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Schwab Market Update

Stocks Finish Higher and Post Strong Weekly Gains

 

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U.S. equities finished higher, adding to a rally that helped the major indices post strong weekly advances. The moves came on the heels of more upbeat earnings and economic data that appeared to ease concerns about a sharp slowdown in growth amid an elevated inflationary environment. Q3 earnings season began on a high note, courtesy of heavyweights in the Financials sector, with Dow member Goldman Sachs joining some of its peers by easily topping expectations as investment banking and trading revenues led the way. In other earnings news, J.B. Hunt Transport Services also posted stronger-than-expected results. On the economic front, September retail sales activity came in stronger than expected, import prices were cooler than estimated, and business inventories continued to rise, apparently helping to overshadow an unexpected decline in a preliminary read on October consumer sentiment. Treasuries came under pressure to lift yields, and the U.S. dollar was little changed in choppy trading, while gold tumbled and crude oil prices tacked onto a recent run. Overseas, Europe finished higher, adding to yesterday's broad-based advance, while markets in Asia also closed out the week with gains.

The Dow Jones Industrial Average rallied 382 points (1.1%) to 35,295, the S&P 500 Index increased 33 points (0.8%) to 4,471, and the Nasdaq Composite gained 74 points (0.5%) to 14,897. In heavy volume, 980 million shares were traded on the NYSE and 4.4 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.97 to $82.28 per barrel. Elsewhere, the gold spot price dropped $29.30 to $1,768.60 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 93.94. Markets were solidly higher for the week, as the DJIA gained 1.6%, the S&P 500 increased 1.8%, and the Nasdaq Composite jumped 2.2%.

Dow member Goldman Sachs Group Inc. (GS $407) reported Q3 earnings-per-share (EPS) of $14.93, versus the $10.14 FactSet estimate, as revenues rose 26.0% year-over-year (y/y) to $13.6 billion, above the Street's forecast of $11.7 billion. The company noted investment banking generated its second-highest quarterly net revenues, reflecting record net revenues in financial advisory and continued strength in underwriting. The company's global markets segment revenues were bolstered by strong trading activity, led by a decisively positive performance in equities, while it saw the second highest quarter for fixed income, currency and commodities trading revenues. Shares were solidly higher.   

J.B. Hunt Transport Services Inc. (JBHT $191) posted Q3 EPS of $1.88, above the projected $1.78, as revenues grew 27.0% y/y to $3.1 billion, exceeding the expected $3.0 billion. The transportation company said its revenue growth reflected strong y/y gains for its truckload and integrated capacity solutions as both segments were able to source and secure capacity for customers in this "capacity-constrained freight environment." JBHT said its intermodal segment revenues grew y/y, driven by increased revenue per load, partially offset by a decline in volume. The company added that its operating income benefited from customer rate and cost recovery efforts and further scaling into its technology investments in addition to higher productivity. However, JBHT said profits were negatively impacted by lack of network fluidity from both rail and customer activity as well as increases in driver wage and recruiting costs, and rail and truck purchase transportation expense.  Shares rallied.

Q3 earnings season has kicked off with a heavy dose of results from the heavyweights in the Financials sector. Results have been mostly upbeat, headlined by strong growth in investment banking revenues as M&A and IPO activity have been robust, trading revenues have remained solid, notably in the equity markets, asset management activity has also contributed with asset inflows continuing to flood in, while loan loss reserves have been released to reflect the continued improvement in the economy. However, the one relatively soft spot remains net interest income as loan growth continues to be severely outpaced by deposit growth.  

Director and Senior Investment Strategist with the Schwab Center for Financial Research (SCFR), David Kastner, CFA, provides his latest Schwab Sector Insights: A View on 11 Equity Sectors, offering a look at what we expect to see over the next three to six months. David notes that the Financials sector has many favorable attributes, such as strong financial positioning and attractive valuations relative to its historical average and other sectors. However, he points out that we are maintaining our marketperform rating for the group as earnings growth expectations have flattened out and uncertainties on the path of the economy, interest rates and the market overall raise the level of risk for the sector. 

Earnings season comes as the markets have been choppy and Schwab's Chief Investment Strategist Liz Ann Sonders provides her commentary, Songs of Experience: Reminiscences of a Strategist, offering lessons she has learned in her 35 years on Wall Street, which are especially relevant given the recent market action.

Find all our market commentary on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

Retail sales top forecasts, October consumer sentiment unexpectedly dips

Advance retail sales (chart)for September rose by 0.7% month-over-month (m/m), versus the Bloomberg consensus forecast of a 0.2% decrease, and compared to August's upwardly-adjusted 0.9% rise. Last month's sales ex-autos gained 0.8% m/m, compared to expectations of a 0.5% gain and as August's figure was revised higher to a 2.0% increase. Sales ex-autos and gas were up 0.7% m/m, versus estimates of a 0.4% rise, while August's reading was adjusted upward to a 2.1% gain. The control group, a figure used to calculate GDP, advanced 0.8% m/m, versus projections of a 0.5% increase, and following August's favorably revised 2.6% jump.

Sales were higher m/m across most categories led by a strong gain in sporting goods, hobby, musical instrument, and book stores, while sales of clothing and accessories, autos, food & beverages, and general merchandise were also noticeable positive contributors. Sales at nonstore retailers—which includes online activity—also gained ground. Sales across all categories were sharply higher y/y, with food services & drinking places, gasoline stations, and clothing & accessories stores seeing the highest gains.  

The October preliminary University of Michigan Consumer Sentiment Index (chart) decreased to 71.4, versus estimates calling for a rise to 73.1 from September's 72.8 reading. The index posted the second-lowest reading since 2011 as both the current conditions and the expectations portions of the index. The 1-year inflation forecast rose to 4.8% from September's 4.6% rate, versus forecasts to tick higher to 4.7%, but the 5-10 year inflation forecast declined to 2.8% from the prior month's 3.0% level.

The University of Michigan said, "the Delta variant, supply chain shortages, and reduced labor force participation rates will continue to dim the pace of consumer spending into 2022," while pointing out that another, less tangible factor has contributed to the slump in optimism: confidence in government economic policies has significantly declined during the past six months.

The Empire Manufacturing Index, a measure of activity in the New York region, slowed more than expected but remained at a level depicting expansion (a reading above zero). The index fell to 19.8 in October from 34.3 that was posted in September, and compared estimates of a decline to 25.0. Growth in new orders and employment both decelerated, though inventories expanded at a faster pace, while prices paid accelerated and continue to be severely elevated.

The Import Price Index (chart)rose 0.4% m/m for September, versus estimates of a 0.6% gain, and compared to August's unrevised 0.3% decline. Versus last year, prices were up by 9.2%, compared to forecasts of a 9.4% increase and August's downwardly-revised 8.9% gain.

Business inventories (chart) rose 0.6% m/m in August, matching forecasts and July's upwardly-revised increase. Business inventories have increased for thirteen straight months. 

Treasuries saw pressure to lift yields after steadying as of late, and the yield curve has steepened over the past month with the markets grappling with expectations that the Fed is set to begin to rein in its extraordinary measures put in place to combat the impact of the pandemic, against the backdrop of persisting inflation pressures. Schwab's Director and Fixed Income Strategist for the SCFR, Collin Martin, CFA, offers his latest article, Waiting for Rates to Rise? What You May Miss by Staying in Cash. Collin discusses how rather than waiting on the sidelines, consider short-term, fixed-rate corporate bonds. 

The yield on the 2-year note rose 4 basis points (bps) to 0.39%, the yield on the 10-year note gained 5 bps to 1.57%, and the 30-year bond rate traded 2 bps higher to 2.04%.

Europe and Asia higher to close out the week

European equities saw widespread gains, with Energy and Financials issues notable contributors as earnings from the sector in the U.S. continued to pour in positively, while crude oil prices resumed a recent run. Also, economic data out of the world's largest economy of the U.S. has been solid, bolstered by today's stronger-than-expected September retail sales report, which followed the favorable reads on jobless claims and wholesale price inflation yesterday. The upbeat sentiment countered elevated expectations of tighter global monetary policies and elevated inflation pressures that have been exacerbated by the festering supply-chain disruptions. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Inflation: Persistently Transitory,noting how persistently going from one transitory source of inflation to the next may keep inflation elevated for longer than markets currently anticipate. In economic news in the region, EU new car registrations continued to fall in September, while the Eurozone trade surplus narrowed unexpectedly for August. The euro was little changed versus the U.S. dollar, but the British pound was noticeably higher to extend a rally, while bond yields in the Eurozone and the U.K. added to recent gains. The moves helped lift the Financials sector and came amid the heightened tighter monetary policy expectations. 

The U.K. FTSE 100 Index was up 0.4%, France's CAC-40 Index and Switzerland's Swiss Market Index rose 0.6%, while Germany's DAX Index, Spain's IBEX 35 Index and Italy's FTSE MIB Index all gained 0.8%.

Stocks in Asia finished higher in the final session of the week, with the markets continuing the positive momentum from yesterday's strong session in the U.S. amid a better-than-expected start to Q3 earnings season and some upbeat economic reports on wholesale price inflation and employment. However, the markets remain choppy as they grapple with expectations of tighter monetary policies and surging energy costs. Meanwhile, the markets digested some September economic data out of India that showed wholesale price inflation cooled more than expected and exports slowed but remained solidly higher and imports surged. Japan's Nikkei 225 Index rallied 1.8%, as the yen extended a recent slide. Japanese stocks have seen increased volatility after strong September and Q3 performances as discussed by Schwab's Jeffrey Kleintop in his article, It's All Over for Japan (and That's Good). China's Shanghai Composite Index advanced 0.4% and the Hong Kong Hang Seng Index jumped 1.5% in a return to action following a two-day holiday. Australia's S&P/ASX 200 Index rose 0.7% and South Korea's Kospi Index traded 0.9% higher. Markets in India were closed closed for a holiday. 

Stocks Continue October Rebound

U.S. stocks continued to climb in October, posting a second-straight weekly gain to chip away at the solid downturn registered in September. A solid start of Q3 earnings season, courtesy of strong results from the Financials sector, and some upbeat economic data seemed to help tamp-down flared-up stagflation concerns and propel stocks back to shouting distance of record high territory. The markets shrugged off still-elevated inflation pressures as September consumer, producer, and import prices all remained sharply higher, but the latter two reads did come in cooler than expected. The recovery in the labor markets appeared to be continuing as jobless claims fell below the 300,000 mark for the first time since March 2020. Friday's second-straight month of stronger-than-expected retail sales for September added to the upbeat economic data points. The markets also took in stride the minutes from the Fed's September monetary policy meeting, which revealed that November 3 will likely be the announcement date for the commencement of its taper campaign that could begin mid-November or mid-December with a targeted mid-2022 end date. The Treasury yield curve flattened noticeably as the short end saw rates jump, while the yields on the 10-year note and 30-year bond slid. The U.S. dollar dipped after a recent rally took the greenback to levels not seen in more than a year. Crude oil prices continued to surge, rising for the eighth-straight week, and gold turned in its third-consecutive weekly gain.

As such, most S&P 500 sectors were higher, led by Real Estate, Materials, Consumer Discretionary, Information Technology and Industrials. Financials did post a gain but as has been typical the past several quarters they showed a subdued and mixed reaction to the earnings results. Communications Services was the lone sector to see red figures and the Energy sector took a break from its recent outperformance but still moved comfortably above the flatline.  

Next week's economic docket will likely yield somewhat to the ramping up of Q3 earnings season, but is still poised to deliver some data points that could move the markets. Housing will be prominent, with the releases of the NAHB's October homebuilder sentiment report, September housing starts and building permits, and existing home sales for last month. In preparation for the November 3 monetary policy meeting, the Fed will release its industrial production and capacity utilization figures for September as well as its Beige Book report—an anecdotal look at business activity across the nation's Fed districts. Other releases that deserve a mention include, initial jobless claims for the week ended October 16, the September Index of Leading Economic Indicators, and Markit's preliminary October Manufacturing and Services PMIs. Before going dark the week before the early-November monetary policy meeting, a host of Fedspeak will hit the wires, headlined by the participation in a panel discussion by Fed Chairman Jerome Powell.   

Next week's international economic calendar is also poised to bring some reports that may contend for attention, highlighted by preliminary October Manufacturing and Services PMIs out of Australia, Japan, the Eurozone and the U.K. Other reports that could foster market responses include: China—Q3 GDP, retail sales, and industrial production. Japan—trade balance. Eurozone—the final September Consumer Price Index. U.K.—inflation figures and retail sales.    

With volatility likely to persist, listen to our latest investor podcast, Anxious Markets Eye Speed Bumps Ahead, with Schwab's Liz Ann Sonders joining in to discuss how the market is facing a host of issues, both short and long term, that are sparking concerns for investors.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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