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Schwab Market Update

Markets Dramatically Bounce Off Early Lows

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U.S. equities finished lower, but well off the deep hole the markets were mired in early on, as selloffs in Europe and Asia, and softer-than-expected earnings reports from Dow members 3M and Caterpillar exacerbated already-skittish global sentiment. Treasury yields fell and the U.S. dollar dipped following a surprising drop in a read of regional manufacturing activity, crude oil prices tumbled to their lowest level since August on Saudi Arabia's pledge to pump as much oil as it can, and gold was higher.

The Dow Jones Industrial Average (DJIA) fell 126 points (0.5%) to 25,191, the S&P 500 Index decreased 15 points (0.6%) to 2,741, and the Nasdaq Composite lost 31 points (0.4%) to 7,437. In heavy volume, 973 million shares were traded on the NYSE and 2.7 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.93 to $66.43 per barrel and wholesale gasoline was $0.07 lower at $1.84 per gallon. Elsewhere, the Bloomberg gold spot price increased $8.64 to $1,230.74 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 95.96.

Dow member 3M Company (MMM $193) reported Q3 earnings-per-share (EPS) of $2.58, below the $2.71 FactSet estimate, as revenues dipped 0.2% year-over-year (y/y) to $8.2 billion, south of the projected $8.4 billion. The company lowered its full-year earnings and organic growth guidance, noting headwinds from foreign exchange. Shares were lower.

Dow component Caterpillar Inc. (CAT $119) posted Q3 EPS of $2.88, or $2.86 ex-items, versus the expected $2.83, with revenues growing 18.0% y/y to $13.5 billion, above the forecasted $13.3 billion. CAT reaffirmed its full-year earnings guidance but noted higher material and freight costs, including tariffs. Shares finished sharply lower.

Dow member McDonald's Corporation (MCD $177) announced Q3 profits of $2.10 per share, compared to the estimated $1.99, as revenues declined 7.0% y/y to $5.4 billion, above the expected $5.3 billion. Global same-store sales rose 4.2%, versus the expected 3.6% gain. Shares were nicely higher.

Dow member United Technologies Corporation (UTX $130) posted Q3 EPS of $1.93 ex-items, compared to the forecasted $1.82, with revenues rising 8.8% y/y to $16.5 billion, north of expectations. The company affirmed its cash flow outlook. Shares traded higher.

Dow member Verizon Communications, Inc. (VZ $57) announced Q3 earnings of $1.19 per share, or $1.22 per share ex-items, versus the $1.19 expectation, as revenues declined 2.8% y/y to $32.6 billion, slightly above the projected $32.5 billion. VZ reaffirmed its full-year guidance and shares were higher.

Regional manufacturing surprisingly declines, Treasuries higher as global uneasiness remains

The Richmond Fed Manufacturing Activity Index for September dropped to 15 from September's level of 29, and versus estimates calling for a slight decline to 24. A reading above zero depicts expansion. Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, Sympathy for the Devil in the Details of Leading Economic Indicators, noting that leading economic indicators are showing no stress on the surface; but it’s what’s beneath the surface that often matters more to the stock market. She adds that global leading indicators are already signaling heightened stress and rising risk of recession. Liz Ann concludes that the spread between "soft" and "hard" economic data is eye-opening.

Although less on the radar with U.S. market volatility taking front seat, the U.S. midterm elections could come into play in the next few weeks. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Midterm Elections: What's at Stake in the House?, that markets seem to be anticipating a divided government after the election, so their reaction may be muted if there is a changing of the guard. He points out that other factors, including the Federal Reserve’s interest-rate policy, corporate earnings and the ongoing trade dispute with China, are more likely to influence the markets than the election outcome.

Treasuries were higher, as the yields on the 2-year and the 10-year notes declined 4 basis points (bps) to 2.87% and 3.16%, respectively, and the 30-year bond rate declined 3 bps to 3.36%. The U.S. dollar dipped after a recent run, with the global markets looking skittish after some disappointing earnings in the U.S. and festering geopolitical concerns.

Tomorrow's economic calendar will hold Markit's Manufacturing and Services PMI reads for October, with economists projecting the former fell slightly to 55.3 and the latter moved higher to a level of 54.0, with readings above 50 for both indexes denoting expansion in activity. Housing data is also on tap, with new home sales expected to have fallen 0.6% m/m during September to an annual rate of 625,000 units, as well as MBA Mortgage Applications. In afternoon action, the Fed will release its Beige Book, a look economic conditions in all U.S. districts ahead of its upcoming two-day monetary policy meeting scheduled to conclude on November 8.  

Europe and Asia mostly lower as global uneasiness continues

European equities fell broadly, following disappointing earnings in the U.S. and Bloomberg reported strong language from the EU Commission requiring Italy to resubmit its 2019 draft budget and Italy's Prime Minister Conte ruled out a Plan B. Also, the global markets remained skittish on the heels of a downturn in Asian markets and as trade tensions between the U.S. and China continued to be elevated. Moreover, Italian fiscal uneasiness persisted amid the aforementioned response by the EU to Italy's latest budget deficit proposal today. The euro was little changed and bond yields in the region lost ground, offset by rising rates in Italy. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, What's In Store For Global Stocks In Q4?, noting that with other market influencing factors like corporate earnings and central banks likely to perform as expected, it may be the positives, negatives and wildcards he describes that exert the most influence over global stocks in the fourth quarter. Jeff adds that we expect the balance of these factors to result in further gains for global stocks, but with the economic and earnings cycle getting late, paying attention to the risks is increasingly important. He concludes that investors should consider rebalancing their portfolios in line with long-term targets.

Stocks in Asia finished mostly to the downside, led by Japanese equities, with markets pondering whether China's latest round of fine-tuning is sufficient. Analysts have noted recent verbal interventions by Chinese officials to reassure markets and offer support to struggling non-state firms amid concerns for widespread margin calls related to shares pledged for loans, and the yuan at previous 21-month lows. Global uneasiness continued in the wake of the recent uptick in global bond rates, headlined by the rally in U.S. yields, while trade tensions between China and the U.S. remained escalated.

Stocks in Japan fell to a two-month low, amid a rise in the yen, and Australian equities also dropped. Markets in mainland China and Hong Kong finished lower after yesterday's rally, and shares in India also traded lower. Global markets remain volatile, and amid this backdrop check out our article Why Are Stocks Volatile When Things Seem to be Going Well?

Preliminary Manufacturing and Services PMI reads from across the globe will dominate tomorrow's international economic calendar, with other reports slated for release to include business sentiment from France, and consumption figures from the Eurozone.

©2018 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Next Steps

Sympathy for the Devil in the Details of Leading Economic Indicators
Sympathy for the Devil in the Details of Leading Economic Indicators

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