Markets Post Losses with Techs Leading the Way

U.S. equities finished out the session with losses, as the Information Technology sector was again the main catalyst downward to extend yesterday's slide, and despite some upbeat readings on leading indicators and consumer sentiment. Heightened tensions between the U.S. and China didn't help matters, after the U.S. announced plans to ban activity with Chinese mobile apps TikTok and WeChat beginning on Sunday. Continued drama in Washington added to the mix, amid the looming highly-contentious presidential election and a non-existent fiscal relief package. Treasury yields were slightly higher as bond prices dipped and the U.S. dollar was little changed, while crude oil prices inched higher and gold gained modest ground. Equity news remained light, as Texas Instruments announced an increase of its quarterly dividend and Nucor offering favorable guidance. Europe finished mostly lower with travel and leisure stocks seeing pressure amid ramped up COVID-19 concerns as new cases rise in parts of the region, while markets in Asia were mixed.

The Dow Jones Industrial Average fell 245 points (0.9%) to 27,657, the S&P 500 Index lost 38 points (1.1%) to 3,319, and the Nasdaq Composite decreased 117 points (1.1%) to 10,793. In very heavy volume as a result of quadruple witching—the simultaneous expiration of equity and index options and futures contracts—3.2 billion shares were traded on the NYSE and 5.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.14 higher at $41.11 per barrel and wholesale gasoline gained $0.02 to $1.24 per gallon. Elsewhere, the Bloomberg gold spot price rose $6.00 to $1,950.44 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was little changed at 92.95. Markets were mixed for the week, as the DJIA was flat, while S&P 500 and the Nasdaq Composite lost 0.6%.

U.S.-China trade tensions continued to simmer, with the U.S. Department of Commerce announcing this morning prohibitions on transactions in the U.S. relating to mobile applications WeChat, owned by Tencent Holdings Ltd. (TCEHY $67), and ByteDance Ltd's TikTok, starting September 20th to "safeguard the national security of the United States." The restrictions will prohibit cash transfers within the U.S. on WeChat, while both apps will be prohibited from distribution, maintenance and updates of their services through app stores in the U.S. The Commerce Department added that the Chinese Communist Party has demonstrated the means and motives to use these apps to threaten the national security, foreign policy, and the economy of the U.S and today’s announced prohibitions, when combined, protect users in the U.S. by eliminating access to these applications and significantly reducing their functionality. The announcement added that President Donald Trump has provided until November 12th for the national security concerns posed by TikTok to be resolved and if they are the prohibitions in this order may be lifted. The release did not offer the November 12th deadline for WeChat.

The actions came as TikTok owner ByteDance submitted a proposal to the Treasury Department last weekend for Oracle Corp. (ORCL $60) to serve as the "trusted technology provider" to the U.S. business of TikTok, which is being reviewed by President Trump. Meanwhile, Bloomberg is reporting that ByteDance made revisions put forward by the Treasury Department calling for ByteDance to own most of a ringfenced TikTok, with Oracle, Dow member Walmart Inc. (WMT $135) and venture capital investors holding a minority stake of a new company that will pursue an initial public offering in about a year. Bloomberg also noted that ByteDance is getting more confident its envisioned alliance with Oracle will get approval by Chinese regulators, per people familiar with the matter. Neither entity involved commented on the Bloomberg report.

In other equity news, Texas Instruments Inc. (TXN $139) announced a 13.0% increase of its quarterly cash dividend to $1.02 per share. TXN said the increase is an integral piece of its disciplined approach to capital management and reflects the company's continued strength in free cash flow generation and its commitment to return excess cash to stockholders. Shares were lower.

Nucor Corporation (NUE $49) issued Q3 earnings-per-share (EPS) guidance that was above the FactSet estimate, noting the continued resiliency of nonresidential construction markets. The company added that results of its steel mills segment in Q3 is expected to be similar to Q2 and while its bar and structural mills are benefitting from nonresidential construction, market conditions for its sheet and plate mills remain challenged. However, NUE said it has seen an uptick in demand and pricing for raw materials and sheet steel late in Q3 and utilization rates for its sheet mills have improved throughout Q3, and it is "cautiously optimistic about the impact these developments will have on the final quarter of the year." Shares were higher.

Equity news remained on the lighter side and stocks were choppy after a strong start to the week that came on the heels of a two-week pullback from a five-month surge to record highs. Amid this backdrop, Schwab Center for Financial Research (SCFR) Senior Vice President Mark Riepe offers his commentary, New to Investing? How to Start Smart and Manage Your Risk, delivering key risk management principles and some tips on how to get started and to follow throughout your investing career.

Finally, for timely commentary amid the wild swings in the equity markets, you can follow the experts from the SCFR on Twitter at @SchwabResearch, and you can visit Schwab's Market Insights page to find more analysis and strategies on the current market environment.

Leading Index improves for fourth-straight month, consumer sentiment hits highest since March

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for August rose 1.2% month-over-month (m/m), compared to the Bloomberg projection of a 1.3% gain, following July's noticeable upward revision to a 2.0% advance. The LEI has increased for four-straight months due to solid positive contributions from jobless claims, stock prices and ISM new orders, as well as increases for average workweek and the yield curve, more than offsetting negative reads on consumer expectations, capital investment and credit.

The September preliminary University of Michigan Consumer Sentiment Index (chart) increased to 78.9 versus expectations of a slight improvement to 75.0 from August's 74.1 reading. The index hit the highest level since March as both the current conditions and expectations portions of the survey improved m/m. The 1-year inflation forecast declined to 2.7% from August's 3.1% rate, and the 5-10 year inflation forecast dipped to 2.6% from the prior month's 2.7% level.

Treasuries were slightly lower, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.14%, the yield on the 10-year note was flat at 0.69%, and the 30-year bond rate gained 2 bps to 1.45%. Schwab's Fixed Income Strategist, Collin Martin, CFA, discusses in his article, Why Own Bonds When Yields Are So Low?, how we believe fixed income investments still have a place in a well-diversified portfolio.

Bond yields remain choppy in the wake of this week's monetary policy decision from the Federal Open Market Committee (FOMC) as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her article, Inflation Blues: Fed Keeps Rates Near-Zero, Officially Adopts Average Inflation Targeting. She discusses how the FOMC kept rates steady, detailed its new average inflation targeting policy framework, and updated its economic/rates projections. Liz Ann points out that the economic contraction is now expected to be shallower; but the recovery thereafter slower, while the Fed highlighted in the post-meeting press conference that more fiscal relief is needed.

Liz Ann also offers a look at the employment front that the Fed has signaled it will prioritize over price stability (inflation) in her article, Crossroads: Shifting Tides in Stock and Labor Markets. She notes how the latest data on the health of the labor market has been mixed, while pointing out how improving productivity, partly due to work-from-home trends, could persist as a positive economic driver.

Europe mostly lower, Asia mixed amid virus concerns and geopolitical tensions

European equities finished mostly lower, shrugging off some relatively favorable economic data that showed U.K. retail sales rose more than expected and industrial production out of Italy continued to recover. Also, the upbeat consumer sentiment and leading indicators data out of the U.S. did little to lift stocks. Travel and leisure stocks saw solid pressure as COVID-19 cases have shown a new resurgence in parts of the region, and the markets also paid attention to the simmering U.S.-China tensions after today's latest actions by the U.S. to block activity with some popular Chinese mobile applications beginning Sunday. The euro rose versus the U.S. dollar and bond yields have were modestly higher. Ramped-up U.K. "hard Brexit" concerns remained in focus with European Union chief negotiator Barnier saying that he believes a deal with the U.K. is still possible, per Reuters. The British pound dipped versus the U.S. dollar amid the report and following yesterday's monetary policy decision from the Bank of England, which hinted at the possibility of adopting a negative interest rate policy amid the backdrop of a dampened economic outlook. For analysis of the flared-up Brexit concerns, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers in his latest article, Brexit Is Back: The Endgame For Investors. Technology issues are gaining ground, while travel and leisure stocks are seeing pressure as COVID-19 cases have shown a new resurgence in parts of the region. The markets are also paying attention to the simmering U.S.-China tensions after today's latest actions by the U.S. to block activity with some popular Chinese mobile applications beginning Sunday. The euro is also nearly unchanged versus the U.S. dollar and bond yields in core Eurozone regions and the U.K. are lower.

The U.K. FTSE 100 Index and Germany's DAX Index were down 0.7%, France’s CAC-40 Index fell 1.2%, Spain's IBEX 35 Index dropped 2.2%, and Italy's FTSE MIB Index declined 1.1%, while Switzerland's Swiss Market Index inched 0.2% higher.

Stocks in Asia finished mixed following yesterday's drop in the U.S. that was led by technology issues, while the markets digested this week's host of monetary policy decisions that suggested extraordinary accommodative policies will continue for some time. Moreover, the markets showed some resiliency in the face of simmering U.S.-China tensions and geopolitical uncertainty, though the economic data as of late has continued to show global economic recovery. Currency markets were in focus with both the Japanese yen and Chinese yuan continuing to firm versus the U.S. dollar. Japan's Nikkei 225 Index nudged 0.2% higher, with consumer price inflation data matching forecasts, while China's Shanghai Composite Index rallied 2.1% to close out the week. The Hong Kong Hang Seng Index increased 0.5% and South Korea's Kospi Index rose 0.3%. However, Australia's S&P/ASX 200 Index and India's S&P BSE Sensex 30 Index both declined 0.3%. Schwab's Jeffrey Kleintop discusses in his article, Stock Market "Inequality" Hides a Big Change, how the recent imbalances in the stock market can lead to vulnerability, while noting how rebalancing portfolios may be valuable to help balance exposure to U.S. capitalization-weighted benchmarks relative to international stocks.

Stocks mixed on the week as choppiness persists

U.S. stocks finished the week mixed, following a two-week pullback from a five-month surge that took the markets to all-time high territory. Stocks flirted with a rebound early on as headlines suggested progress continued in the race to find an answer to the COVID-19 pandemic. Moreover, M&A activity ramped-up, headlined by Nvidia Corp. (NVDA $489) agreeing to acquire SoftBank Group Corp's (SFTBY $31) chip division Arm Ltd. for $40.0 billion, and Gilead Sciences Inc. (GILD $65) striking a deal to acquire Immunomedics Inc. (IMMU $85) for $21.0 billion. However, the upward momentum was stymied as hump day rolled around, courtesy of a disappointing retail sales read and as the Fed's monetary policy decision appeared to underwhelm the markets. Conviction seemed to get further drained as political uncertainty remained elevated ahead of the pivotal presidential election, a new fiscal relief package continued to be elusive, and signs of resurging COVID-19 cases in Europe emerged. Meanwhile, an unexpected miss in housing construction activity took some of the luster off a jump to a record high in homebuilder sentiment, while the continued moderation in initial jobless claims was met with the reality that unemployment remained painfully elevated, exacerbated by the recent expiration of emergency relief measures for hampered workers and employers.

The Energy sector was a standout winner on the week as crude oil prices rallied sharply, while nascent signs of a potential rotation into value and cyclically-natured Industrials, Materials and Financials sectors continued, to the detriment of the high-flying Information Technology, Consumer Discretionary and Communications Services stocks. The Treasury yield curve steepened slightly and the U.S. dollar remained hamstrung, while gold prices were little changed.

Next week, while political and geopolitical uncertainties are likely to remain in the backdrop, the global economic front is poised to garner attention, headlined by preliminary September Manufacturing and Services PMIs out of the U.S., the Eurozone and the U.K. Moreover, the U.S. economic calendar will also bring more August housing data in the form of existing and new home sales reports, initial jobless claims for the week ended September 19th, and the preliminary August durable goods orders figures, which could move the markets. Fedspeak will be robust and could carry some weight following this week's monetary policy decision, highlighted by two days of Congressional testimony from Chairman Jerome Powell, who will be accompanied by Treasury Secretary Mnuchin. Other international reports that are due out next week that deserve a mention include September releases of Eurozone consumer confidence and German business sentiment.

As noted in our latest Schwab Market Perspective: Rotation, the U.S. stock market hit pause in early September, as investors took a harder look at market overconcentration and frothy sentiment. Meanwhile, global economies may be entering a new phase, and the Federal Reserve’s newly announced inflation policy is likely to keep U.S. rates lower for longer. For a look at our analysis of the current stock market environment, check out our latest, Schwab Sector Views: Concentrate on Sector Overconcentration, in which we discuss how we think that the Financials sector stands to potentially benefit from a shift to value-oriented stocks and a continued rebalancing of the markets. We conclude by pointing out how using alternatives to market-cap weighted funds—such as fundamental or equal-weight index funds–can help disperse the concentrated risk in the growth-oriented sectors.

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 Post Losses with Techs Leading the Way

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