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Stocks Mixed in Choppy Trading as Uncertainties Linger

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U.S. stocks closed mixed following a choppy day of trading as investors assessed positive earnings results against concerns regarding the ultimate economic impact from the rise in new COVID-19 cases across the U.S. and Europe. An uncertain political backdrop also added to investor hesitation with no clear end to the fiscal relief standoff. Earnings data continued to be a source of optimism, highlighted by encouraging results from Dow members Caterpillar, 3M Company and Merck & Co, however forward guidance remained in short supply. M&A activity was again in focus, with Advanced Micro Devices agreeing to acquire rival chipmaker Xilinx in an all-stock transaction valued at about $35.0 billion. Durable goods orders came in stronger than expected, and regional manufacturing output jumped to a record, though Consumer Confidence surprisingly slipped. Treasury yields dipped, alleviating recent pressure on bond prices and the U.S. dollar moved down. Gold and crude oil prices were higher. Asia finished mixed and Europe closed lower amid concerns of rising cases of COVID-19 and a flood of data, headlined by an upbeat earnings report from HSBC.

The Dow Jones Industrial Average fell 222 points (0.8%) to 27,463, the S&P 500 Index was down 10 points (0.3%) at 3,391, and the Nasdaq Composite gained 72 points (0.6%) to 11,431. In moderate volume, 796 million shares were traded on the NYSE and 3.0 billion shares changed hands on the Nasdaq. WTI crude oil was $1.01 higher at $39.57 per barrel and wholesale gasoline added $0.03 to $1.13 per gallon. Elsewhere, the Bloomberg gold spot price rose $5.66 to $1,907.74 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.1% at 92.96.

Dow member Caterpillar Inc. (CAT $158) reported Q3 earnings-per-share (EPS) of $1.22, or $1.34 ex-items, versus the $1.17 FactSet estimate, as revenues decreased 23.0% year-over-year (y/y) to $9.9 billion, north of the Street's forecast of $9.7 billion. CAT said the results largely aligned with its expectations, and it is encouraged by positive signs in certain industries and geographies, while it is ready to respond quickly to changing market conditions. The company did not provide full-year guidance. Shares were lower. 

Dow component 3M Company (MMM $161) posted Q3 EPS of $2.43, above the projected $2.26, with revenues rising 4.5% y/y to $8.4 billion, north of the anticipated $8.3 billion. The company said it returned to positive organic sales growth with sequential improvement across businesses and geographies as the COVID-19 pandemic continued to evolve and affect its businesses in a number of ways. MMM said it continues to believe it is prudent to not provide guidance due to the continued evolving and uncertain impact of the COVID-19 pandemic and as it is not able to estimate the full duration, magnitude and pace of recovery with reasonable accuracy. Shares moved to the downside.      

Dow member Merck & Co. Inc. (MRK $78) announced Q3 earnings of $1.16 per share, or $1.74 ex-items, compared to the forecasted $1.44, as revenues rose 1.0% y/y to $12.6 billion, topping the expected $12.2 billion. MRK said demand for its products remains robust, and production, supply and distribution of its medicines, vaccines and animal health products are moving forward with minimal disruption. However, the company pointed out the negative impact of the COVID-19 pandemic on its pharmaceutical revenue and how lower back-to-school demand negatively impacted its vaccine sales, while access to health care providers remains reduced, though improved from Q2. MRK raised its full-year earnings outlook and narrowed its revenue forecast. Shares were lower.

Advanced Micro Devices Inc. (AMD $79) announced an agreement to acquire rival chipmaker Xilinx Inc. (XLNX $124) for $143 per share in an all-stock transaction valued at about $35.0 billion. Under the terms of the deal, XLNX stockholders will receive a fixed exchange ratio of 1.7234 shares of AMD for each share held. The announcement came as AMD reported stronger-than-expected Q3 earnings and revenues, noting strong demand from its PC, gaming and data center products, while raising its full-year revenue outlook. AMD traded lower and XLNX rallied.

As Q3 earnings season shifts into high gear, results have been positive thus far as business activity recovers from the severe impact of the COVID-19 pandemic, but the reaction has been muted as expectations heading into the period have been dubious. Schwab's Chief Investment Strategist Liz Ann Sonders, Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Chief Fixed Income Strategist Kathy Jones, point out how actual earnings numbers may be less important than what corporate leaders say about their expectations in the latest, Schwab Market Perspective: Turning to Earnings Season.

Meanwhile, Schwab's Liz Ann Sonders offers guidance on the looming highly-contentious political showdown, exacerbated by the fading expectations of a near-term expected agreement on a new fiscal relief program, in her article, Election Blues: Looking at Election History for Market Guidance. Moreover, Schwab's Managing Director and Senior Investment Strategist, David Kastner, CFA, discusses Health Care vs the 2020 Election, in his latest Schwab Sector Views

For timely strategies on how to navigate the volatile market environment and in-depth analysis of the election, check out our Market Insights page, and you can follow us on Twitter at @SchwabResearch.

Durable goods orders top forecasts, Consumer Confidence dips, regional manufacturing jumps 

September preliminary durable goods orders (chart) grew 1.9% month-over-month (m/m), versus the Bloomberg estimate of a 0.5% rise and compared to August's downwardly-revised 0.4% increase. Ex-transportation, orders rose 0.8% m/m, versus forecasts of a 0.4% gain and compared to August's upwardly-adjusted 1.0% increase. Moreover, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, were up 1.0%, compared to projections of a 0.5% rise, while the prior month's figure was favorably-revised to a 2.1% increase.

The Conference Board's Consumer Confidence Index (chart) unexpectedly declined to 100.9 in October, from September's downwardly-revised 101.3 level, and versus estimates calling for an improvement to 102.0. The index surprisingly softened as a solid improvement for the Present Situation Index portion of the survey was more than offset by a drop in the Expectations Index of business conditions for the next six months. On employment, the labor differential—consumers’ appraisal of jobs being "plentiful" minus being "hard to get"—moved further into positive territory, rising to 6.6 from the 3.3 level posted in September.

The Richmond Fed Manufacturing Activity Index showed expansion (a reading above zero) hit a record this month. The index jumped to 29, versus forecasts calling for the figure to dip to 18.0 from September's 21.0 level. Growth in new orders accelerated and shipments surged, while employment growth remained steady.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index posted a 5.2% y/y gain in home prices in August, versus estimates of a 4.2% increase. Compared to the prior month, home prices were up 0.5% on a seasonally adjusted basis, in line with forecasts.

Treasuries ticked higher, with the yield on the 2-year note little changed at 0.15%, while the yields on the 10-year note and the 30-year bond decreased 3 basis points to 0.77% and 1.56%, respectively.

The recent rise in bond yields has garnered some attention but rates have yet to break out of a trading range and Schwab's Kathy Jones notes in her article, Do Bonds Still Provide Diversification?, that many fear that if markets become volatile and stocks decline again, bond yields don't have much room to fall—and therefore, won't provide the balance to a portfolio that they have in the past. She points out that in our view, those fears appear overblown.

he economic calendar tomorrow will be on the lighter side, beginning with the release of September’s wholesale inventories report, forecasted by economists to show a 0.4% increase, the same level as the prior month’s 0.4% increase, and followed by MBA Mortgage Applications for the week ended October 23rd.

Asia mixed and Europe dips as data countered by festering virus concerns

European equities finished lower, as the economic implications of the reaction to the spiking new cases of COVID-19 in the region remained a drag on sentiment. Schwab's Jeffrey Kleintop notes in his article, Risk of Second Wave of COVID-19 Lockdowns, how the biggest political risk facing investors may be the potential for politicians to implement national lockdowns in response to a rise in new COVID-19 cases that could lead to renewed recession and a new bear market for stocks. However, a solid gain in shares of HSBC Holdings PLC. (HSBC $21) on the company's stronger-than-expected earnings results seemed to keep the losses in check. The markets likely also treaded with some caution ahead of this week's monetary policy decision from the European Central Bank and as U.K. Brexit trade negotiations are set to continue with a deal elusive as the transition period is set to end in 2021. Schwab's Jeffrey Kleintop offers his commentary on the matter in his article, Brexit Is Back: The Endgame For Investors. Fading expectations of a new U.S. fiscal relief bill could be also adding to the lack of conviction in the markets. The euro and British pound gained ground on the U.S. dollar, while bond yields in the Eurozone and U.K. were mostly lower.  

The U.K. FTSE 100 Index was down 0.9%, France’s CAC-40 Index fell 1.6%, Germany's DAX Index was off 0.9%, Spain's IBEX 35 Index declined 2.0%, Switzerland's Swiss Market Index was 0.9% lower, and Italy's FTSE MIB Index decreased 1.3%.

Stocks in Asia finished mixed on the heels of the solid downward move in the U.S. yesterday as uneasiness remains toward the rising new COVID-19 cases in the U.S. and Europe, while the former's lawmakers continued to fail to find an agreement on a new fiscal relief program. China's Shanghai Composite Index nudged 0.1% higher and the Hong Kong Hang Seng Index declined 0.5%, following a 10.1% rise in September industrial profits for China and as HSBC rallied after its upbeat earnings report. Japan's Nikkei 225 Index finished little changed, with the yen gaining some ground late in the day ahead of this week's monetary policy decision from the Bank of Japan. South Korea's Kospi Index traded 0.6% to the downside with the nation posting a smaller-than-expected 1.3% drop in Q3 GDP y/y, versus Q2's 2.7% decline and estimates of a 1.8% decrease. India's S&P BSE Sensex 30 Index rose 0.9% amid some data that appeared to bolster optimism of a rebound in consumer spending, while Australia's S&P/ASX 200 Index fell 1.7%, as the Energy, Information Technology and Financials sectors all saw pressure.

Tomorrow’s international economic calendar will bring CPI figures from Australia and consumer confidence data from France.

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