Stocks Lower in Another Volatile Session

U.S. equities finished out the holiday-shortened week lower in yet another bumpy trading session. Nervousness surrounding the Delta variant and Fed tapering timing persisted, while investors also digested another hotter-than-expected read on wholesale price inflation, which comes amid festering supply-chain issues. On the equity front, Affirm Holdings rallied after topping operating earnings forecasts and offering upbeat guidance, while shares of Take-Two Interactive Software suffered after it delayed the release of the latest versions of its popular Grand Theft Auto video game, Kroger Co. dropped after it missed margins forecasts, despite posting upbeat Q2 results and full-year guidance, and Apple received a disappointing ruling in a legal battle. Treasuries were lower, putting upward pressure on yields, and the U.S. dollar nudged to the upside, while gold lost ground, and crude oil prices rose. Europe finished mostly lower to close out the week, while markets in Asia were higher.

The Dow Jones Industrial Average declined 272 points (0.8%) to 34,608, the S&P 500 Index fell 35 points (0.8%) to 4,459, and the Nasdaq Composite decreased 133 points (0.9%) to 15,115. In moderate volume, 776 million shares were traded on the NYSE and 4.5 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.58 to $69.72 per barrel. Elsewhere, the gold spot price fell $10.50 to $1,789.50 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.1% higher to 92.60. Markets were lower for the week, as the DJIA lost 2.2%, the S&P 500 shed 1.7%, and the Nasdaq Composite decreased 1.6%.

Affirm Holdings Inc. (AFRM $124) reported adjusted fiscal Q4 operating income of $14.2 million, compared to the FactSet estimate calling for a $51.3 million loss, as revenues rose 71.0% year-over-year (y/y) to $262 million, north of the Street's forecast of $224 million. The buy-now-pay-later company said its revenue growth was driven by increases in network revenue and interest income, related to growth in gross merchandise volume (GMV) and loans held for investment, as well as gains on loan sales. AFRM issued Q1 revenue and GMV guidance that were above forecasts, and also forecasted current year revenue and GMV that was north of expectations, excluding estimates of potential contributions from the recently announced partnership with Amazon.com Inc. AMZN $3,469). AFRM rallied over 30%.

Take-Two Interactive Software Inc. (TTWO $154) reiterated its full-year outlook, but noted that its wholly-owned label, Rockstar Games, has delayed the launch of expanded and enhanced versions of Grand Theft Auto V and Grand Theft Auto Online to allow for additional time to further polish the final products. Shares traded lower.

Kroger Co. (KR $43) posted adjusted Q2 earnings-per-share (EPS) of $0.80, compared to the expected $0.64, with revenues rising 3.9% y/y to $31.7 billion, above the forecasted $30.6 billion. The grocery store operator said it saw customers seamlessly shift between channels, and it continued to see strong digital engagement, as "customers are eating more food at home because it is more affordable, convenient, and healthier than other options." However, the company's gross margin came in below forecasts and was down y/y, primarily related to continued price investments, and higher shrink and supply-chain costs, partially offset by sourcing benefits and growth in the alternative profit business. KR raised its full-year EPS and sales guidance. Shares finished to the downside.

Apple Inc. (AAPL $149) was in focus after a Federal Judge ruled against the tech giant in a legal battle it has been in with video game and software developer Epic Games. The Judge handed down the decision and issued an injunction that stated that AAPL was no longer allowed to prohibit developers from providing links or other methods of communication that lead users away from its in-app purchasing. AAPL typically obtains a 15%-30% cut of the gross sales. APPL did not comment as to whether it would appeal the ruling. Shares were lower.

Stocks dipped this week but remained near record high levels and the underlying market action had been choppy, and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Phases and Stages: COVID's Impact on Market's Phases, how since COVID's wrath began, the stock market has gone through three major phases of leadership, with a fourth possibly underway driven in part by seasonals.

Liz Ann also delivers her article, You Take My Breadth Away: Market's Underlying Deterioration, discussing how as summer winds down, September has historically been 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.

Wholesale price inflation comes in hotter than expected

The Producer Price Index (PPI) (chart),showed prices at the wholesale level in August rose 0.7% month-over-month (m/m), above the Bloomberg consensus estimate calling for a 0.6% gain, but below July's 1.0% increase. The core rate, which excludes food and energy, gained 0.6% m/m, in line with estimates and south of the prior month's 1.0% gain. Y/Y, the headline rate was 8.3% higher, above projections of an 8.2% increase and compared to July's 7.8% gain. The core PPI increased 6.7% y/y last month, topping estimates calling for a 6.6% rise, following July's 6.2% increase.

July wholesale inventories (chart) were unrevised at a 0.6% m/m gain, matching estimates and compared to June's 1.2% increase. Sales rose 2.0% after June's upwardly-adjusted 2.3% gain.

Treasuries were lower, as the yield on the 2-year note was flat at 0.22%, while the yields on the 10-year note and the 30-year bond gained 4 basis points to 1.34% and 1.94%, respectively. The U.S. dollar modestly added to a gain it has seen this week.

The markets continue to grapple with when the Fed will begin to taper its monthly asset purchases as inflation has been running hot and employment data has been mixed. 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.

Treasury yields have nudged higher and the U.S. dollar has held onto a rally that began in mid-June and Schwab's Kathy Jones and Christina Shaffer discuss in their latest article, Dollar Outlook: Can the Rally Continue?, how we believe it can, at least in the short term.

After the opening bell, the economic calendar will bring the final read on wholesale inventories, projected to be unrevised at a 0.6% increase for July.

Europe mostly lower following data, Asia closes out the week in positive fashion

European equities finished mostly lower, with the markets continuing to digest yesterday's monetary policy decision from the European Central Bank (ECB), which came as inflation pressures have ramped-up, while global economic uncertainty remains amid continued supply-chain issues and the impact of the Delta variant. The ECB held its benchmark interest rate unchanged, but announced that it will slow the pace of its monthly asset purchases under its pandemic emergency purchase program (PEPP). ECB President Christine Lagarde stressed that this was not a "taper" but "a recalibration of the pandemic emergency purchase program for the next three months," as inflation continues to miss its target while growth also remains hampered by the Delta virus. In economic news, U.K. July GDP growth slowed more than expected, while its industrial/manufacturing production for July came in mixed, along with activity out of France, though Italy's industrial production unexpectedly advanced in July. The euro was little changed versus the U.S. dollar, while the British pound ticked higher against the greenback. Bond yields in the Eurozone and the U.K. were higher.

The mixed industrial and manufacturing production output reports come 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 inched 0.1% higher, while Germany's DAX Index was down 0.1%, France's CAC-40 Index decreased 0.3%, Switzerland's Swiss Market Index declined 0.5%, Italy's FTSE MIB Index fell 0.9%, and Spain's IBEX 35 Index dropped 1.2%.

Stocks in Asia finished broadly higher to close out the week, with Hong Kong stocks snapping back from yesterday's tumble as China reportedly continued its regulatory crackdown on big businesses, aimed at the gaming industry. 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.

The markets showed some resiliency in the face of the persistent uncertainties regarding the path of the global recovery, which continue to be exacerbated by the Delta variant, and the lingering supply-chain disruption. In economic news, Japan's machine tool orders for August were preliminarily reported to have slowed y/y, but remained robust at an 86.2% pace following July's 93.4% gain. Just as the markets were closing, China's aggregate financing—a measure of total credit issued—rose more than expected for last month, while its new yuan loans rose at a rate that was below forecasts. The Hong Kong Hang Seng Index rallied 1.9%, and Japan's Nikkei 225 Index gained 1.3% with the yen trimming some of yesterday's rise. South Korea's Kospi Index increased 0.4%, Australia's S&P/ASX 200 Index advanced 0.5%, and China's Shanghai Composite Index finished 0.3% to the upside. Markets in India were closed for a holiday.

Stocks begin Fall in the red

U.S. stocks finished lower on the week that was shortened by the three-day Labor Day holiday weekend, which unofficially marked the end of Summer. The markets seemed a bit tentative following the recent rally in mega-cap growth stocks that carried the S&P 500 and Nasdaq to another string of record highs and as Fall begins, typically an historically sluggish period for the markets. Conviction also seemed to be stymied by the festering Delta variant uneasiness, uncertainty regarding the timing of when the Fed will begin to rein in its monthly asset purchases, and as the equity front delivered a host of news showing how the ongoing supply-chain disruptions are negatively impacting performance. The economic calendar delivered some positive news on the employment front to counter Friday's inflation report that showed pricing pressures continued. Jobless claims for the week ended September 4 decelerated more than expected and hit a new pandemic low, while the job openings and labor turnover survey (JOLTS) showed another record high of nearly 11 million job openings to widen the gap between demand for labor and the unemployed. The Treasury yield curve was stable, the U.S. dollar gained ground, crude oil prices were modestly higher, and gold saw some pressure.

As such, most major S&P 500 sectors were lower, led by Real Estate, Health Care, and Industrials, while the high-flying Information Technology and Communications Services sectors pared recent gains. However, the Consumer Discretionary sector outperformed and was the lone group in the green, aided by continued upbeat results from the retail sector, highlighted by Lululemon Athletica Inc. (LULU $420), which rallied after easily topping the Street's quarterly forecasts and boosting its guidance.

Next week, the economic calendar will heat back up after being relatively light this week, headlined by more August inflation figures, notably the Consumer Price Index (CPI). Additionally, the all-important U.S. consumer will be in focus, courtesy of the August retail sales report and the timely preliminary University of Michigan Consumer Sentiment Index for September. Amid the supply-chain challenges and labor shortages, next week's NFIB Small Business Optimism Index for August will likely also foster some market scrutiny. Other reports that could command attention include, September manufacturing readsout of New York and Philadelphia, the Fed's industrial production and capacity utilization report, and jobless claims for the week ended September 11. Fedspeak will be quiet ahead of the September 22 Federal Open Market Committee (FOMC) monetary policy meeting.

Next week's international economic calendar is also poised to bring some reports that may contend for attention, with releases worth noting including: Australia—Employment change. China—retail sales, industrial production, and fixed asset investment. India—CPI, wholesale price inflation, and trade balance. Japan—core machine orders and trade balance. Eurozone—industrial production, trade balance, and construction output. U.K.—inflation statistics, employment change, retail sales, and the Bank of England's 12-month inflation outlook.

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. Also check out Director and Senior Investment Strategist with the Schwab Center for Financial Research, David Kastner's, CFA, latest Schwab Sector Views: Too Early for Defensive Positioning, in which he notes how despite recent bouts of sector leadership rotation, we don't expect defensive sector outperformance to last.

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 Lower in Another Volatile Session

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