September Continues Historical Norm, Stocks Down for 2nd Week

Stocks saw noticeable pressure to close out a second-straight weekly drop as September seems to be living up to its typical volatile norm. The Materials sector was the worst performer as metal prices continue to soften, while heavyweight Information Technology issues applied the most downside pressure. The markets continued to grapple with uncertainties regarding the Delta variant, global monetary policy tightening timing, fiscal stimulus, and persistent supply-chain challenges. Volume and volatility were likely bolstered on this quadruple witching day where options and futures contracts on stocks and indexes simultaneously expire. The economic calendar showed preliminary September consumer sentiment improved from the prior month's tumble but at a pace that was below forecasts. Treasuries were lower to lift yields and the U.S. dollar gained ground. Crude oil prices were lower, and gold extended a second-straight weekly drawdown. In equity news, United States Steel Corporation fell despite issuing stronger-than-expected guidance, General Motors extended downtime at some North American plants due to the global chip shortage, and Thermo Fisher Scientific offered guidance that trounced the Street's forecast. Europe finished lower to close out the choppy week, while Asia finished mostly higher as China and Hong Kong trimmed weekly drawdowns.

The Dow Jones Industrial Average declined 166 points (0.5%) to 34,585, the S&P 500 Index fell 41 points (0.9%) to 4,433, and the Nasdaq Composite decreased 138 points (0.9%) to 15,044. In heavy volume, 3.3 billion shares were traded on the NYSE and 6.4 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.64 to $71.97 per barrel. Elsewhere, the gold spot price fell $5.00 to $1,751.70 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.3% higher to 93.19. Markets were lower for the week, as the DJIA dipped 0.1%, the S&P 500 declined 0.6%, and the Nasdaq Composite decreased 0.5%.

United States Steel Corporation (X $23) issued Q3 guidance for operating earnings that came in above estimates, noting sustained customer demand, and continued increases in steel selling prices. The company also said it remains bullish that market fundamentals will support a stronger for longer steel market and it has accelerated the pace of deleveraging. The company also announced plans to build a new steel mill as demand for steel continues to surge. Shares were solidly lower despite the guidance, with Bloomberg noting that analysts are questioning X's new mill plan announcement.

General Motors Company (GM $51) announced that it plans to extend downtime into mid-October at seven North American factories due to the continued impact of the global semiconductor shortage on production, exacerbated by the automaker's recall of the Chevy Bolt electric vehicle. Shares dipped.

Thermo Fisher Scientific Inc. (TMO $597) rallied after the life sciences and diagnostics company that makes tests for COVID-19 issued fiscal year 2022 earnings and revenue guidance that was well above expectations, while its outlook for 2023-2025 also bested the Street's forecasts by a wide margin.

Stocks have been choppy amid the historically volatile September period, with the markets facing a plethora of uncertainties regarding the Delta variant, monetary policy direction, China's intensifying regulatory crackdown, and supply-chain disruptions. Moreover, with fiscal stimulus adding another layer of contention for the markets amid already hefty government spending and a potential government shutdown, Schwab's Chief Investment Strategist Liz Ann Sonders provides in her latest article, Will Rising Federal Debt Slow Economic Growth?, a discussion of how over the past 70 years, rising government debt generally has been accompanied by weaker economic activity. But she discusses how it's not a simple relationship.

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

September consumer sentiment improves but at a smaller pace than expected

The September preliminary University of Michigan Consumer Sentiment Index (chart) improved to 71.0, versus the Bloomberg estimate calling for a rise to 72.0 from August's 70.3 reading. The index rose modestly as a decline for the current conditions portion of the index was met with a gain for the expectations component. The 1-year inflation forecast ticked higher to 4.7% from August's 4.6% rate, in line with forecasts, and the 5-10 year inflation forecast remained at the prior month's 2.9% level.

The University of Michigan said, "The steep August falloff in consumer sentiment ended in early September, but the small gain still meant that consumers expected the least favorable economic prospects in more than a decade."

Treasuries were lower with the yield on the 2-year note ticking 1 basis points (bp) higher to 0.23%, the yield on the 10-year note rising 3 bps to 1.37%, and the 30-year bond gaining 2 bps to 1.91%.

Timing of when the Fed will begin to taper its monthly asset purchases remains a key for the markets as they grapple with inflation pressures, mixed employment data, the Delta variant, and persistent supply-chain issues. Schwab's Chief Fixed Income Strategist Kathy Jones points out in her latest commentary, Is the Treasury Bond Market About to Wake Up?, that the bond market has been in hibernation for months, and investors may have become complacent about risks.

Europe mostly lower, Asia mostly higher, as mixed week reaches the finish

European equities finished mostly lower in the final session of a mixed week, as the markets grappled with lingering uneasiness regarding the Delta variant, supply-chain challenges, and the intensified regulatory crackdowns in China. Value/cyclical sectors saw some pressure, led by a solid decline in Materials. Also, the markets may have looked to next week, which will bring monetary policy decisions out of the U.S., U.K., and Japan, as well as some September reports on manufacturing and services sector output. Expectations have moved higher that global monetary policies may be on a path of tightening after extreme accommodation was put in place to combat the global pandemic as inflation data has come in hotter than expected. In economic news, August U.K. retail sales unexpectedly declined, while Eurozone consumer price inflation was unrevised at a 3.0% year-over-year rise for last month, and Eurozone construction output modestly rebounded for July. The euro and British pound fell late in the day and finished lower versus the U.S. dollar, and bond yields in the Eurozone and the U.K. extended recent gains.

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 was down 0.9%, France's CAC-40 Index declined 0.7%, Germany's DAX Index and Italy's FTSE MIB Index fell 1.0%, and Switzerland's Swiss Market Index decreased 0.8%, while Spain's IBEX 35 Index gained 0.3%.

Stocks in Asia finished mostly higher to conclude a volatile week that has seen China's intensified crackdown on big businesses remain a drag as it has focused on the casino industry in Macau this week. Also, debt problems at real estate company China Evergrande Group(EGRNY $11) has exacerbated the pressure on stocks in the region, notably Hong Kong. For a look at the Chinese and Hong Kong markets amid the ramped-up volatility, check out Schwab's Jeffrey Kleintop's, CFA, article, Is China’s Bear Market an Opportunity

The economic calendar was quiet today, but is set to heat up next week with a host of global preliminary September manufacturing and services reports, as well as monetary policy decisions out of the U.S., U.K., and Japan. Japan's Nikkei 225 Index increased 0.6% with the yen retreating, while China and Hong Kong markets chipped away at solid weekly losses. China's Shanghai Composite Index ticked 0.2% higher and the Hong Kong Hang Seng Index rose 1.0%. South Korea's Kospi Index gained 0.3%, but India's S&P BSE Sensex 30 Index dipped 0.2%, modestly retreating from record highs, and Australia's S&P/ASX 200 Index fell 0.8%, with some pressure on mining issues amid the recent pullback in iron ore prices.

September sounding a familiar tone as stocks remain sluggish

U.S. stock market performance remained choppy for the week with September living up to its historically normal volatile form. The markets, which remain within shouting distance of record highs, jumped in and out of positive and negative territory as conviction seemed to be in short supply in both the bulls' and bears' camps. Uncertainties persisted regarding the Delta variant impact, fiscal and monetary policy paths, festering supply-chain disruptions, and intensified China regulatory crackdowns. Economic data was mixed, with retail sales unexpectedly rising in August—though July's figures were revised negatively—manufacturing growth out of New York and Philadelphia for September surprisingly jumping, and consumer prices moderating more than anticipated. Treasury yields were higher on the short-to-mid portions of the curve, the U.S. dollar gained noticeable ground, crude oil prices rallied, and gold sold off for a second-straight week. Amid this backdrop, the heavyweight Information Technology and Communications Services sectors weighed on the markets, while Materials led to the downside as metals prices continued to retreat. However, the Energy sector rallied and was the best performer amid the rise in crude oil prices that was bolstered by a larger-than-expected drawdown in oil inventories, while Financials and Consumer Discretionary issues also outperformed.

Next week, the economic calendar will be loaded with data points that could garner some market reactions. Housing data will be plentiful, courtesy of the NAHB's homebuilder sentiment release, housing starts and building permits data, along with existing and new home sales reports. Markit will deliver preliminary September reads on manufacturing and services sector activity, while other timely economic reports will come in the form of jobless claims for the week ended September 18 and the Leading Index. However, the headlining event of the week will likely be Wednesday's monetary policy decision from the Federal Open Market Committee (FOMC), given how hyper-focused the global markets are regarding the timing of when the FOMC will begin to taper its monthly asset purchases. Accompanying the decision will be updated FOMC economic projections, and shortly after the announcement Chairman Jerome Powell will deliver his customary press conference.

The markets continue to expect the Fed to begin trimming its monthly asset purchases sometime in Q4, despite August's much softer-than-expected nonfarm payroll report, but the first rate hike is not expected for some time. Schwab's Kathy Jones and Senior Fixed Income Analyst, Christina Shaffer, note in their commentary, Fed Tapering: Will it Be Different This Time?, that although the prospect of the Federal Reserve tapering its bond purchases has unsettled markets in the past, we expect it to be more orderly this time around.

Along with the U.S. monetary policy decision, the Bank of Japan and Bank of England (BoE) will also deliver their decisions, with the latter likely garnering the most scrutiny as BoE members have suggested that it may be getting closer to tightening. The international economic calendar will also feature a plethora of September preliminary Manufacturing and Services PMIs out of the Eurozone, the U.K., and Japan. Another report that is due out next week that deserves a mention is the September read on German business sentiment.

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September Continues Historical Norm, Stocks Down for 2nd Week

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