Chips Sink, Consumers Strain, Congress Shifts

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" while Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

The same old issues face Congress next Monday when its lame duck session starts. "At the top of the to-do list is a looming December 11 deadline for government funding that could produce a government shutdown," said Michael Townsend, managing director, legal and government affairs at Schwab. Next year's debt ceiling fight is "the biggest potential market-moving issue" for the first half of 2027, he said. Volatility could accelerate if politicians tangle over it, and past instances put stocks into a skid and raised yields. There's never been a U.S. default, but the country's credit rating was hurt by past battles. The biggest industry losers of the election, Townsend said, were data centers and the companies that need them, thanks to the public backlash that partly drove the Democratic victory. A slowdown in the data center build rate could loom, along with possible mandates that companies cover the costs of upgrading infrastructure and grids along with electricity and water.

Last month, personal spending data was weak, raising concern about holiday shopping numbers. The "low hire, low fire" labor market of the last year means layoffs and jobless claims are low but so is wage growth, perhaps making middle income consumers reluctant to spend. Average September hourly earnings growth didn't match inflation. There's also the wealth effect with tech stocks in correction. This could make even wealthier consumers a bit less enthusiastic about Black Friday. The heart of retail earnings season lies ahead, perhaps giving insight into consumers response to high gas and food prices. Target (TGT) and Walmart (WMT) report later this month. Earlier retail earnings sent mixed messages, with Shopify's (SHOP) revenue growth missing estimates and Amazon's (AMZN) retail results disappointing. However, Amazon had tough comparisons due to a date change in its Prime Day promotion. The National Retail Federation predicts holiday sales will grow 4.2% this year after 3.1% growth last year. That isn't adjusted for inflation, however, and investors should watch retail hiring trends, sometimes a clue to demand.

After this week's epic sell-off, semiconductors are down 30% from recent peaks, losing 12% Thursday alone. "The fundamentals surrounding the AI infrastructure buildout—or the potential pace of that buildout—have been under fire due to questions around future funding, and the blue sweep just exacerbated that concern," said Nathan Peterson, director of derivatives research and strategy at Schwab Center for Financial Research (SCFR). The question is whether stocks can make a soft landing if chips remain weak. The jury is out, especially with tech embedded so heavily in the indexes, but there is hope. This includes strong cloud growth from "hyperscalers" last quarter and solid AI-propelled results from AppLovin (APP). Back on Wednesday, investors poured cash into consumer names, but bullish sentiment fell to 34.1% from 37.8% in the latest AAII Sentiment report. Yesterday saw the most net selling by retail traders since the Covid collapse in 2020. Traditional benchmarks show oversold conditions, so investors might want to track institutions, systematic funds, and commodity trading advisors on a day-to-day basis to see where their positioning is and get a sense of whether the market has hit a wash-out point. It might not be there yet.

The crypto industry spent $68 million in hopes of defeating Ohio's Sherrod Brown in his Senate race, according to Reuters, and with the Democratic rout on Tuesday, Brown now looks poised to become chair of the Senate Agriculture Committee, while Senator Elizabeth Warren (D-MA) looks set to take over the Banking Committee. Both are crypto critics whose committees have jurisdiction over the industry. But Democratic leadership doesn't mean the Clarity Act market structure bill is dead. It was only narrowly defeated in the Senate in September, and plenty of Democrats want to pass a crypto regulatory framework, albeit one that may be tougher on crypto companies and addresses ethics concerns surrounding the president, Townsend said. "I think that's a place where you may see some bipartisanship to get that across the finish line next year," he said.

Overshadowed late last week by tech earnings was the Bureau of Economic Analysis's report on September personal income and spending. Personal income inched up 0.2% month over month, missing Briefing expectations of 0.3%, while spending rose 0.5%, slowing from August's 0.9% jump. Adjusted for inflation, the picture is starker; spending was essentially flat, while after-tax income fell 0.3%. With spending continuing to outpace income, households have less left over to save. The personal saving rate, which measures saving as a share of after-tax income, dipped to 3.8% in September, falling shy of 4% for the first time since 2022. The rate has trended lower since peaking at 7.2% in January 2024. "Last week's data helped confirm that the U.S. consumer entered Q4 on a weaker foot," said Kevin Gordon, head of macro research and strategy at SCFR.