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Posted: 8/23/2019 4:15 PM EDT

Stocks Plummet on Heated Trade Tensions

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U.S. equities plunged after President Trump ratcheted up trade tensions with China by indicating the U.S. would respond to announced retaliatory tariffs on $75 billion of U.S. goods by China, while also ordering U.S. manufacturers to disengage with their China operations. The heated rhetoric overshadowed Federal Reserve Chairman Jerome Powell's highly-anticipated speech that kept the door open for further rate cuts this year, which initially provided the markets with modest gains. Treasury yields tumbled following the comments and the U.S. dollar gave up an early advance to finish lower, while crude oil prices also lost ground and gold rallied. In economic news that took a back seat to the trade developments, new home sales declined more than forecasts. Earnings reports dominated the equity front, with Salesforce and Intuit posting better-than-expected results, while HP and Foot Locker disappointed with their respective quarterly reports.

The Dow Jones Industrial Average (DJIA) fell 623 points (2.4%) to 25,629, the S&P 500 Index tumbled 76 points (2.6%) to 2,847 and the Nasdaq Composite plunged 240 points (3.0%) to 7,752. In heavy volume, 971 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil moved $1.18 lower to $54.17 per barrel and wholesale gasoline was down $0.02 at $1.53 per gallon. Elsewhere, the Bloomberg gold spot price rallied $30.33 to $1,528.39 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.6% to 97.63. Markets were lower for the week, as the DJIA decreased 1.0%, the S&P 500 Index fell 1.4% and the Nasdaq Composite declined 1.8%.

Salesforce.com Inc. (CRM $152) reported Q2 earnings-per-share (EPS) of $0.11, or $0.66 ex-items, versus the $0.47 FactSet estimate, as revenues rose 22.0% year-over-year (y/y) to $4.0 billion, roughly in line with forecasts. CRM issued full-year EPS and revenue guidance that was north of the Street's expectations. Shares were nicely higher.

HP Inc. (HPQ $18) posted fiscal Q3 EPS of $0.78, or $0.58 ex-items, topping the forecasted $0.55, with revenues ticking 0.1% higher y/y to $14.6 billion, roughly in line with expectations. HPQ raised its full-year profit outlook. Additionally, the company announced that President and Chief Executive Officer (CEO) Dion Weisler will step down, effective November 1st, due to a family health matter, and be succeeded by Enrique Lores. Shares fell.

Intuit Inc. (INTU $279) announced a fiscal Q4 loss of $0.09 per share, compared to the estimated $0.15 per share shortfall, with revenues rising 15.0% y/y to $994 million, exceeding the projected $962 million. The company issued current-year EPS and revenue guidance that was above expectations. Shares finished higher.

Foot Locker Inc. (FL $34) reported Q2 profits of $0.55 per share, or $0.66 ex-items, compared to the estimated $0.67, as revenues dipped 0.4% y/y to $1.8 billion, mostly in line with expectations. Q2 same-store sales gained 0.8% y/y, south of the projected 3.1% increase. Shares dropped.

Hasbro Inc. (HAS $104) traded solidly lower after the toy company announced an agreement to acquire Entertainment One Ltd. (ENTMF $8), the parent of the Peppa Pig brand, in an all-cash transaction valued at about $4.0 billion. ENTMF was solidly higher.

Treasury yields lower as trade headlines counter Fed Chief's speech

Treasuries were higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, fell 8 basis points (bps) to 1.51%, 1.52% and 2.01%, respectively. For a look at the volatility in the fixed income markets, see Schwab's Chief Fixed Income Strategist Kathy Jones' latest article, Bond Market: Why Is Everything Upside Down?

The floor dropped out from under stocks in today's session, bond yields moved sharply lower, the U.S. dollar gave up an early gain to finish in the red and gold rallied. The main catalyst driving the action was President's Trump's pledge to respond to China's announcement of retaliatory tariffs on another $75 billion of U.S. goods, expected to take place in two rounds on September 1st and December 15th, as well as his order to U.S. manufacturers to find alternatives to their operations in the Asian nation. The sharp downside reversal came despite Federal Reserve Chairman Jerome Powell's speech at the Central Bank's annual gathering in Jackson Hole, Wyoming, that firmed heightened expectations that the Fed will announce more rate cuts this year, as the Chairman left the door open for future reductions. Powell acknowledged that the U.S. economic outlook continues to be favorable, but cited further evidence of a global slowdown, notably in China and Germany, the problem of low inflation, while pointing to the amplified trade tensions, rising potential for a no-deal Brexit, as well as political turmoil in Hong Kong and Italy. The Fed Chief reiterated that it will act as appropriate to sustain the expansion, as risk management is part of its decision making and it is carefully watching developments.

Global growth concerns have ramped-up since the Fed's July decision to cut its benchmark interest rate, amid the escalated U.S.-China trade tensions and intensified geopolitical uneasiness, while a host of global central banks have moved to more accommodative stances to foster deeper dives into negative rates globally—notably in Europe. Amid this backdrop, check out our latest video, How Do Negative Yields in the Global Market Affect the U.S.?

Amid the intensified market volatility as of late, Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Panic Is Not a Strategy—Nor Is Greed, noting that the development of a long-term strategic asset allocation plan isn't the hard part—it's sticking to it that often becomes the real challenge. Liz Ann adds that this can be especially difficult when markets are volatile, but if we learn from our mistakes, use our brains over our hearts and look to our portfolios as rebalancing guides, we can expect a more successful investing future and maybe even get a free lunch along the way.

In the lone economic report released today, and taking second fiddle to the focus on the increased trade worries, new home sales (chart) dropped 12.8% month-over-month (m/m) in July to an annual rate of 635,000 units, versus the Bloomberg forecast calling for 647,000 units and south of the sharp upward revision to a 728,000 unit pace in June. The median home price was down 4.5% y/y at $312,800. New home inventory jumped to 6.4 months of supply at the current sales pace from 5.5 in June. Sales surged m/m in the Northeast, but fell in the Midwest, South and West. New home sales are based on contract signings instead of closings.

Europe sharply lower on increased U.S.-China tensions, Asia higher ahead of turn in events

Following an afternoon downside reversal, European stocks finished sharply lower, as today's highly-anticipated speech from U.S. Fed Chairman Jerome Powell that kept further rate cut hopes intact was overshadowed by escalated trade tensions following a threat of new tariffs on $75 billion of U.S. goods by China and President Trump's vow to retaliate. The global markets also looked ahead to this weekend's G-7 annual summit, which comes as the heightened trade tensions are being met with festering U.K. Brexit uncertainty and lingering political turmoil in the region, notably in Italy. The euro and British pound were higher versus the U.S. dollar, while bond yields in the region fell. Schwab’s Chief Investment Strategist Liz Ann Sonders offers her article, Recession Watch (or Distant Early Warning?), noting that most "soft" measures of economic data have been deteriorating since the trade war began; but recently some of the "hard" data has succumbed to trade/tariff uncertainty. She adds that whether this is yet another mid-cycle slowdown or the beginning of a recession matters a lot to the stock market. For now, Liz Ann declares the market's "bet" that this is a slowdown, not a recession, but continued weakness could be a "tell," given that historically the worst performance for the stock market has come in the six months leading into recessions.

Stocks in Asia finished mostly higher to close out the week, though conviction may have been tempered by some caution ahead of today's speech from U.S. Fed Chairman Jerome Powell amid the backdrop of elevated expectations of further rate cuts this year. Equities in mainland China and Hong Kong both rose, with the moves coming as the nation threatened countermeasures against new U.S. tariffs yesterday but ahead of this morning's threat by China of increased levies on $75 billion of U.S. goods that unnerved the U.S. and European markets after today's closing bell in Asia. Trade uncertainty also lingered and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Is The Tariff War Turning Into A Currency War?, discussing that if rate cuts aren't seen as enough to address slowing growth and policymakers turn to direct currency intervention, the resulting currency war could be bad news for investors. Jeff adds that in a tariff war, the U.S. has a big advantage over China due to the trade balance, but in a currency war, China has way more ammunition than the United States. Stocks in Japan moved higher, with the yen softening a bit late in the session after the nation reported slightly cooler than expected July consumer price inflation data, and markets in Australia and India advanced. However, South Korean securities dipped amid escalated trade tensions with Japan after the Asian nation said it would withdraw from an intelligence-sharing agreement between the two countries.

Early gains relinquished, stocks post fourth week of losses

U.S. stocks began the week extending last-Friday's rally with global bond yields stabilizing briefly after being a main source of market volatility as the yields on the 2-year and 10-year Treasury notes inverted to exacerbate global growth concerns. Moreover, quarterly results continued to pour in from the retail sector and suggest the all-important U.S. consumer remains healthy, highlighted by a surge in the shares of Target Corporation (TGT $104) as its strong results followed Dow member Walmart Inc's (WMT $111) upbeat earnings figures last week. The economic calendar lied dormant for the first part of the week but heated up with mixed data as the Index of Leading Economic Indicators rebounded and posted the strongest monthly gain in nearly a year and jobless claims fell further, but Markit's preliminary August business activity reports showed manufacturing output contracted for the first time in almost a decade to agitate growing worries of a global recession.

As the markets looked poised to end a string of three-straight weekly losses, the Fed minutes from the meeting that ended July 31st with a rate cut confirmed Committee members felt the rate cut was a "recalibration", as opposed to the start of an easing cycle, raising the stakes for Fed Chairman Jerome Powell's highly-anticipated speech to close out the week amid the backdrop of elevated expectations of further rate cuts this year. Powell appeared to toe the line and not unnerve the markets as he kept a dovish tilt, but his remarks were followed shortly after by President Donald Trump's tweets ordering American companies to "immediately start looking for an alternative to China," in response to China's threat of new tariffs on $75 billion worth of U.S. goods that caused the markets to sell-off and give back the week's advance. For the week, the U.S. dollar dipped, crude oil prices slipped and gold rebounded from an early drop to finish slightly higher, while bond yields were mixed and the 2-year and 10-year Treasury note spread remained close to inversion.

Next week, the economic calendar is likely to gain more attention in the aftermath of earnings season and as the docket is chock full of releases to digest including: preliminary durable goods orders, Consumer Confidence, the first revision of Q2 GDP, personal income and spending, and the final August University of Michigan Consumer Sentiment Index.

As noted in our latest Schwab Market Perspective: Mixed Picture Getting More Concerning, stock markets have become more volatile as trade tensions have worsened and weakness in the manufacturing side of the economy has caused increasing concern. Swift resolutions to these issues seem unlikely and a dovish Fed may not be the elixir to what ails the economy. With the likelihood of persistent volatility in the coming months, we recommend investors stay broadly diversified and focused on the long term. From a tactical perspective, we remain neutral to U.S. and global equities; with a bias within the U.S. market toward large cap stocks relative to small caps. Investors should not attempt to trade around short-term moves in the equity markets; but instead remain disciplined, diversified, and use rebalancing as necessary.

Economic reports from the international calendar next week that could garner attention include: China—industrial profits. India—Q2 GDP. Japan—retail sales and industrial production. Eurozone—economic confidence and consumer price inflation statistics, along with German business sentiment, Q2 GDP, unemployment change and retail sales.

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