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Market Update

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Posted: 5/24/2019 1:15 AM EDT

Markets Finish Volatile Week on the Upswing

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The U.S. equity markets headed into the holiday weekend with modest gains following a wild week that saw stocks whipsaw between positive and negative territory amid heightened U.S.-China trade tensions and resurfaced global growth concerns. Treasury yields were nearly unchanged and the U.S. dollar dipped amid a light economic calendar that showed that durable goods orders were a tick below estimates, while crude oil prices rose in choppy trading after yesterday's sharp drop, and gold finished in the green. In equity news, HP Inc. bested revenue forecasts and offered relatively favorable guidance, but Foot Locker fell short of earnings and same-store sales expectations.

The Dow Jones Industrial Average (DJIA) rose 95 points (0.4%) to 25,586, the S&P 500 Index gained 4 points (0.1%) to 2,826, and the Nasdaq Composite added 9 points (0.1%) to 7,637. In light volume, 639 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.72 to $58.63 per barrel and wholesale gasoline was up $0.02 at $1.91 per gallon. Elsewhere, the Bloomberg gold spot price advanced $1.30 to $1,284.75 per ounce, and the Dollar Index— a comparison of the U.S. dollar to six major world currencies—was down 0.3% at 97.59. Markets were lower for the week, as the DJIA fell 0.7%, the S&P 500 Index lost 1.1%, and the Nasdaq Composite declined 2.2%.

HP Inc. (HPQ $20) reported fiscal Q2 earnings-per-share (EPS) of $0.51, or $0.53 ex-items, versus the $0.51 FactSet estimate, with revenues ticking 0.2% higher year-over-year (y/y) to $14.0 billion, above the projected $13.9 billion. The company's personal systems revenue rose y/y as its commercial unit increased to overshadow a decline in its consumer segment. Printing revenues were down y/y. HPQ issued full-year EPS guidance that was mostly above expectations, while noting that it is adjusting to tariff headwinds. Shares were nicely higher.

Hewlett Packard Enterprise Co. (HPE $14) posted fiscal Q2 EPS of $0.30, or $0.42 ex-items, compared to the expected $0.36, as revenues declined 4.3% y/y to $7.2 billion, below the forecasted $7.4 billion. Revenue growth was seen in its storage unit but revenues from its computer segment declined. HPE issued Q3 earnings guidance with a midpoint above estimates and raised its full-year profit outlook. Shares finished higher.

Foot Locker Inc. (FL $44) announced Q1 profits of $1.52 per share, or $1.53 ex-items, versus the expected $1.61, with revenues rising 2.6% y/y to $2.1 billion, roughly in line with estimates. Q1 same-store sales rose 4.6% y/y, above the forecasted 5.6% gain. FL lowered its full-year earnings guidance, citing share repurchase activity to date. Shares fell.

Durable goods orders miss forecasts

April preliminary durable goods orders (chart) fell 2.1% month-over-month (m/m), compared to the Bloomberg estimate of a 2.0% decline and March's downwardly-revised 1.7% gain. Ex-transportation, orders were little changed m/m, below forecasts of a 0.1% rise and compared to March's downwardly-revised 0.5% decline. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, decreased 0.9%, compared to projections of a 0.3% decline, and the prior month's figure was revised lower to a 0.3% rise from the initially reported 1.4% increase.

The generally volatile report showed a drop in demand for transportation equipment, led by a sharp drop in orders for nondefense aircraft and parts, likely impacted by the 737 MAX issues for Dow member Boeing Company (BA $355), which was met with weakness in manufacturing and communications equipment. The softness overshadowed a solid gain in orders for computers and related products, and modest increases for machinery and electrical equipment, appliances and components.

Treasuries were nearly flat, as the yield on the 2-year note increased 2 basis points (bps) to 2.17%, while the yields on the 10-year note and the 30-year bond were unchanged at 2.32% and 2.75%, respectively. The markets have been choppy as of late, led by heightened volatility in the technology sector, amid escalated trade tensions and some mixed global economic data.

For a look at the current environment, check out Schwab’s Chief Investment Strategist Liz Ann Sonders' latest commentary, Street Fightin’ Man: President Trump Ups Trade War Ante, discussing the economic implications of the trade war and tariffs; currently and prospectively. Also, Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, Interest Rates May Be "Lower for Longer": What's an Income Investor to Do?, that the prospect for bond yields staying lower for longer means investing for income is likely to remain challenging for the foreseeable future.

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

Europe finishes higher to trim weekly losses, Asia mixed

European equities finished higher, paring some of the losses seen this week which have come courtesy of increased U.S.-China trade uncertainty and economic growth concerns following some disappointing global manufacturing reports. The British pound was higher versus the U.S. dollar as U.K. Brexit uncertainty took another turn with Prime Minister Theresa May announcing that she will resign on June 7th. The euro also gained ground on the greenback and bond yields in the region were mixed. In economic news in the region, U.K. retail sales declined by a smaller amount than expected. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the plethora of global risks in his latest article, Geopolitics: Examining The Top Five Risks. Jeff points out that geopolitical threats include renewed trade tensions, North Korean missile launches, Iran abandoning the nuclear deal, instability in Venezuela, and the European parliamentary elections.

Stocks in Asia finished mixed following yesterday's broad-based declines in the global markets as U.S.-China trade tensions remain escalated and continue to weigh on sentiment, while a host of manufacturing data out of the U.S., Eurozone and Japan caused growth concerns to flare up. Japanese equities declined, with the yen gaining ground amid the uneasiness, and those traded in South Korea also fell. Markets in Australia decreased, with the energy sector seeing pressure following yesterday's tumble in crude oil prices on the trade and growth worries. However, stocks in mainland China finished flat and securities in Hong Kong gained modest ground, while Indian shares rallied after the nation's election resulted in a decisive victory for Prime Minister Narendra Modi. Amid the choppiness in the global markets, Schwab's Jeffrey Kleintop, CFA, offers his article, Diversification: Finally Back After 20 Years, in which he notes that the trend in the degree to which the world's stock markets move in sync with each other has fallen to the lowest level in 20 years, adding that the lower correlation enhances the potential risk-reducing benefits of diversification.

Weekly losses continue as trade jitters joined by resurfaced growth concerns

U.S. stocks extended a string of weekly losses and the global markets came under pressure, with U.S.-China trade tensions escalating as recently increased tariffs by both countries was joined by the fallout of U.S. restrictions on Chinese telecom giant Huawei Technologies. The technology sector bore the brunt of the selling pressure, amplified by a sharp drop in Qualcomm Incorporated (QCOM $66) after a federal judge ruled that the chipmaker violated antitrust law. The energy sector led to the downside, falling amid a tumble in crude oil prices as oversupply concerns remained, with oil inventories unexpectedly jumping and exacerbated by resurfaced global growth fears. The growth worries flared-up as manufacturing activity in the Eurozone shrank for a fourth-straight month, Japanese manufacturing output moved back to contraction territory and U.S. growth in the sector fell to the slowest pace since September 2009. Consumer discretionary issues also came under solid pressure, with retail earnings continuing to pour in and weighing on Kohl's Corporation (KSS $51), Best Buy Co. Inc. (BBY $66), Nordstrom Inc. (JWN $34) and Lowe's Companies Inc. (LOW $95), partially offset by a rally in Target Corporation (TGT $82) and a modest rise in Dow member Home Depot Inc. (HD $194) on the heels of their results. The markets were defensive, fostering gains for utilities, health care and real estate sectors, with the latter shrugging off some softer than expected existing and new home sales reports. Treasury yields continued to fall, with the 10-year rate hitting the lowest since late 2017, and the U.S. dollar dipped.

In the wake of the Memorial Day holiday and with earnings season behind us, the abbreviated week will likely continue to be at the mercy of trade headlines and the economic calendar. The ball will get rolling with May Consumer Confidence, and roll on with the second (of three) read on Q1 GDP and April personal income and spending figures, while culminating with the final May University of Michigan Consumer Sentiment Index.

As noted in our latest Schwab Market Perspective: Trade Tension Takes Turn at Top, rising trade tensions with China have rattled U.S. markets, but other trade issues may be cooling. Volatility is likely to remain elevated until there is more clarity on trade; but it's increasingly likely this could be a long slog. Although on the back burner recently, economic data has been mixed and we're concerned that the longer the trade dispute lingers, the bigger the hit will be to business and consumer confidence. There may be some international locations that are worth a look in the midst of the trade drama, as some areas may be able to stay out of the fray.

International reports due out next week include: Australia—building approvals. China—industrial profits, and Manufacturing and non-Manufacturing PMIs. Japan—industrial production and retail sales. Eurozone—economic, business and consumer confidence reports, along with German unemployment change, consumer price inflation and retail sales.

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