President's COVID-19 Diagnosis Hampers Stocks

U.S. equities finished lower, but still managed to post weekly gains, amid ramped-up concerns about COVID-19 after President Donald Trump and First Lady Melania Trump tested positive for the virus. Moreover, the September employment report suggested the job recovery has slowed. A glimmer of hope that lawmakers may be able to come to an agreement on a new fiscal relief package was renewed to help stocks pare some of the losses after House Speaker Pelosi hinted that aid for the airline industry could be coming soon. However, tech stocks kept the Nasdaq well entrenched in the red. In other economic news, September consumer sentiment improved much more than projected and factory orders rose for a fourth-straight month. Treasury yields were higher as bond prices dipped and the U.S. dollar ticked to the upside, while gold was modestly lower and crude oil prices lost noticeable ground. In light equity news, Tesla announced higher-than-expected deliveries and Lennar boosted its dividend, while Twilio and Nu Skin Enterprises preannounced positive guidance. Europe pared early losses to finish mixed, while markets in Asia were lower in thin trading volume with a number of markets in the region closed for holidays.

The Dow Jones Industrial Average declined 134 points (0.5%) to 27,683, the S&P 500 Index fell 32 points (1.0%) to 3,348, and the Nasdaq Composite decreased 251 points (2.2%) to 11,075. In moderately-heavy volume, 901 million shares were traded on the NYSE and 3.7 billion shares changed hands on the Nasdaq. WTI crude oil was $1.67 lower at $37.05 per barrel and wholesale gasoline lost $0.03 to $1.12 per gallon. Elsewhere, the Bloomberg gold spot price shed $3.37 to $1,902.64 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 93.85. Markets were higher for the week, as the DJIA gained 1.9%, the S&P 500 increased 1.5%, and the Nasdaq Composite rose 1.5%.

Tesla Inc. (TSLA $415) is in focus after the electric vehicle maker announced that Q3 total deliveries came in at 139,300, above the FactSet estimate of 136,350. Shares were lower.

Lennar Corporation (LEN $84) announced that is has increased its quarterly dividend by 100% to $0.25 per share. The homebuilder said, "Given our confidence in our operating platform and resulting cash flow generation, we believe a diversified program of debt reduction, stock repurchase and now an increased dividend, is appropriate." LEN was higher.

Twilio Inc. (TWLO $290) rose solidly after announcing that its Q3 revenues will be ahead of its previously issued guidance. The cloud communications platform as a service company also issued a long-term outlook that appeared to please analysts.

Nu Skin Enterprises Inc. (NUS $56) increased its Q3 revenue outlook, highlighting its ongoing investment in its digitally enabled business model and benefits of the current environment where consumers are spending more time online and working from home. Shares were higher.

Q4 began on a positive note after the September drop that snapped a string of five-straight monthly advances. However, stocks saw pressure today on the announcement that President Donald Trump and First Lady Melania Trump tested positive for COVID-19. The news appeared to foster concerns about a second wave of the virus and add another layer to the political uncertainty.

Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Risk of Second Wave of COVID-19 Lockdowns, discussing 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.

Moreover, the Schwab Center for Financial Research (SCFR) offers a Quarterly Market Outlook: Walking the Fine Line, in which Schwab's Chief Investment Strategist Liz Ann Sonders, Jeffrey Kleintop, and Chief Fixed Income Strategist Kathy Jones offer insight into the volatile market environment.

You can also find in-depth analysis of the election from Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend on our Market Insights page, where you can find commentary and other timely strategies on how to navigate the volatility. Finally, you can follow us on Twitter at @SchwabResearch.

Employment report suggest slowing recovery, consumer sentiment improves

Nonfarm payrolls (chart) increased by 661,000 jobs month-over-month (m/m) in September, compared to the Bloomberg forecast of an 859,000 rise, and following August's upwardly-adjusted gain of 1,489,000. Excluding government hiring and firing, private sector payrolls grew by 877,000, versus the forecasted rise of 850,000 after advancing by a downwardly-revised 1,022,000 in August. The Department of Labor said job gains were notable in leisure and hospitality, retail trade, health care and social assistance, and in professional and business services, but employment in government declined, mainly in state and local government education.

The unemployment rate fell to 7.9% from August's 8.4% rate, versus forecasts of a decline to 8.2%, with the labor force participation rateunexpectedly declining to 61.4% from August's 61.7% rate, versus an expected increase to 61.9%. The number of persons on temporary layoff fell by 1.5 million to 4.6 million, down considerably from the high of 18.1 million in April but 3.8 million higher than in February. The number of permanent job losers increased by 345,000 to 3.8 million and the figure has risen by 2.5 million since February.

Average hourly earnings ticked 0.1% higher m/m, versus projections of a 0.2% gain and compared to August's downwardly-revised 0.3% rise. Y/Y, wages were 4.7% higher, below estimates of a 4.8% increase. Finally, average weekly hours rose to 34.7 from August's unrevised 34.6 rate, where it was forecasted to remain.

This was the last employment report before the pivotal election and the numbers likely exacerbate concerns about a slowing of the economic recovery. The stalemate among lawmakers on finding an agreement to provide further relief for impacted workers and small businesses, and the economic implications of the resurgence of COVID-19 cases are likely compounding the uneasiness.

The September final University of Michigan Consumer Sentiment Index (chart) was revised higher to 80.4, versus expectations for an adjustment to 79.0 from the preliminary reading of 78.9. The stronger-than-expected revision that took the index to the highest since March came as both the current conditions and expectations components of the survey were adjusted to higher levels than initially-reported, with a notable adjustment to the latter.

Both portions of the survey were solidly higher versus August, and the overall index also improved from the prior month's 74.1 level. The 1-year inflation forecast fell to 2.6% from August's 3.1% rate, and the 5-10 year inflation forecast remained at the prior month's 2.7% pace.

Factory orders (chart) rose 0.7% month-over-month (m/m) in August, versus estimates of a 0.9% gain, and compared to July's upwardly-revised 6.5% gain. This was the fourth-straight monthly rebound from the historic 13.5% tumble in April which followed the 11.0% fall in March, but the pace was notably slower.

Stripping out the volatile transportation component, orders gained 0.7%, compared to July's upwardly-adjusted 2.4% rise. Final durable goods orders (chart), preliminarily reported last week, were revised higher to a 0.5% m/m gain for August, and orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, were adjusted upward to a 1.9% increase.

Treasuries were lower, as the yield on the 2-year note was flat at 0.13%, while the yield on the 10-year note was up 1 basis point (bp) at 0.69%, and the 30-year bond rate rose 2 bps to 1.48%. Bond yields have gained some ground as of late but remain in a recent range and 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.

Europe pares losses to finish mixed, Asia lower amid very light volume

European equities finished mixed, paring early losses that came after the news that U.S. President Donald Trump and First Lady Melania Trump tested positive for COVID-19, which exacerbated concerns about a potential second-wave of the virus. The turnabout came amid increased hopes that lawmakers may be able to find an agreement on a new fiscal relief package. Meanwhile, U.K. Brexit negotiations continued a critical final stage and U.K. Prime Minister Boris Johnson is set to intervene in the talks this weekend for the first time since June, per Bloomberg. The British pound rose versus the U.S. dollar and Schwab's Jeffrey Kleintop points out in his article, Brexit Is Back: The Endgame For Investors, how uncertainty may continue until a potential last-minute compromise in mid-to-late October, but avoiding a "no deal" Brexit could benefit U.K. financials and the pound. In economic news, the Eurozone consumer price inflation estimate for September came in below estimates. The euro traded lower versus the greenback and bond yields in the Euro region were lower, but U.K. rates nudged higher.

The U.K. FTSE 100 Index was up 0.3%, Spain's IBEX 35 Index increased 0.4% and Switzerland's Swiss Market Index ticked 0.1% higher, while France’s CAC-40 Index and Italy's FTSE MIB Index were little changed, and Germany's DAX Index lost 0.3%.

Stocks in Asia finished lower amid ramped up COVID-19 second wave concerns and political uncertainty after U.S. President Donald Trump and First Lady Melania Trump tested positive for the virus. Volume was very light as markets in China, Hong Kong, and South Korea remained closed for holidays, while India also was shuttered for a holiday. Japan's Nikkei 225 Index declined 0.7% with the yen rallying as the markets were closing, while a broad-based decline weighed on Australia's S&P/ASX 200 Index, which fell 1.4% and economic data showed retail sales dropped in August. Schwab's Jeffrey Kleintop, CFA, 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.

Stocks snap weekly string of losses

Despite the pullback on Friday, U.S. stocks snapped a string of four-straight weekly declines to close out a down month of September that stymied a run of five-straight monthly gains. The bulls found sustenance from a variety of sources, headlined by global PMI data continuing to paint a recovery picture, further progress on the COVID-19 treatment/vaccine front, and resuscitated hopes that a new fiscal relief deal could come to fruition before the election. The markets shrugged off elevated political uncertainty as the pivotal election looms, exacerbated by the disorderly first presidential debate, as well as resurging COVID-19 cases in Europe and the preserved threat of the worst case scenario that the U.K. could leave the European Union without a trade deal.

Among the market sectors gains were widespread, led by Real Estate, Utilities and Consumer Discretionary, while the lone group that finished in the red was Energy, which fell as the woes for the struggling sector continued and crude oil prices fell decisively. The Treasury yield curve steepened somewhat and the U.S. dollar saw some pressure amid some faded uneasiness amid the aforementioned catalysts. Gold prices rebounded from last week's drop.

Next week, the economic calendar will simmer down a bit and likely share market attention with the lingering political uncertainty and focus on a new fiscal relief package. However, there are some reports that could garner attention, such as the ISM and Markit's services sector reports, the trade balance, the JOLTS job openings report, and initial jobless claims for the week ended October 3. The Fed will also remain prominent, with the midweek release of the minutes from the September meeting and as a host of Fed officials speak, headlined by Chairman Jerome Powell's keynote address at the annual meeting of the National Association for Business Economics in Chicago.

The international economic front will also deliver some potential market-moving data/events, highlighted by business activity PMIs out of China, the Eurozone and the U.K. Moreover, Germany will report its latest factory orders, industrial production and trade figures. The Reserve Bank of Australia will announce its monetary policy decision and Japan will provide statistics on household spending and labor earnings.

For analysis of the volatile markets, check out Schwab's Chief Investment Strategist Liz Ann Sonders' analysis in her article, Unwind: Simple Rotation or Something More Sinister?. She notes how a rotation could give way to broader-based selling if economic data fails to support recent leadership by more classically-cyclical sectors.

Also, Schwab's Michael T. Townsend offers his article, 4 Reasons to Stay the Course as the Election Approaches, which is complemented by the SCFR's look at Election 2020: How Do the Candidates' Tax Plans Compare?.

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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President's COVID-19 Diagnosis Hampers Stocks

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