Stocks Close Out October on a Sour Note

U.S. equities closed out the month of October by posting solid losses, while notching a second-straight week of declines in the process. The uneasiness surrounding the impact of a resurgence in new COVID-19 cases here and in Europe persisted, exacerbated by festering uncertainty ahead of next week's presidential election. Earnings season hit its apex, headlined by Dow members Apple and Honeywell International, as well as Amazon.com, Twitter, Google's parent Alphabet and Facebook. News on the economic front was mostly positive, with personal income and spending, consumer sentiment and regional manufacturing reports all coming in stronger than expected. Treasury yields were higher as bond prices declined and the U.S. dollar ticked to the upside, while gold rose and crude oil prices lost ground. Europe finished mixed amid some divergent data and the palpable uneasiness, while markets in Asia were lower.

The Dow Jones Industrial Average decreased 158 points (0.6%) to 26,502, the S&P 500 Index was down 40 points (1.2%) at 3,270, and the Nasdaq Composite lost 274 points (2.5%) to 10,912. In moderate volume, 722 million shares were traded on the NYSE and 3.1 billion shares changed hands on the Nasdaq. WTI crude oil was $0.37 lower at $35.79 per barrel and wholesale gasoline was unchanged at $1.03 per gallon. Elsewhere, the Bloomberg gold spot price rose $10.10 to $1,877.69 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 94.01. Markets were sharply lower for the week, as the DJIA lost 6.5%, the S&P 500 decreased 5.6%, and the Nasdaq Composite fell 5.5%.

Dow member Apple Inc. (AAPL $109) reported fiscal Q4 earnings-per-share (EPS) of $0.73, above the $0.71 FactSet estimate, as revenues rose 1.0% year-over-year (y/y) to $64.7 billion, north of the Street's forecast of $63.7 billion. Revenues from its iPad, Mac and wearables products all came in above expectations, along with sales out of its services unit, though its iPhone revenues came in below expectations. The company held off on providing guidance due to the uncertainty regarding the COVID-19 pandemic. Shares were lower.

Amazon.com Inc. (AMZN $3,036) reported Q3 EPS of $12.37, well above the projected $7.41, with revenues rising 37.0% y/y to $96.2 billion, topping the expected $92.8 billion. The company's Q4 earnings forecast came in south of forecasts, which included estimates of $4.0 billion related to costs pertaining to COVID-19, while its revenue outlook had a midpoint above projections. Shares traded to the downside.

Alphabet Inc. (GOOGL $1,616), the parent of Google, reported Q3 EPS of $16.40, above the projected $11.28, as revenues rose 14.0% y/y to $46.2 billion, exceeding the estimated $42.8 billion. The company said its Q3 revenues reflected broad-based growth led by an increase in advertiser spending in search and YouTube as well as continued strength in Google cloud and play. Shares gained ground.

Facebook Inc. (FB $263) announced Q3 earnings of $2.71 per share, north of the projected $1.90, with revenues rising 22.0% y/y to $21.5 billion, exceeding the expected $19.8 billion. The company said it saw daily active users and monthly active users in the U.S. and Canada decline slightly from Q2, which were elevated due to the impact of the COVID-19 pandemic. FB added that it expects this trend to continue but Q4 y/y ad revenue growth to be higher that its reported Q3 rate, driven by continued strong advertiser demand during the holiday season. FB finished lower.

Twitter Inc. (TWTR $41) posted Q3 EPS of $0.04, or $0.19 ex-items, versus the expected $0.17, as revenues rose 14.0% y/y to $936 million, above the forecasted $777 million. Daily active users were up 29.0% y/y, but the figure came in well below expectations. Shares fell nearly 20%.

Dow member Chevron Corporation (CVX $70) reported a Q3 loss of $0.12 per share, or EPS of $0.11 ex-items, compared to the forecasted shortfall of $0.26 per share, with revenues of $24.5 billion missing the expected $25.8 billion. The company said its Q3 results were down y/y, primarily due to lower commodity prices and margins resulting from the impact of COVID-19. Shares gained ground.

Exxon Mobil Corporation (XOM $33) posted a Q3 loss of $0.15 per share, or a shortfall of $0.18 per share ex-items, compared to the forecasted $0.26 per share loss. Revenues of $46.2 billion topped the Street's forecast of $45.4 billion. XOM reduced its capital expenditure expectation for the full year. XOM traded to the downside.

Dow member Honeywell International Inc. (HON $165) reported Q3 EPS of $1.07, or $1.56 ex-items, versus the expected $1.49, with revenues declining 14.0% y/y to $7.8 billion, north of the anticipated $7.7 billion. HON's aerospace, building technologies and performance materials and technologies revenues all declined, but its safety and productivity solutions unit sales were up. The company issued Q4 EPS guidance that was above expectations, and its revenue outlook bracketed estimates. Shares were higher.

Starbucks Corporation (SBUX $87) announced fiscal Q4 earnings of $0.33 per share, or $0.51 ex-items, compared to the forecasted $0.31, with revenues declining 8.0% y/y to $6.2 billion, exceeding the projected $6.1 billion. Q4 same-store sales declined 9.0% y/y, compared to the anticipated 11.7% drop. The company noted the unfavorable impacts related to the COVID-19 outbreak, while a decrease in transactions was partially offset by an increase in average ticket. SBUX issued Q1 EPS guidance that was below expectations. SBUX traded lower.

Q3 earnings season has reached its pinnacle and although results have been mostly positive the response has taken a back seat to the ramped-up concerns about the economic and earnings implications of the persistent spikes in new COVID-19 cases here and notably in Europe. Thus far, of the 319 S&P 500 companies that have reported results, about 77% have topped revenue expectations and roughly 85% have exceeded earnings forecasts.

Schwab's Chief Investment Strategist Liz Ann Sonders, Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Chief Fixed Income Strategist Kathy Jones, point out how actual earnings numbers may be less important than what corporate leaders say about their expectations in the latest, Schwab Market Perspective: Turning to Earnings Season.

Volatility has been amplified by the looming presidential election and the potential for a drawn out, contentious contest has fostered uncertainty regarding the timing of a new round of fiscal relief.

Amid this backdrop, the Schwab Center for Financial Research (SCFR) offers commentary, Rising COVID-19 Cases Deepen Stock Selloff, and 3 Reasons to Expect Election Result Delays.

Meanwhile, Schwab's Liz Ann Sonders offers her analysis in her article, Election Blues: Looking at Election History for Market Guidance, and Schwab's Managing Director and Senior Investment Strategist, David Kastner, CFA, discusses Health Care vs the 2020 Election, in his latest Schwab Sector Views.

For timely strategies amid the volatile market environment and in-depth analysis of the election, including Jeffrey Kleintop's article, Global Impact of a "Blue Wave" Election Outcome, check out our Market Insights page, and you can follow us on Twitter at @SchwabResearch.

Personal income and spending top forecasts, consumer sentiment revised higher

Personal income (chart) rose 0.9% month-over-month (m/m) in September, versus the Bloomberg forecast of 0.4% gain, following August's upwardly-revised 2.5% decline. Personal spending rose 1.4%, above the estimated 1.0% rise and versus the prior month's unadjusted 1.0% gain. The September savings rate as a percentage of disposable income was 14.3%. The PCE Deflator increased 0.2% m/m, matching expectations and compared to August's unadjusted 0.3% rise. Compared to last year, the deflator was 1.4% higher, below estimates of a 1.5% rise and above August's downwardly-adjusted 1.3% gain. Excluding food and energy, the PCE Core Index rose 0.2% m/m, in line with expectations and versus August's unrevised 0.3% rise. The index was 1.5% higher y/y, versus estimates of a 1.7% increase and August's downwardly-adjusted 1.4% gain.

The October final University of Michigan Consumer Sentiment Index was revised higher to 81.8, versus expectations to match the preliminary reading of 81.2. The upward revision came as both the current conditions and expectations components of the survey were adjusted to higher levels than initially-reported. Compared to September, the overall index was higher as a decline in the assessment of current conditions was more than offset by an improvement in expectations. The 1-year inflation forecast remained at September's 2.6% rate, and the 5-10 year inflation forecast fell to 2.4% from the prior month's 2.7% pace.

The Chicago PMI came at a higher level of expansion (a reading above 50). The index dipped to 61.1 in October from September's 62.4 level, and versus forecasts calling for a decline to 58.0.

The Q3 Employment Cost Index rose 0.5%, in line with estimates and Q2's unadjusted increase.

Treasuries were lower, as the yield on the 2-year note was up 2 basis points (bps) at 0.17%, the yield on the 10-year note rose 4 bps to 0.88% and the 30-year bond rate gained 3 bps to 1.66%.

Bond yields have been choppy as of late but remain in a range. Schwab's Kathy Jones notes in her article, Do Bonds Still Provide Diversification?, that many fear that if markets become volatile and stocks decline again, bond yields don't have much room to fall—and therefore, won't provide the balance to a portfolio that they have in the past. She points out that in our view, those fears appear overblown.

Europe mixed following data and amid heightened uncertainties

European equities finished out the week mixed, with the markets remaining uneasy regarding the resurgence in COVID-19 cases in the U.S. and within the region, along with the political uncertainty ahead of next week's U.S. presidential election. Schwab's Jeffrey Kleintop notes in his article, Risk of Second Wave of COVID-19 Lockdowns, 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. Scrutiny of a flood of earnings reports from key companies in the U.S. appeared to hamper sentiment, but Eurozone Q3 GDP growth of 12.7% quarter-over-quarter topped expectations of a 9.6% gain, with German output leading the way, to keep the mood in check . However, German September retail sales fell more than expected m/m. The data came after the European Central Bank said yesterday that risks are clearly tilted to the downside and that it will consider further monetary policy action in December. The euro dipped versus the U.S. dollar and the British pound ticked higher versus the greenback, while bond yields in core Eurozone regions were mostly higher and rates in the U.K. rose.

The U.K. FTSE 100 Index was down 0.1%, France’s CAC-40 Index and Spain's IBEX 35 Index rose 0.5%, Germany's DAX Index declined 0.3%, Italy's FTSE MIB Index increased 0.3%, and Switzerland's Swiss Market Index ticked 0.1% higher.

Stocks in Asia finished broadly lower amid the intensifying uncertainties regarding the spiking new COVID-19 cases in the U.S. and Europe, as well as the increasing skittishness ahead of next week's key presidential election in the world's largest economy of the U.S. Moreover, a host of earnings reports from key companies in the U.S. garnered scrutiny. The markets also shrugged off reports showing Japan's and South Korea's industrial production both rose more than expected in September. Japan's Nikkei 225 Index declined 1.5%, with the yen gaining ground late in the session, while South Korea's Kospi Index fell 2.6%. China's Shanghai Composite Index traded 1.5% lower and the Hong Kong Hang Seng Index dropped 2.0%. Australia's S&P/ASX 200 Index decreased 0.6% and India's S&P BSE Sensex 30 Index dipped 0.3%. Schwab's Jeffrey Kleintop offers a look at the global landscape in his latest article, "De-globalization" Already Happened And It Didn't Matter, how for investors, the stall in global trade since 2008 hasn't necessarily led to a stall in profits for multinational companies that make up the major stock market indexes or a decline in the international portion of those profits.

Stocks selloff amid interrelated catalysts

U.S. stocks fell sharply, posting a second-straight weekly decline, courtesy of a host of conspiring catalysts. The economic implications of the resurgence of new COVID-19 cases in the world's largest economy of the U.S. and notably in key regions of Europe weighed heavily on the markets. Conviction also waned as hopes of a near-term fiscal stimulus package vanished and sentiment was further agitated by the high likelihood of a contentious presidential election next week that fostered uncertainty regarding the timing of a still-expected fiscal deal. Earnings season hit its apex and noticeably upbeat Q3 results were countered by the continued lack of guidance amid the political and COVID-19 related uncertainties.

The economic front also did little to help the bulls' cause even as annualized Q3 GDP hit a record of 33.1% to follow Q2's historic 31.4% plunge, durable goods orders rose more than expected, highlighted by continued strong business spending, and the still painfully-elevated weekly initial jobless claimscontinued to decline. All the major S&P 500 sectors fell, with profits being trimmed from high-flying Information Technology stocks, and cyclically-natured Industrials and Energy issues leading to the downside, while the defensively-natured Utilities sector outperformed with a near 4.0% drop. Treasury yields held steady as the bond market showed a muted reaction to the volatility, and the U.S. dollar regained some footing. Crude oil prices saw heavy pressure and gold dipped.

Next week, although earnings season will continue to roll on and the markets will pay close attention to Election Day on Tuesday, the economic calendar is poised to garner heavy scrutiny. The U.S. will participate in a host of global October Manufacturing and Services PMIs, with separate reports from the Institute for Supply Management and Markit. Initial jobless claims for the week ended October 31st will provide a timely indicator of the employment front, and vehicle sales figures for October will shed some light on what seems to be a reviving auto sector. However, the two events that are likely to garner the most market focus will be the mid-week monetary policy decision from the Federal Open Market Committee (FOMC), which comes amid the intensified market uneasiness, and Friday's October nonfarm payroll report after the prior month's release suggested a potential slowdown in the jobs recovery.

Along with the aforementioned global reads on manufacturing and services sector activity, next week's international economic calendar will bring some data points that could move the markets including: Australia—the Reserve Bank of Australia monetary policy decision, trade balance and retail sales. Japan—household spending and labor earnings figures. Eurozone—retail sales, as well as German industrial production and factory orders. U.K.—the Bank of England monetary policy decision.

Schwab's Liz Ann Sonders has warned for some time and most recently in her latest article, Mixed Emotions: Sentiment Telling Divergent Stories, how extreme bullishness; which when connected to the euphoria already on display by shorter-term traders, could mean a sentiment extreme that suggests some contrarian downside risk for stocks. She reiterates our advice: remain disciplined around diversification and periodic (and perhaps volatility-based) rebalancing.

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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Stocks Close Out October on a Sour Note

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