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Market Update

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Posted: 7/18/2019 4:15 PM EDT

Stocks Mixed in Bumpy Session

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U.S. equities were able to finish with modest gains after a rocky session, as uncertainty was palpable amid a host of divergent earnings and economic reports, as well as continued angst over a U.S.-China trade deal. Netflix fell sharply after disappointing with its subscriber growth, but eBay and Union Pacific saw gains after their respective results. In economic news, the Leading Index posted its first monthly decline of 2019, but regional manufacturing surprised to the upside and jobless claims rose. Treasury yields, the U.S. dollar and crude oil prices were all lower, while gold jumped.

The Dow Jones Industrial Average (DJIA) inched 3 points higher to 27,223, the S&P 500 Index was up 11 points (0.4%) to 2,995, and the Nasdaq Composite gained 22 points (0.3%) to 8,207. In moderate volume, 734 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.48 to $55.30 per barrel and wholesale gasoline was down $0.05 at $1.83 per gallon. Elsewhere, the Bloomberg gold spot price advanced $18.23 to $1,444.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 96.69.

Netflix Inc. (NFLX $325) reported Q2 earnings-per-share (EPS) of $0.60, above the $0.56 FactSet estimate, as revenues rose 26.0% year-over-year (y/y) to $4.9 billion, roughly in line with expectations. The streaming service's Q2 domestic net subscriber additions unexpectedly fell and its international streaming additions came in well below expectations, with NFLX citing price increases and a weak content slate that led to elevated churn. The company said it expects U.S. paid membership to return to more typical growth in Q3 and its global paid net subscriber additions to be up y/y. Shares fell sharply.

Morgan Stanley (MS $44) posted Q2 EPS of $1.23, north of the estimated $1.14, with revenues decreasing 3.4% y/y to $10.2 billion, above the forecasted $10.0 billion. The company's investment banking revenues was above expectations, along with its global wealth management and institutional securities units, while its fixed income and equity trading revenues were below estimates. Shares finished to the upside.

Dow member UnitedHealth Group Incorporated (UNH $261) announced Q2 earnings of $3.42 per share, or $3.60 ex-items, versus the expected $3.45, as revenues grew 8.0% y/y to $60.6 billion, roughly in line with forecasts. The health insurer's overall membership climbed but its Medicaid membership fell. UNH raised its full-year EPS outlook. Shares were lower.

Dow component International Business Machines Corporation (IBM $149) achieved Q2 profits of $2.81 per share, or $3.17 ex-items, compared to the expected $3.08, with revenues declining 4.2% y/y to $19.2 billion, mostly in line with forecasts. IBM said it will update its full-year guidance, including the impact of its Red Hat acquisition, on August 2nd. Shares were higher.

eBay Inc. (EBAY $40) reported Q2 EPS of $0.46, or $0.68 ex-items, versus the expected $0.62, as revenues rose 2.0% y/y to $2.7 billion, roughly in line with forecasts. The company raised its full-year earnings outlook, while it lowered its revenue guidance. Shares rallied as the company also noted that it is reviewing the role and value of its StubHub and Classifieds businesses.

Union Pacific Corporation (UNP $174) posted Q2 profits of $2.22 per share, above the projected $2.15, with revenues declining 1.0% y/y to $5.6 billion, mostly matching expectations. The rail company's business volumes decreased y/y, and growth in its industrial volumes were more than offset by flat agricultural products shipments as well as declines in energy and premium. UNP's operating ratio—a key industry metric measuring efficiency—was an all-time best and came in better than anticipated. Shares were nicely higher.

With earnings season heating up as we head to the second half of the year, Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, offers his latest Schwab Sector Views: Uncomfortably Neutral, noting that the second-half sector outlook begins the way the first half did—with health care at outperform and communication services at underperform. Brad adds that patience can be frustrating, but may be the most prudent course of action, especially during periods of heightened uncertainty, like now. Brad concludes that a more-defensive posture is appearing to be appropriate given the weakening economic data, but elevated valuations keep him from pulling the trigger.

Leading Indicators decline, jobless claims rise, regional manufacturing activity jumps

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for June decreased 0.3% month-over-month (m/m)—the first decline of the year—versus the Bloomberg projection of a 0.1% gain and compared to May's unrevised flat reading. Positive contributions came from credit, average workweek and stock prices components of the index, but were more than offset by declines for building permits, ISM new orders and jobless claims.

Weekly initial jobless claims (chart) increased by 8,000 to 216,000, matching the Bloomberg estimate, with the prior week's figure being revised lower by 1,000 to 208,000. The four-week moving average dipped by 250 to 218,750, while continuing claims fell by 42,000 to 1,686,000, south of estimates of 1,700,000.

The Philly Fed Manufacturing Index (chart) in July jumped to 21.8, from the 0.3 posted the month prior, well above expectations of a rise to 5.0, and moving comfortably into expansion territory (a reading above zero).

TTreasuries finished higher, as the yield on the 2-year note dropped 8 basis points (bps) to 1.75%, the yield on the 10-year note declined 3 bps to 2.03%, and the 30-year bond rate declined 1 bp to 2.57%. For a look at the bond markets check out Schwab's Chief Fixed Income Strategist Kathy Jones' 2019 Mid-Year Outlook: Rate Expectations, where we discuss that recession risk is rising, but markets expect central banks to keep it at bay by cutting short-term interest rates and address if it will it be enough to keep the stock market rally going.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Round Here: Bulls Celebrate Round Numbers for U.S. Indexes, Friday, the S&P crossed 3k; which followed the Dow’s 27k cross and the NASDAQ’s 8k cross last month; with small caps not in gear. She adds that round numbers are more psychological than technically-important and have helped boost most measures of investor sentiment back into optimistic territory. Liz Ann concludes that round number cheering is being accompanied by rate cut cheering, with stocks (perversely?) cheering weaker economic news in the interest of easier monetary policy.

The only item on tomorrow's economic calendar is the preliminary University of Michigan Consumer Sentiment Index for July, forecasted to increase to 98.7 from June's 98.2 level.

Europe mixed, Asia lower on data and flared-up trade uncertainty

European equities were mixed, with the global markets digesting the ramped-up Q2 earnings season, while U.S.-China trade uncertainty flared-up recently to apply some pressure to conviction. euro dipped versus the U.S. dollar and bond yields in the region lost ground. The British pound rose versus the greenback after U.K. retail sales for June came in stronger than expected. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Valuations Hold A Surprising Message For Stock Market Investors, in which he points out that valuations suggest international stocks may produce above average, double-digit annualized total returns over the next 10 years, in contrast to below average, mid-single digit returns for U.S. stocks.

Stocks in Asia finished lower with the global markets appearing to turn cautious amid resurfacing U.S.-China trade uncertainty, while scrutiny continued regarding the start to Q2 earnings season. A host of economic data was sifted through with a mixed response, as Japanese exports in June fell more than anticipated, Australian employment change was below estimates for last month, and the Bank of Korea unexpectedly cut its benchmark interest rate. Japanese equities dropped, with the yen moving higher, while markets in South Korea, mainland china, Hong Kong, Australia and India were also lower. Schwab's Jeffrey Kleintop, CFA, offers his Global Stocks Mid-Year Outlook, in which he points out that in the second half of 2019, stock markets around the world will likely have to contend with slowing global economic growth as leading indicators point to an increasingly vulnerable world economy that may be worsened by shocks from trade tariffs and other factors. Jeff adds that the potential for reversals in long-term market performance trends may catch unprepared investors by surprise, suggesting investors should ensure they have an appropriate amount of broad international exposure, including both emerging and developed markets, in their portfolios to potentially benefit from opportunities for performance and diversification.

Unlike the domestic docket, the international economic calendar will be fairly busy, with reports scheduled to be released to include PPI from South Korea, lending statistics from India, CPI and the All Industry Index from Japan, PPI from Germany, and public sector net borrowing from the U.K.

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