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Schwab Market Update

Stocks Bounce on Upbeat Profit Reports

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The U.S. equity markets finished solidly higher, led by technology shares, paring last week's rout amid some upbeat earnings from Dow members Goldman Sachs, UnitedHealth and Johnson & Johnson, along with Morgan Stanley. Treasury yields and the U.S. dollar were little changed, despite positive news on the economic front, with industrial production coming in above forecasts, homebuilder sentiment surprising to the upside, and job growth hitting another record high. Meanwhile crude oil prices were higher and gold reversed to the downside.

The Dow Jones Industrial Average (DJIA) rallied 548 points (2.2%) to 25,798, the S&P 500 Index increased 59 points (2.2%) to 2,810, and the Nasdaq Composite jumped 215 points (2.9%) to 7,646. In moderate volume, 789 million shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.14 to $71.92 per barrel and wholesale gasoline was $0.04 higher at $1.98 per gallon. Elsewhere, the Bloomberg gold spot price fell $1.76 to $1,225.30 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was unchanged at 95.06.

Dow member Goldman Sachs Group Inc. (GS $222) reported Q3 earnings-per-share (EPS) of $6.28, above the $5.38 FactSet estimate, as revenues rose 4.0% year-over-year (y/y) to $8.7 billion, north of the projected $8.4 billion. The company's investment banking revenues topped expectations, along with its equity trading, while its fixed income trading activity was below estimates. Shares moved higher.  

Dow component UnitedHealth Group Inc. (UNH $272) posted Q3 EPS of $3.24, or $3.41 ex-items, versus the expected $3.29, with revenues growing 12.0% y/y to $56.6 billion, above the forecasted $56.4 billion. UNH raised its full-year earnings guidance. Shares gained ground.  

Dow member Johnson & Johnson (JNJ $137) announced Q3 profits of $1.44 per share, or $2.05 ex-items, compared to the estimated $2.03, as revenues rose 3.6% y/y to $20.3 billion, above the expected $20.1 billion. JNJ raised its full-year guidance. JNJ finished to the upside.  

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers his latest Schwab Sector Views: Health Care—The Right Prescription for Your Portfolio?, noting that we believe the sector has further upside left, and its defensive characteristics may become more attractive if economic growth slows.

Morgan Stanley (MS $46) reported Q3 EPS of $1.17, north of the estimated $1.01, as revenues increased 7.6% y/y to $9.9 billion, topping the expected $9.5 billion. Investment banking revenues were stronger than expected, along with its fixed income trading unit, and its equity trading activity was roughly in line with estimates. The company said the first half of the year it saw strong results across the franchise, despite the seasonal summer slowdown in Q3. Shares finished higher.  

W.W. Grainger Inc. (GWW $280) reported Q3 EPS of $1.82, or adjusted earnings of $4.19 per share ex-items, compared to the forecasted $3.99, as revenues increased 7.4% y/y to $2.8 billion, roughly in line with expectations. The company said its reported earnings contained non-cash charges relating to the Cromwell business in the U.K., reflecting a slower growth trajectory and structural issues, including prolonged Brexit uncertainty. The business supplies company posted profit margin figures that came in a bit short of expectations to unnerve the Street. The company pointed out on a conference call that 20% of U.S. costs of goods sold was sourced from China, with roughly half of Chinese imports subject to tariffs, and that incremental 25% tariffs on China would increase costs by approximately 2.0%. GWW added that, "Even though we lapped the 2017 U.S. pricing changes during the quarter, we saw continued strong momentum and share gains from large and medium customers." Shares were sharply lower.    

Manufacturing, housing and employment data all top forecasts, job openings hit a fresh record

The Federal Reserve's industrial production report (chart) showed a 0.3% month-over-month (m/m) rise in September, compared to the Bloomberg estimate of a 0.2% gain and August's unrevised 0.4% increase. Manufacturing and mining output both rose, while utilities production was little changed. Capacity utilization remained at the prior month's unrevised 78.1% rate, versus forecasts of 78.2. Capacity utilization is 1.7 percentage points below its long-run average.

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, unexpectedly rose to a fresh record high of 7.14 million jobs available to be filled in August from July's upwardly-revised 7.08 million rate, and compared to forecasts calling for a 6.90 million figure. The hiring rate ticked higher to 3.9% from July's 3.8% pace, and the separation rate held at July's 3.8% level.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month improved to 68 from September's unrevised 67 level, versus forecasts to dip to 66. A reading of 50 separates good and poor conditions. The NAHB said builders continue to view solid housing demand, fueled by a growing economy and a nearly 50-year low for unemployment. They pointed out that lumber price declines for three straight months from elevated levels earlier this summer have also helped to reduce some cost pressures, but builders will need to manage supply-side costs to keep home prices affordable. Housing has been a source of economic concern as of late and tomorrow we will get a look at September construction activity in the form of the housing starts and building permits (economic calendar). Housing starts are projected to decline 5.6% m/m to an annual rate of 1,210,000 units and building permits are forecasted to rise 2.0% to an annual rate of 1,274,000 units. MBA Mortgage Applications are also on tap.   

Treasuries were little changed, as the yield on the 2-year note ticked 1 basis point higher to 2.86%, while the yields on the 10-year note and the 30-year bond were flat at 3.16% and 3.34%, respectively.

The recent jump in yields and flared-up concerns that the Fed may be on the verge of the policy mistake in the face of a host of simmering global risks have been key contributors to the recent rise in volatility, setting the stage for tomorrow's release of the minutes from the Fed's September monetary policy decision, which resulted in third rate hike of the year and kept expectations alive regarding a potential December move. Schwab's Chief Fixed Income Strategist Kathy Jones and Fixed Income Director, Collin Martin, CFA, discuss in the video, How High Might Bond Yields Rise?, and Kathy provides analysis in her latest article, Will the Fed Go Too Far in This Cycle? 3 Indicators to Watch.

As noted in the latest Schwab Market Perspective: Always Be Prepared, recent stock market action reminds us how quickly things can change. It’s also a reminder that seemingly-subtle shifts in the direction of fundamental data can lead to significant moves in the markets. Heading into this month, markets were breathing easier over the apparent trade agreement among the United States, Mexico and Canada; however, the potential higher stakes battle continues to escalate with China, which has been one of the market risks we've been citing all year. Add to mix the ongoing tight labor market, and a seemingly more hawkish Federal Reserve and you had the recipe for a major pullback. The correlation between bond yields and stocks has shifted to an inverse relationship; both here and globally, which could be sounding a further warning sign for investors.

Europe and Asia higher amid U.S. earnings and relatively eased political concerns

European equities finished broadly higher, with earnings season ramping up in the U.S. and results mostly better than forecasted, while Italian budget and U.K. Brexit concerns appeared to ease Italy reached a budget accord that will go to the European Commission for a review, while some upbeat employment data and optimistic comments helped combat concerns regarding a U.K. Brexit deal. U.K. wage growth figures came in above expectations for August, though the data boosted the British pound versus the U.S. dollar and likely hamstrung gains for the U.K. markets. The euro was little changed versus the greenback and bond yields in the region traded lower with rates in Italy noticeably declining. In other economic news, the Eurozone trade surplus widened more than expected, while German investor confidence slipped more than expected. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, On Watch: Is There More Trouble Ahead for Stocks?, the threat of storms in the economy and markets seems to be moving from "Advisory" to "Watch," as indicated by the narrowing gap between the unemployment rate and inflation rate in many of the world’s largest economies. 

Stocks in Asia finished mostly higher, with the recent surge in U.S. bond yields, which has been at the heart of the recent global market volatility, appearing to pause, though a host of uncertainties remain, notably toward trade, geopolitics and whether the Fed will continue to tighten policy despite growing risks. Japanese equities rose as the yen gave back some of yesterday's gains, while Australian securities also advanced, with financials gaining ground. Shares in India moved higher in the wake of some upbeat economic data, which has helped ease some of the uneasiness toward the nation's festering banking system uneasiness, concerns about the impact of the surge in crude oil prices, and lingering concerns toward emerging markets. Markets in South Korea finished little changed and stocks in mainland China declined, while those traded in Hong Kong ticked higher. The markets digested some mixed September inflation data that kicked off this week's host of releases that will likely be headlined by the nation's Q3 GDP report. Chinese stocks have seen some pressure as of late as trade concerns have seemed to foster uneasiness regarding the economic impact on the nation to exacerbate the aforementioned emerging market worries. Schwab's Jeffrey Kleintop, CFA, offers his article, Emerging Market Stocks: What We Are Watching.

Tomorrow's international economic calendar will offer CPI and PPI from the U.K., as well as CPI from the Eurozone.

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

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Raising Interest Rates: Will the Federal Reserve Get it Right?

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