1 billion, south of forecasts of $15.1 billion. The company said its private equity portfolio saw a decline that was expected, while its well-diversified set of businesses in its underwriting segment provided meaningful offsets to increased claims from COVID-19. Shares were lower.

Bristol-Myers Squibb Company (BMY $61) posted a Q2 loss of $0.04 per share, or EPS of $1.63 ex-items, compared to the expected $1.48 per-share profit, as revenues jumped 61.0% y/y to $10.1 billion, above the estimated $10.0 billion. The company said its Q2 results reflect the passion and focus of its employees to introduce new medicines to support patients with serious diseases and deliver strong results during the COVID-19 pandemic. BMY raised its full-year earnings forecast and upped the lower end of its revenue outlook. Separately, BMY and Dow member Pfizer Inc. (PFE $38) received a favorable court ruling regarding a patent dispute with their blood-thinning treatment Eliquis. Shares of BMY were higher, while PFE lost modest ground.

ViacomCBS Inc. (VIAC $27) reported Q2 profits of $0.77 per share, or EPS of $1.25 ex-items, versus the expected $0.95, with revenues declining 12.0% y/y to $6.3 billion, above the projected $6.2 billion. The company said it delivered another solid quarter, with clear operational momentum and sequential improvement in key earnings and cash flow metrics. Despite the impact of COVID-19 on revenue in the quarter, VIAC said it successfully managed through the effects of the pandemic. The company added that its results underscored its strong progress delivering on its value-creation initiatives, including integration cost synergies, expanded and new distribution agreements, as well as the rapid acceleration of its streaming business, where it achieved record users and revenue in free and pay services. Shares were higher.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Running on Faith: Are Stocks Discounting Too Powerful an Earnings Recovery?, we are in the heart of second quarter earnings season, with the "beat rate" above average thanks to an extremely low bar. She also points out that stocks' substantial run since the March lows has been price-to-earnings ratio (P/E)-driven, not EPS-driven, and concentration, courtesy of the "big five" represents potentially-significant risk; but there are fundamental differences between 2000 and 2020.

The markets continue to focus on the elusive agreement on the size and scope of the next wave of fiscal relief measures by lawmakers on Capitol Hill as emergency benefits have expired. Headlines have suggested there has been some progress on discussions, notably an agreement to try to finalize a deal by the end of the week, but lawmakers continue to remain at odds on some key aspects of the package. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Stock Market Reaction to Expiring COVID-19 Programs, how if not extended or replaced, the fading support for the unemployed raises the risk of weakening economic momentum, turning the V-shaped recovery into a W. Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his article, Clock Ticks as Congress Struggles for Consensus on Next Aid Bill, noting how despite the slow pace of negotiations, we continue to think a deal will be struck this month.

For timely commentary, you can follow the experts from the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and you can visit www.schwab.com/volatility to find more analysis and strategies on the current market environment.

Jobless claims come in better than expected

Weekly initial jobless claims (chart) came in at a level of 1,186,000 for the week ended August 1st, better than the Bloomberg estimate of 1,400,000, and compared to the prior week's upwardly-revised 1,435,000 level. The four-week moving average decreased by 31,000 to 1,337,750, while continuing claims for the week ended July 25th fell by 844,000 to 16,107,000, below estimates of 16,900,000. The four-week moving average of continuing claims declined by 413,250 to 16,628,250.

Treasuries were mixed, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.12%, while the yield on the 10-year note was flat at 0.54%, and the 30-year bond rate decreased 2 bps to 1.20%.

Treasury yields remain choppy as the markets grapple with uncertainties regarding the sustainability of the economic recovery amid flared-up new cases of COVID-19 and the fiscal fight in Congress, but the Fed has continued to stress its willingness to use all of its tools to combat the pandemic's severe disruption as discussed by Schwab's Liz Ann Sonders in her article, Policy of Truth: Fed Holds Rates Steady Amid Somber Outlook.

The week's economic calendar will close out tomorrow with what is likely to be the headliner for the week—the July labor report. Nonfarm payrolls and private sector payrolls are both forecasted to have gained 1,500,000, the unemployment rate is expected to decline to 10.5%, and average hourly earnings are estimated to have declined 0.5% month-over-month (m/m) and be up 4.2% y/y. In the final hour of trading, consumer credit will be released, with economists projecting consumer borrowing rose by $10.0 billion during June

Europe lower despite data, Asia mixed

European equities were lower, despite the recent string of upbeat global economic data, which continued today with a stronger-than-expected bounce in German factory orders for June and the much lower-than-forecasted U.S. jobless claims figures. The Bank of England's (BoE) unchanged monetary policy decision was also in focus, with the BoE noting that the depth of the downturn in economic activity due to the COVID-19 pandemic may be less severe than expected, while cooling the speculation of negative rates. The euro and the British pound traded higher versus the U.S. dollar, while bond yields in the region were lower. Global stock market valuations have rebounded to above those of prior market peaks as discussed by Schwab's Jeffrey Kleintop in his latest article, How Have Recent Developments Impacted Long-Term Returns?. Jeff notes that in the near-term, this is typical and is not anticipated to act as a drag on returns, but over the long-term, a high P/E ratio has historically had a negative impact on returns.

The U.K. FTSE 100 Index was down 1.3%, France's CAC-40 Index decreased 1.0%, Germany's DAX Index declined 0.5%, Spain's IBEX 35 Index dropped 1.2%, Italy's FTSE MIB Index fell 1.3%, and Switzerland's Swiss Market Index traded 0.3% lower.

Stocks in Asia finished mixed, with the markets continuing to find support from the recent round of upbeat global economic data that has suggested economic activity is recovering from the severe disruption of the COVID-19 pandemic. However, U.S.-China tensions remain palpable, uncertainties remain elevated regarding a next installment of U.S. fiscal aid and the recent flare-up of new virus cases globally. Also, the U.S. dollar continued a drop yesterday, which has underpinned some emerging markets as of late. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, U.S. Dollar Outlook: What Could a Weaker Dollar Mean for Your Portfolio?, how the U.S. dollar has been showing signs of weakening, a trend that may underscore the importance of global diversification. Kathy adds that movements in currencies can have a large impact on returns in global bonds and a weaker dollar removes one of the headwinds to returns in foreign-currency-denominated bonds. In separate commentary she discusses Are Emerging-Market Bonds Worth the Risk?. Japan's Nikkei 225 Index declined 0.4% as the yen remained firm, while South Korea's Kospi Index rose 1.3%. China's Shanghai Composite Index advanced 0.3% and the Hong Kong Hang Seng Index decreased 0.7%. Australia's S&P/ASX 200 Index moved 0.7% higher and India's S&P BSE Sensex 30 Index moved 1.0% to the upside even as the Reserve Bank of India kept its monetary policy stance unchanged versus forecasts of some rate cuts.

Tomorrow's international economic calendar will hold trade data from China, the Leading Index from Japan, as well as industrial production from France, Spain and Germany.