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Stocks Decline Amid Fed Chair’s Remarks, Data

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U.S. stocks finished in the red and near the lows of the day, as remarks from today's speech from Federal Reserve Chairman Jerome Powell dampened a widely anticipated rate cut in July, adding to the cautious sentiment that was already in place caution ahead of this week's highly-expected meeting between President Trump and Chinese President Xi at the G-20 summit. The economic calendar didn’t help, as Consumer Confidence and new home sales both fell, and another read on regional manufacturing was soft. Treasury yields were lower and the U.S. dollar ticked higher, while crude oil prices were mixed, and gold added to its rally. In equity news, AbbVie inked a deal to acquire botox-maker Allergan for about $63.0 billion, while Lennar’s upbeat quarterly report was overshadowed by concerns of costs as a result of tariffs in place.

The Dow Jones Industrial Average (DJIA) fell 179 points (0.7%) to 26,548, the S&P 500 Index declined 28 points (1.0%) to 2,917, and the Nasdaq Composite tumbled 121 points (1.5%) to 7,885. In moderate volume, 877 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.07 lower to $57.83 per barrel and wholesale gasoline gained $0.02 to $1.84 per gallon. Elsewhere, the Bloomberg gold spot price traded $2.41 higher to $1,422.14 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.2% to 96.17.

AbbVie Inc. (ABBV $66) announced an agreement to acquire botox-maker Allergan PLC. (AGN $162) for $188.24 per share in cash and stock, in a transaction with an equity value of about $63.0 billion. Under the terms of the deal, AGN stockholders will receive 0.8660 ABBV shares and $120.30 in cash for each share owned. ABBV tumbled and AGN rallied over 25%.

Read about our outperform rating on the health care sector in Schwab's Director of Market and Sector Analysis Brad Sorensen's, CFA, latest Schwab Sector Views: 9.5 Thoughts for the Second Half

Lennar Corporation (LEN $48) reported fiscal Q2 earnings-per-share (EPS) of $1.30, above the $1.15 FactSet estimate, as revenues rose 2.0% year-over-year (y/y) to $5.6 billion, topping the expected $5.0 billion. The homebuilder said its results benefitted from both Q1 deliveries postponed by weather as well as a recovering housing market. However, shares turned negative following a conference call with analysts where the company indicated continued headwinds on material costs as a result of the implemented tariffs. 

Consumer Confidence and new home sales fall, Fed Chief speech eyed

The Consumer Confidence Index (chart) dropped to 121.5 in June, from May's downwardly-revised 131.3 level, below the Bloomberg estimate of 131.0. This was the lowest level since September 2017 as the Present Situation Index and the Expectations Index of business conditions for the next six months both fell month-over-month (m/m). On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—decreased to 27.6 from the 33.5 level posted in May.

New home sales (chart) fell 7.8% m/m in May to an annual rate of 626,000 units versus forecasts calling for 684,000 units and the upwardly-revised 679,000 unit pace in April. The median home price was down 2.7% y/y to $308,000. New home inventory rose to 6.4 months of supply at the current sales pace from 5.9 in April. Sales dropped sharply m/m in the Northeast and West, but rose in the Midwest and South. New home sales are based on contract signings instead of closings.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 2.5% y/y gain in home prices in April, matching expectations. M/M, home prices were flat on a seasonally adjusted basis, compared to forecasts of a 0.1% gain.

The Richmond Fed Manufacturing Activity Index for June dipped to 3, versus forecasts calling for the figure to decline to 2 from March's unrevised level of 5. A reading of zero is the demarcation point between expansion and contraction.

However, the main event for the day was likely the afternoon speech from Federal Reserve Chairman Jerome Powell on the economic outlook and monetary policy. Powell’s remarks came following last week's monetary policy decision that kept rates unchanged but put a rate cut for this year on the table. However the Chairman noted that while uncertainty surrounding trade and global growth have increased, he and his colleagues are “grappling with whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation,” indicating a July rate cut, widely expected by investors and economists, is not a done deal.

As noted in our U.S. Stocks/Market Mid-Year Outlook: Battle Symphony, the June Federal Open Market Committee (FOMC) meeting gave markets what they were expecting; which was no change to rates, but the removal of the key word "patient" in the statement, and firmly putting a July rate cut on the table. Ultimately, if the Fed cuts rates in July or some other meeting(s) in the second half of the year, the action by the stock market in the subsequent period will likely rest on whether we are heading into an economic recession.

Treasuries were higher, as the yield on the 2-year note was 1 basis point (bp) lower at 1.73%, and yields on the 10-year note and the 30-year bond decreased 3 bps to 1.99% and 2.52%, respectively. For a look at the bond markets check out Schwab's Chief Fixed Income Strategist Kathy Jones' Fixed Income Mid-Year Outlook: "Lower for Longer" is Back, in which she notes that we feel fixed income returns should remain positive in the second half of the year, but probably won't repeat the first half's sharp gains.

Tomorrow’s economic calendar will include preliminary durable goods orders, forecasted to have declined 0.2% m/m during May, while ex-transportation orders are estimated to have inched 0.1% higher m/m, and nondefense capital goods excluding aircraft are projected to also have risen 0.1% m/m. The advance goods trade balance is also scheduled for release, with economists projecting the deficit to have narrowed during May to $71.8 billion, while wholesale inventories and MBA Mortgage Applications will round out the docket.

Europe and Asia mostly lower on geopolitical tensions and G-20 focus

European equities were mostly lower in apparent caution ahead of this week's much-anticipated G-20 summit in Japan at which U.S. President Donald Trump and Chinese President Xi are expected to hold talks. Also, the markets continue to grapple with escalated geopolitical tensions as the U.S. imposed new sanctions on Iran. The euro and British pound dipped versus the U.S. dollar and bond yields in the region were mostly lower. In economic news, French manufacturing confidence declined for June. Schwab's Chief Global Investment Strategist 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.

Stocks in Asia finished mostly to the downside as the global markets continue to grapple with heightened geopolitical concerns as the U.S. announced new sanctions on Iran and appeared to tread with some caution ahead of this week's G-20 summit that is expected to see the U.S. and China resume trade talks. Japanese equities declined, as the yen gained ground late in the session, while those traded in South Korea also traded to the downside. Stocks in mainland China and Hong Kong dropped, with the banking sector seeing solid pressure on the exacerbated geopolitical tensions. Meanwhile, Australian securities dipped, but shares in India bucked the trend, rising to snap a two-day losing streak. With volatility likely to remain, Schwab's Jeffrey Kleintop, CFA, offers some analysis for investors navigating the choppy global market environment in his commentary, Diversification: Finally Back After 20 Years. He points out that the lower correlation between the world's stock markets enhances the potential risk-reducing benefits of diversification.

Reports internationally tomorrow will again be sparse, with items of note being consumer confidence in Germany and France.  

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