Stocks End Choppy Week with a Whimper

U.S. stocks finished near the unchanged mark following a mixed September nonfarm payroll report that saw the headline job growth figure miss severely. However, the unemployment rate fell more than expected, the prior two months were revised higher, and wages were strong. The report seemed to preserve expectations that the Fed will still begin to rein in its monthly asset purchases later this year. The Treasury yield curve steepened following the jobs report and the U.S. dollar saw modest pressure. Gold dipped and crude oil prices continued to rally. The markets posted a weekly gain courtesy of signs of an easing Delta variant environment, and as Congress reached an agreement to temporarily extend government funding to avoid a default at least until December. M&A news was in focus amid a relatively light equity front, with Cigna Corporation agreeing to sell some insurance businesses to Chubb Limited for $5.75 billion. In other equity news, military and emergency truck maker Oshkosh lowered its earnings guidance due to supply chain disruptions and higher-than-expected cost inflation. Europe finished mixed following the U.S. labor report, while the Energy sector continued to rally, and Asia finished mostly higher as China returned to action following a week off.

The Dow Jones Industrial Average declined 9 points to 34,746, the S&P 500 Index decreased 8 points (0.2%) to 4,391, and the Nasdaq Composite lost 74 points (0.5%) to 14,580. In moderate volume, 713 million shares were traded on the NYSE and 3.5 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.05 to $79.35 per barrel. Elsewhere, the gold spot price declined $2.20 to $1,757.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—dipped 0.1% to 94.17. Markets were higher for the week, as the DJIA gained 1.2%, the S&P 500 increased 0.8%, and the Nasdaq Composite ticked 0.1% higher.

M&A news was in focus, with Cigna Corporation (CI $205) announcing an agreement to sell its life, accident and supplemental benefits businesses in seven countries to Chubb Limited (CB $183) for $5.75 billion. CI traded higher and CB gained solid ground.

Oshkosh Corp. (OSK $101) fell after lowering its Q4 and full-year earnings guidance, citing how strong growth in demand is being met with significant supply chain and logistics disruptions as well as material and freight cost inflation that are beyond its prior expectations. The fire and emergency and military truck maker added that the unavailability of parts has impacted its ability to produce and ship units and has also contributed to labor inefficiencies.

The first full week of October and Q4 finished with a gain but in choppy fashion with multiple large swings above and below the unchanged mark. Stocks have been bolstered by the delay of the debt ceiling decision as Congress passed an extension of government funding until early December. Moreover, the Delta variant continued to show signs of rolling over and economic data was mostly upbeat, headlined by stronger-than-expected September services sector reports and a larger-than-expected deceleration in initial jobless claims which snapped a string of three weeks of acceleration. However, the global supply chain disruption continued to hamper economic activity and inflation pressures remained elevated, while expectations persisted that global monetary policies are heading down the tightening path.

The weekly advance was led by Energy, Financials, Industrials and Materials. However, the longer duration higher valuation segments of the market—Information Technology and Communication Services—were hamstrung by the rise in Treasury yields.

Q3 earnings season is set to unofficially kick off next week as heavyweights from the Financials sector report results after being among the best performers this year. The Street will likely pay close attention to net interest margins, equity and fixed income trading revenues, investment banking activity, and loan loss reserve changes. Year-over-year earnings growth for the S&P 500 is expected to be robust but guidance and the impact of rising inflation and supply chain issues are likely to be highly scrutinized. Director and Senior Investment Strategist with the Schwab Center for Financial Research (SCFR), David Kastner, CFA, provides his latest Schwab Sector Insights: A View on 11 Equity Sectors, offering a look at what we expect to see over the next three to six months.

For a look at the market environment, check out the SCFR's article, Market Volatility: Schwab's Quick Take, while Schwab's Chief Investment Strategist Liz Ann Sonders provides her commentary, 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.

September job growth misses expectations

Nonfarm payrolls (chart) rose by 194,000 jobs month-over-month (m/m) in September, well below the Bloomberg consensus estimate of a 500,000 rise, while August's figure was upwardly-adjusted to an increase of 366,000. Excluding government hiring and firing, private sector payrolls increased by 317,000, versus the forecasted rise of 450,000, after increasing by a positively-revised 332,000 in August. Potentially helping offset the noticeable miss in the headline job growth reading, the prior two months figures were revised higher by a total of 169,000. The labor force participation rate dipped to 61.6% from August's 61.7% rate, compared to forecasts of an increase to 61.8%. The U.S. Department of Labor said notable job gains occurred in leisure and hospitality, in professional and business services, in retail trade, and in transportation and warehousing. However, employment in public education declined over the month.

The unemployment rate fell to 4.8% from August's 5.2% rate, versus expectations of a dip to 5.1%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—decreased to 8.5% from the prior month's 8.8% rate. Average hourly earnings rose 0.6% m/m, north of projections for a 0.4% increase, and versus August's downwardly-revised 0.4% rise. Y/Y, wages were 4.6% higher, in line with forecasts. Finally, average weekly hours rose to 34.8 from August's downwardly-revised 34.6, and versus expectations to come in at 34.7 hours.

August wholesale inventories (chart) were unrevised at the previously reported 1.2% m/m increase and at a faster pace than July's 0.6% rise. Sales fell 1.1%, compared to forecasts of a 0.9% increase, and after July's upwardly-adjusted 2.1% gain.

Treasuries were mostly lower and yields jumped this week as the markets grappled with expectations that the Fed is set to begin to rein in its extraordinary measures put in place to combat the impact of the pandemic, against the backdrop of persisting inflation pressures. Schwab's Liz Ann Sonders provides analysis of the Fed in her commentary, Fed Tapering Coming Soon; Dots Plot Has Thickened.

The yield on the 2-year note was little changed at 0.31%, while the yields on the 10-year note and the 30-year bond gained 3 basis points to 1.60% to 2.16%, respectively.

With earnings season unofficially kicking off, next week's economic calendar will yield a bit but still offer some key reports on inflation, courtesy of the Consumer Price Index (CPI) and the Producer Price Index(PPI). Given the hyper-focus on the Fed, the markets are likely to pay close attention to the minutes from the Fed's September monetary policy meeting. The docket will also feature timely indicators, in the form of initial jobless claims for the week ended October 9, and the September NFIB Small Business Optimism Index.

Europe mixed following U.S. jobs report, though Energy continued to rally, Asia mostly higher

European equities finished mixed with volatility remaining following the much softer-than-expected U.S. September employment report. The markets also digested an unexpected decline in German exports for August. However, the Energy sector continued to run as crude oil prices moved higher and were on track to post a seventh-straight weekly gain. The markets continued to grapple with rising global bond yields as monetary policies are expected to tighten in response to rising inflation pressures, exacerbated by the surging energy costs. The rising inflation concerns have been fostered by the intensifying global supply challenges. Bond yields in the Eurozone were mostly higher and rates in the U.K. gained solid ground, while the euro and British pound traded higher versus the U.S. dollar.

Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Payback Time With a Potential Payoff, noting 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 up 0.3%, France's CAC-40 Index was down 0.6%, Germany's DAX Index dipped 0.3%, Spain's IBEX 35 Index dipped 0.1%, Italy's FTSE MIB Index gained 0.2%, and Switzerland's Swiss Market Index was little changed.

Stocks in Asia finished mostly higher to close out the choppy week, with Chinese equities gaining ground in a return to action following the Golden Week holiday break, while the Caixin China Services PMI for September showed output in the sector jumped back into expansion territory. In other economic news, Japan's household spending in August fell more than expected, and real cash earnings for August rose at a smaller rate than anticipated. Meanwhile the markets focused on yesterday's solid gain in the U.S. after lawmakers reached an agreement to temporarily avoid a default, though the global supply chain disruptions remained intensified and expectations continued to be elevated that global monetary policies are heading toward the tightening path. Some caution may have set in ahead of today's U.S. key September employment report.

Japan's Nikkei 225 Index traded 1.3% higher, with the yen extending a slide. Japanese stocks have been volatile after strong September and Q3 performances as discussed by Schwab's Jeffrey Kleintop in his article, It's All Over for Japan (and That's Good). China's Shanghai Composite Index advanced 0.7% and the Hong Kong Hang Seng Index gained 0.6%. Australia's S&P/ASX 200 Index rose 0.9%, and India's S&P BSE Sensex 30 Index traded 0.6% to the upside, while South Korea's Kospi Index bucked the trend, dipping 0.1%.

Next week's international economic calendar will be relatively heavy with reports worth noting including: Australia—employment change. China—lending statistics, the trade balance, and inflation figures. India—trade balance, industrial production, and inflation figures. Japan—core machine orders. Eurozone—industrial production and trade balance, along with Germaninvestor sentiment and consumer price inflation. U.K.—employment change, industrial/manufacturing production, the trade balance, and August GDP growth.

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 End Choppy Week with a Whimper

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