Markets Finish Volatile Week Mixed

U.S. equities ended the final session of an extremely volatile week mixed and in a tight range, after witnessing a tumble on Monday and a two-day rally to recoup those losses. The markets have been unsettled amid the festering Chinese real estate debt crisis, while contending with what appears to be a more hawkish Fed that set expectations for tapering of monthly asset purchases this year following its monetary policy decision this week. The bond and currency markets were also choppy this week, exacerbated by rallies in European currencies and bond yields amid expectations that monetary policies in the region are on the path to tightening. Treasuries dipped to extend this week's steepening of the yield curve, and the U.S. dollar pared some of yesterday's fall. Gold traded modestly to the downside in choppy action and crude oil prices were higher. The economic calendar delivered a second-straight monthly gain in new home sales despite lingering supply and affordability issues. On the equity front, Dow member Nike missed revenue expectations and lowered its guidance on supply chain challenges, while Costco Wholesale topped Q4 expectations. Europe finished mostly lower, giving back some of yesterday's gains, while Asia was mixed amid lingering Chinese debt issues.

The Dow Jones Industrial Average rose 33 points (0.1%) to 34,798 and the S&P 500 Index nudged 7 points (0.2%) higher to 4,455, while the Nasdaq Composite lost 5 points to 15,048. In moderate volume, 763 million shares were traded on the NYSE and 3.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.68 to $73.98 per barrel. Elsewhere, the gold spot price fell $2.50 to $1,747.30 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.3% higher to 93.36. Markets were mixed for the week, as the DJIA gained 0.6%, the S&P 500 increased 0.5%, and the Nasdaq Composite was flat.

Dow member Nike Inc. (NKE $150) reported fiscal Q1 earnings-per-share (EPS) of $1.16, above the $1.12 FactSet estimate, as revenues rose 16.0% year-over-year (y/y) to $12.3 billion, south of the Street's $12.5 billion forecast. Direct sales were up 28.0% y/y, and digital sales rose 29.0% and the company's gross margin came in just above forecasts. The company noted that its inventories came in flat y/y, driven by strong consumer demand during the quarter, offset by elevated in-transit inventories due to extended lead times from ongoing supply chain disruptions.

Due to the supply chain challenges, including 10 weeks of lost production in Vietnam since mid-July, NKE lowered its full-year revenue outlook. The company said it expects all geographies to be impacted from these supply chain impacts, with Asia experiencing a disproportionate impact in Q2. NKE added that it expects Vietnam factories to reopen in phases beginning in October with several months to ramp up to full production. Shares were solidly lower.

Costco Wholesale Corporation (COST $468) reported fiscal Q4 EPS of $3.76, including the negative impact of a write-off of certain information technology assets, which amounted to $0.14 per share. The Street was looking for the company to post EPS of $3.58. Revenues grew 17.4% y/y to $62.7 billion, topping the expected $61.4 billion. Shares traded higher even as the company warned of higher inflation-related expenses, notably related to freight, labor and food.

September and October have historically been blustery months for stock market performance as discussed in the Schwab Center for Financial Research's Quarterly Market Outlook: Is Seasonal Volatility Ahead?. The markets are volatile after the past two-day rally that erased Monday's tumble in the wake of this week's Fed monetary policy decision, while real estate debt concerns out of China, the continued stalemate among lawmakers on whether to raise the debt ceiling, the Delta variant, and supply chain challenges continue to fester.

Amid this backdrop, Schwab's Chief Investment Strategist Liz Ann Sonders provides her latest article, 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.

New home sales top forecasts, this week's Fed decision continued to be eyed

New home sales (chart) rose 1.5% month-over-month (m/m) in August to an annual rate of 740,000 units, above the Bloomberg forecast calling for a rate of 715,000 units, and compared to July's upwardly-revised 729,000-unit level. The median home price jumped 20.1% y/y to $390,900. New home inventory nudged higher to a 6.1-months supply at the current sales pace from the 6.0-months level in July. Sales in the Northeast surged m/m, and also rose in the South and West, but sales in the Midwest fell. Sales in all the major regions were solidly lower compared to the same period a year ago. New home sales are based on contract signings, offering a timelier read on housing activity compared to the larger contributor of existing home sales, which are based on closings.

The markets continue to digest Wednesday's Fed monetary policy decision where the Central Bank hinted that formal details of balance sheet tapering may come in November, while there were notable changes in economic/inflation projections and rate hike expectations. Liz Ann Sonders provides analysis of the decision in her latest commentary, Fed Tapering Coming Soon; Dots Plot Has Thickened.

Treasuries declined, adding to yesterday's drop that boosted yields in the wake of this week's Fed's decision and amid rising yields in Europe, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.27%, the yield on the 10-year note gained 2 bps to 1.45%, and the 30-year bond rate advanced 4 bps to 1.98%.

Europe sees pressure, Asia mixed as Chinese debt issues linger

European equities finished out the week mostly lower, with bond yields in the Eurozone and the U.K. continuing to climb, while the euro and British pound gave back some of yesterday's advances versus the U.S. dollar. The moves came on the heels of this week's monetary policy decisions from the Fed in the U.S. and the Bank of England that signaled the potential tapering and tightening, respectively, of the extremely loose policies put in place to combat the pandemic. Also, earlier this week, the European Central Bank announced that it will recalibrate its monthly asset purchases in the face of rising inflation pressures. In economic news, German business confidence in September showed expectations came in above forecasts, while the assessment of current conditions surprisingly declined.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Payback Time With a Potential Payoff. Jeff notes how a gradual slowing of stimulus heralds a potential drop for the world's stock markets, but the evidence suggests a possibility for a positive outcome. Jeff also discusses in his article, Can Investors Avoid Rising Supply Chain Risks?, how supply chain issues are worsening, increasing the risk to sales, production, and inflation. He points out how European stocks may offer an opportunity to avoid these risks.

The U.K. FTSE 100 Index and Italy's FTSE MIB Index were down 0.4%, France's CAC-40 Index and Switzerland's Swiss Market Index dropped 1.0%, Germany's DAX Index decreased 0.7%, and Spain's IBEX 35 Index was little changed.

Stocks in Asia finished mixed, with trading continuing to be volatile amid the festering uncertainty regarding the implications of defaults and debt worries at the world's most indebted property developer, China Evergrande Group (EGRNY $8). The markets were roiled earlier this week on contagion concerns out of China, as discussed by Schwab's Jeffrey Kleintop, CFA, Director of International Research, Michelle Gibley, CFA, and Senior Investment Research Specialist, Kevin Gordon, in their latest commentary, China Woes Drive Stocks to Biggest Drop Since May.

Moreover, the global markets are digesting this week's monetary policy decisions out of the U.S. and England, which have boosted expectations that extremely accommodative policies may soon begin to be reined in. In economic news, Japan's manufacturing growth slowed in September and its services sector output remained in contraction territory even after improving. Also, Japan reported that its consumer price inflation remained subdued. Japan's Nikkei 225 Index rallied 2.1%, playing some catch up after yesterday's holiday break, while the yen extended yesterday's softness. China's Shanghai Composite Index declined 0.8% and the Hong Kong Hang Seng Index fell 1.3%. South Korea's Kospi Index dipped 0.1%, Australia's S&P/ASX 200 Index declined 0.4%, though India's S&P BSE Sensex 30 Index continued to post record highs, advancing 0.3%.

Stocks mixed on an extremely volatile week

U.S. stocks finished the week mixed after seeing a Monday tumble on intensified Chinese real estate debt concerns, the continued stalemate in the debt ceiling debate, and caution ahead of the highly-anticipated Fed monetary policy decision. However, the markets snapped back with the Dow and S&P 500 climbing out of Monday's hole as the markets digested the Fed's decision that hinted at tapering its asset purchases "soon" if the economy continued to progress broadly as expected. Fed Chairman Jerome Powell also continued to stress that the tapering process, which is projected to end sometime in mid-2022, does not mean the lift-off date for the first rate hike is also in the offing as he said there is a substantially more stringent set of tests to be passed for that to happen. The Treasury yield curve steepened noticeably after an initial flattening in the wake of the Fed's decision, and as bond yields in the Eurozone and U.K. moved decisively higher. The rise in global rates came as the Fed, Bank of England, and the European Central Bank have all suggested this month the imminent commencement of reining in extremely-accommodative policy put in place to combat the pandemic. The U.S. dollar nudged higher on the week in choppy trading in the wake of the monetary policy decisions. Gold was little changed amid the wild swings in the markets, and crude oil prices rose for a fifth-straight week, bolstered by the continued faster-than-expected pace of draw downs in oil inventories.

Given the market moves, the Energy sector rallied and was the best performing sector, while other value/cyclical sectors posted gains, with Financials moving nicely higher, and Industrials and Materials eking out gains. However, Communication Services stocks were the worst performers, exacerbated by a Disney+ subscriber growth warning from Dow component Walt Disney Company(DIS $176). The Real Estate sector was also one of the worst performers and the defensively-natured Utilities sector also came under pressure, both likely bogged down by the rise in Treasury yields.

Volatility is likely to persist next week, somewhat due to a fully-loaded economic docket that could move the markets as they try to nail down the timing of when the Fed will begin to taper asset purchases. Manufacturing output will be in focus, as preliminary durable goods orders and the September ISM Manufacturing Indexwill bookend the week. Sandwiched between the manufacturing reports, the health of the all-important U.S. consumer will be on display, courtesy of the Conference Board's Consumer Confidence report, personal income and spending, and the University of Michigan Consumer Sentiment Index. Other reports that could garner some attention include the final read (of three) on Q2 GDP and initial jobless claimsfor the week ended September 25. Given the hyper-focus of the markets on the path of monetary policy, a plethora of Fedspeak will hit the tape, headlined by two separate appearances from Federal Reserve Chairman Jerome Powell.

Next week's international economic calendar is also poised to bring some reports that may contend for attention, with releases worth noting including: Australia—retail sales. China—Manufacturing and Services PMIs and industrial profits. India—Manufacturing PMI. Japan—Q3 Tankan large manufacturing sentiment report, retail sales, and industrial production. Eurozone—economic/consumer confidence reports, and the preliminary September consumer price inflation estimate, along with Germanretail sales and unemployment change. U.K.—final read on Q2 GDP.

As noted in our latest Schwab Market Perspective: Choppy Waters, although the S&P 500 index has climbed steadily year to date, overall index performance is masking a lot of choppiness beneath the surface. Global stocks face waves of worry about near-term issues, despite favorable longer-term economic forecasts. And while it's clear the Federal Reserve is moving toward tighter policy, the pace of the change is uncertain. Meanwhile, Congress is wrestling with multiple issues that could affect markets.

Important Disclosures

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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Markets Finish Volatile Week Mixed

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