Stocks Head into Holiday Weekend Mixed

U.S. equities headed into the long holiday weekend mixed, both for today's session and on a weekly basis, but the Nasdaq notched yet another record high. Investors digested a much softer-than-expected August nonfarm payroll report that showed the Delta variant and seasonal factors may have played a role. The report likely keeps Fed tapering expectations intact, but it possibly pushed out the commencement to later this year, despite a noticeable rise in wages. Treasuries were lower, pushing yields higher, and the U.S. dollar dipped, while gold rallied, and crude oil prices edged lower. In other economic news, August U.S. services sector activity slowed but remained solidly in expansion territory, similar to reads out of Europe, though contractions were seen in Asia, notably an unexpected drop in China. On the equity front, Broadcom topped earnings expectations, along with DocuSign. Europe closed out the week lower, and markets in Asia were mixed.

The Dow Jones Industrial Average declined 75 points (0.2%) to 35,369, the S&P 500 Index shed 2 points to 4,535, while the Nasdaq Composite advanced 32 points (0.2%) to 15,364. In moderate volume, 703 million shares were traded on the NYSE and 3.6 billion shares changed hands on the Nasdaq. WTI crude oil shed $0.70 to $69.29 per barrel. Elsewhere, the gold spot price jumped $20.30 to $1,831.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.2% lower to 92.08. Markets were mixed for the week, as the DJIA lost 0.2%, while the S&P 500 rose 0.6%, and the Nasdaq Composite increased 1.6%.

Broadcom Inc. (AVGO $498) reported adjusted fiscal Q3 earnings-per-share (EPS) of $6.96, topping the $6.88 FactSet estimate, as revenues rose 16.0% year-over-year (y/y) to $6.8 billion, roughly in line with the Street's forecast. The company said it delivered record revenues reflecting its product and technology leadership across multiple secular growth markets in cloud, 5G infrastructure, broadband, and wireless, and it is projecting the momentum to continue in Q4. AVGO issued Q4 revenue guidance that was above expectations. Shares finished to the upside.

DocuSign Inc. (DOCU $310) posted adjusted Q2 EPS of $0.47, above the projected $0.40, with revenues gaining 50.0% y/y to $512 million, north of the expected $489 million. DOCU said organizations of all types and sizes are leveraging the power of the Agreement Cloud to digitize the most foundational process of doing business—the agreement process—starting with eSignature. The company raised its full-year revenue and billings guidance. Shares were nicely higher.

Schwab's Chief Investment Strategist Liz Ann Sonders delivers her latest article, You Take My Breadth Away: Market's Underlying Deterioration, discussing how as summer winds down, we soon head into September—historically the worst month for stocks in terms of average performance. She notes that aside from seasonality, there are several risks with which the market is confronting … including deteriorating breadth, fading monetary and fiscal stimulus, peak earnings/economic growth rates, and of course the Delta variant. Individually or collectively, though, they should not be taken as a "get out" message. For stock pickers out there, we would recommend a focus on quality via factor screening; both within growth and value indexes.

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

August employment report misses noticeably, services sector activity slows but remains solid

Nonfarm payrolls (chart)rose by 235,000 jobs month-over-month (m/m) in August, well below the Bloomberg consensus estimate of a 733,000 rise, though July's figure was upwardly-adjusted to an increase of 1,053,000. Excluding government hiring and firing, private sector payrolls increased by 243,000, versus the forecasted rise of 610,000, after increasing by an upwardly-revised 798,000 in July. The labor force participation rate remained at July's 61.7% rate, compared to forecasts of an increase to 61.8%. The Department of Labor said job gains occurred in professional and business services, transportation and warehousing, private education, manufacturing, and other services, while employment in retail trade declined over the month and leisure and hospitality job growth was unchanged after increasing by an average of 350,000 per month over the prior six months.

The unemployment rate decreased to 5.2% from July's 5.4% rate, in line with expectations. 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—fell to 8.8% from the prior month's 9.2% rate. Long-term unemployed—those jobless for 27 weeks or more—fell by 246,000 but is 2.1 million higher than in February 2020, and permanent job losers dropped by 443,000 but is 1.2 million higher than in February 2020.

Average hourly earnings jumped 0.6% m/m, north of projections for a 0.3% increase, and versus July's unadjusted 0.4% rise. Y/Y, wages were 4.3% higher, north of the 3.9% forecast. Finally, average weekly hoursremained at July's downwardly-revised 34.7, versus expectations of a modest increase to 34.8.

The August Institute for Supply Management (ISM)non-Manufacturing Index (chart) showed expansion in the key services sector (a reading above 50) slowed to 61.7 from July's 64.1 reading, and versus estimates of a decline to 61.6. The modestly better-than-expected read came as growth in new orders and business activity declined but both remained above 60.0, employment growth was little changed. However, new export orders fell but remained solidly in expansion and prices paid continued to suggest inflation pressures as the component retreated from the highest level since September 2005, but remained above 75.0. The ISM said, "There was a pullback in the rate of expansion in the month of August; however, growth remains strong for the services sector. The tight labor market, materials shortages, inflation and logistics issues continue to cause capacity constraints."

The final Markit U.S. Services PMI Index for August was revised slightly lower to 55.1 from the preliminary estimate of 55.2, where it was expected to remain. The index was down from July's 59.9 figure. A reading above 50 denotes expansion. Markit's release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and Markit weights its index components differently, while its survey respondents include those that vary more in size, including small and medium-sized companies.

Treasuries were lower following the data, as the yield on the 2-year note was little changed at 0.20%, while the yield on the 10-year note rose 4 basis points (bps) to 1.32%, and the 30-year bond rate gained 5 bps to 1.94%. The U.S. dollar saw modest pressure.

The markets continue to expect the Fed to begin trimming its monthly asset purchases sometime in Q4, but the first rate hike is not expected for some time and Schwab's Chief Fixed Income Strategist 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.

Please note: All U.S. markets will be closed on Monday in observance of the Labor Day holiday.

Europe lower following data to close out the week, Asia mixed

European equities finished lower, with the markets digesting a plethora of global August services sector reports, along with the noticeable miss in employment growth out of the U.S. for last month. Services sector growth out of the Eurozone and U.K. both decelerated more than initially expected, but remained solidly in expansion territory. Financials were lower despite bond yields in the Eurozone and the U.K. moving higher, while Energy issues were lower amid the softness in crude oil prices. The euro and British pound were higher versus the U.S. dollar.

The slowdown in services sector output came as the Delta variant continues to foster uncertainty, and amid the festering supply-chain issues that is impacting global business activity. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Can Investors Avoid Rising Supply Chain Risks?. Jeff notes 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 0.4%, France's CAC-40 Index fell 1.1%, Germany's DAX Index lost 0.4%, Italy's FTSE MIB Index declined 0.6%, Spain's IBEX 35 Index dropped 1.3%, and Switzerland's Swiss Market Index decreased 0.7%.

Stocks in Asia finished mixed as the markets digested a host of August services sector reports, while awaiting today's key U.S. labor report that could have implications on the timing of when the Fed will begin to taper its monthly asset purchases. Most markets finished higher, while China and Hong Kong declined after a recent rebound from the drawdown that has been fostered by China's recent crackdown on big businesses. Schwab's Jeffrey Kleintop, CFA, offers his article, Is China’s Bear Market an Opportunity?, noting that China’s stock market pullback this year has been in line with the average annual drawdown. However, the recent drop seems to be driven by a regulatory crackdown, not an economic slowdown, with the market not responding to the economic outlook, but to the policy uncertainty.

China's services sector output unexpectedly fell into contraction territory, while contractions in Japanese and Australian services sector activity accelerated. Japan's Nikkei 225 Index rallied 2.1% despite the data and as the yen remained stable, South Korea's Kospi Index advanced 0.8% and Australia's S&P/ASX 200 Index traded 0.5% higher. India's S&P BSE Sensex 30 Index also rose 0.5%, extending a recent rally and adding to all-time highs as the nation reported a jump in August services sector output, which moved solidly into expansion territory. China's Shanghai Composite Index declined 0.4%, and the Hong Kong Hang Seng Index decreased 0.7%. However, stocks in the region managed to post solid weekly gains.

Stocks mixed as cyclicals see red, growth and defensive issues lead to the upside

U.S. stocks finished mixed on the week, though the S&P 500 and Nasdaq continued to notch record highs as the markets continued to grind higher despite the lingering Delta variant impact, supply-chain disruptions, and as Hurricane Ida hammered the South and Northeast. The markets digested a plethora of global economic data that showed Asia business activity declined into contraction territory, but manufacturing and services output in the U.S., the Eurozone and the U.K. slowed but remained comfortably in expansion territory. The markets showed a modest downside reaction to Friday's much softer-than-expected August nonfarm payroll report, which seemed to push out expectations of Fed tapering but not enough to eliminate the possibility that the commencement would likely still come in Q4. The markets also shrugged off another drop in consumer confidence for August. The Treasury yield curve steepened slightly and the U.S. dollar came under pressure, while gold advanced and crude oil prices extended last week's sharp bounce.

As such, defensively-natured sectors—Real Estate, Health Care, Utilities and Consumer Staples—led to the upside after underperforming last week, while value/cyclical sectors—Financials, Materials, Energy and Industrials—saw some pressure to hamstring gains and the Dow. The heavyweight growth-related sectors—Information Technology, Communications Services and Consumer Discretionary—also moved higher to contribute to multiple all-time highs for the Nasdaq.

Next week, the economic calendar will be lighter than usual amid a short week as the U.S. markets will be closed on Monday for the Labor Day holiday. However, there are some reports due out that could garner some attention, headlined by the Job Openings and Labor Turnover (JOLTS) survey, the Fed's Beige Book report—an anecdotal read on national business activity that policymakers lean on to prep for its two-day monetary policy meeting set to conclude on September 22—initial jobless claims for the week ended September 4, and the Producer Price Index (PPI). The economic calendar will also feature some speeches from Fed officials, which could also foster some scrutiny against the backdrop of Friday's softer-than-expected jobs report and the recent signal that the Fed could begin to rein in its monthly asset purchases (tapering) this year.

Next week's international economic calendar is also poised to bring some reports that may contend for attention, with releases worth noting including: Australia—Reserve Bank of Australia monetary policy decision. China—trade balance, inflation statistics and lending figures. Japan—Q2 GDP, household spending, machine tool orders, and labor and cash earnings figures. Eurozone—the European Central Bank monetary policy decision, Q2 GDP, and investor confidence, as well as German factory orders, industrial production, the trade balance, and investor sentiment. U.K.—monthly GDP, industrial/manufacturing production, and trade balance.

As noted in our latest Schwab Market Perspective: The Next Phase, although U.S. stocks and economy seem to be moving beyond the recovery phase, there are some market risks out there, including the spread of the COVID-19 delta variant, overly bullish investor sentiment (a contrarian indicator when taken to extremes), and the return of the federal government’s debt ceiling.

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Stocks Head into Holiday Weekend Mixed

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