Stocks Turn Lower Amid Continued Uneasiness

U.S. equities finished solidly lower heading into the Labor Day holiday weekend, erasing early gains that came in the wake of the August labor report and notching a third week of losses. While the report showed job growth was slightly higher than expected and wage gains moderated, it didn't appear to cool off some of the elevated expectations about how aggressive the Fed will be later this month. A delay in the opening of the key Nord Stream gas pipeline to Europe also weighed on sentiment. Treasury yields were lower, and the U.S. dollar was flat but remained at fresh multi-decade highs. Crude oil prices saw modest increases and gold also gained ground. On the equity front, Lululemon Athletica topped earnings estimates and raised its guidance, while Broadcom also topped quarterly projections and offered an upbeat outlook. In other economic news, factory orders unexpectedly fell in July. Europe finished broadly higher to keep some markets in the region from posting a weekly loss, and Asia finished mixed.

The Dow Jones Industrial Average declined 338 points (1.1%) to 31,318, the S&P 500 Index fell 43 points (1.1%) to 3,924, and the Nasdaq Composite dropped 154 points (1.3%) to 11,631. In moderate volume, 3.6 billion shares of NYSE-listed stocks were traded, and 4.2 billion shares changed hands on the Nasdaq. WTI crude oil nudged $0.26 higher to $86.87 per barrel. Elsewhere, the gold spot price increased $11.00 to $1,720.30 per ounce, and the Dollar Index was unchanged at 109.70. Markets ended noticeably lower for the week, as the DJIA dropped 3.0%, the S&P 500 fell 3.3%, and the Nasdaq Composite tumbled 4.2%.

Lululemon Athletica Inc. (LULU $314) reported adjusted Q2 earnings-per-share (EPS) of $2.20, above the $1.86 FactSet estimate, as revenues increased 29.0% year-over-year (y/y) to $1.9 billion, topping the Street's forecast of $1.8 billion. LULU said momentum in its business continued in Q2, fueled by the strong guest response to its product innovations, community activations, and Omni experience. The company said inventory increased 85% y/y, but it believes its inventories are well positioned to support its expected revenue growth in Q3. LULU raised its full-year earnings and revenue guidance. Shares traded solidly higher.

Broadcom Inc. (AVGO $500) posted adjusted fiscal Q3 EPS of $9.73, north of the anticipated $9.56, as revenues grew 25.0% y/y to $8.5 billion, above the expected $8.4 billion. The company said its results were driven by robust demand across the cloud, service providers, and enterprise. AVGO issued Q4 revenue guidance that came in above estimates, noting that it expects solid demand to continue amid continued investment by its customers in next-generation technologies in data centers, broadband, and wireless. Shares moved to the upside.

Q2 earnings season is mostly in the books, and of the 495 S&P 500 companies that have reported thus far, roughly 63% have topped revenue forecasts, and approximately 75% have bested profit projections, per data compiled by Bloomberg. Compared to last year, revenue growth is tracking to be up 13.7%, and earnings are 7.3% higher.

Schwab's Chief Investment Strategist, Liz Ann Sonders points out in her latest article, Fade: Market Hits Resistance as Breadth Waned, how the stock rally since mid-June that has faded over the last two weeks looked healthier from a breadth perspective, but low-quality leadership and deteriorating economic data have kept downside risks elevated. You can follow Liz Ann on Twitter: @LizAnnSonders.

The recent pullback in the markets was amplified by market anticipation of continued aggressive monetary policy tightening as we discuss in the Schwab Center for Financial Research's article, Fed Policy Talk Rattles Market. Stocks dropped after Federal Reserve Chair Jerome Powell vowed to bring inflation down despite potential "pain" to households and businesses.

Read all our market commentary on our Insights & Education page, and follow us on Twitter at @SchwabResearch.

August jobs report mostly better than expected

Nonfarm payrolls (chart) rose by 315,000 jobs month-over-month (m/m) in August, compared to the Bloomberg consensus estimate of a 298,000 rise, while July's figure was adjusted lower to an increase of 526,000 from the initial reading of 528,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 308,000, versus the forecasted rise of 300,000, after increasing by 477,000, revised up from the preliminarily reported 471,000 gain in July. The labor force participation rate rose to 62.4% from July's unrevised 62.1% figure, and above estimates to tick higher to 62.2%. The Department of Labor said notable job gains occurred in professional and business services, health care, and retail trade.

The unemployment rate increased to 3.7% from July's 3.5% rate, where forecasts called for it to remain. 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—rose to 7.0% from the prior month's 6.7% rate. Average hourly earnings were up 0.3% m/m, below projections of a 0.4% gain and July's unadjusted 0.5% rise. Compared to last year, wages were 5.2% higher, south of forecasts of a 5.3% gain and matching July's unadjusted rise. Finally, average weekly hours dipped to 34.5 from July's 34.6 rates, where it was expected to remain.

Factory orders (chart) fell 1.0% m/m in July, well below estimates of a 0.2% rise, with the prior month's 2.0% gain being revised lower to a 1.8% increase. Durable goods orders—preliminarily reported last week—were revised negatively to a 0.1% decline for July, and excluding transportation, orders were adjusted downward to a 0.2% gain. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—were negatively revised to a 0.3% increase.

Treasury yields were lower, as the yield on the 2-year note declined 13 basis points (bps) to 3.40%, the yield on the 10-year note decreased 7 bps to 3.20%, and the 30-year bond rate ticked 3 bps lower to 3.35%.

Bond yields have moved higher recently as the markets anticipate further aggressive monetary policy tightening from the Fed, which Chairman Jerome Powell solidified last week in Jackson Hole, Wyoming. Also, the U.S. dollar has rallied back to a multi-decade high.

Schwab's Chief Fixed Income Strategist Kathy Jones discusses in our Schwab Market Perspective: Mixed Signals how the Fed has embarked on one of the most rapid tightening cycles in over 40 years, and with inflation continuing to outpace wage growth, more rate hikes are likely on the horizon. Kathy also offers an analysis of the greenback in her commentary, The Strong Dollar: Can It Continue? You can follow Kathy on Twitter: @KathyJones, and check out our Financial Decoder podcast, When Interest Rates Rise, What Should You Do with Bonds? featuring Kathy.

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

Europe rebounds from yesterday's drop

Stocks in Europe finished with solid widespread gains as the markets digested the favorable August employment report out of the U.S. that does not appear to be exacerbating concerns that the Fed will be forced to be more aggressive with tightening monetary policy. The gains were able to bring some markets in the region out of the negative territory on a weekly basis, but investors continued to grapple with the economic ramifications of aggressively restrictive monetary policies on both sides of the pond. Additionally, the festering energy crisis in the region that has ensued amid the ongoing war in Ukraine and Russia's actions to curb energy supplies added an additional layer of concern.

Inflation pressures have forced the Fed, Bank of England, and European Central Bank to tighten monetary policies, and today the Eurozone reported that its July producer price inflation accelerated solidly and more than anticipated. However, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Shortages Have Led to Gluts, how inventory gluts have been bad news for the stocks of companies experiencing them but could also be indicating an inflation peak, which tends to be an ingredient for market bottoms. Also, Jeff discusses in his article, The End of Rate Hikes? how the signals from central banks that rate hikes, which began last year, may be coming to an end could be welcome news for investors looking ahead to the next 12 months. You can follow Jeff on Twitter: @JeffreyKleintop. In other economic news, Germany's exports fell in July. The euro gained ground and the British pound was lower versus the U.S. dollar, while bond yields in the Eurozone fell, but rates in the U.K. continued to climb.

The U.K. FTSE 100 Index was up 1.9%, Germany's DAX Index rallied 3.3%, France's CAC-40 Index rose 2.2%, Spain's IBEX 35 Index gained 1.6%, Italy's FTSE MIB Index increased 2.9%, and Switzerland's Swiss Market Index traded 2.1% higher.

Asia mixed to close out the week

Stocks in Asia finished mixed in the final session of the week as the markets seemed a bit cautious ahead of today's key August employment report out of the U.S. Markets have been volatile amid increased expectations of continued aggressive monetary policy in the U.S. Moreover, the markets continued to grapple with yesterday's announcement that the U.S. will restrict some chip sales to China. The economic calendar was relatively light, but South Korea's consumer price inflation data came in cooler than expected for August.

China, the world's second-largest economy, has been hampered by COVID-induced lockdowns, real estate struggles, and regulatory crackdowns. Also, geopolitical tensions between the U.S. and China remain elevated, mostly due to the evolving situation in Taiwan, with the U.S. set to begin trade negotiations next month, of which China has expressed opposition. China announced further COVID lockdowns this week and manufacturing and services data out of the country suggested slowing economic activity. Schwab's Jeffrey Kleintop provides commentary on China's situation in his latest article, China Q&A: Top 5 Questions, discussing various topics, including inflationary concerns, currency movements, government policies, and more.

Japan's Nikkei 225 Index finished little changed, with the yen extending yesterday's losses versus the U.S. dollar in choppy trading. The yen remains near multi-decade lows versus the greenback following a sharp drop that began in March as the Bank of Japan lags other key global central banks in monetary policy. China's Shanghai Composite Index ticked 0.1% higher, and the Hong Kong Hang Seng Index traded 0.7% lower. Australia's S&P/ASX 200 Index and South Korea's Kospi Index both dipped 0.3%, while India's S&P BSE Sensex 30 Index nudged 0.1% to the upside.

Stocks post a third-straight weekly decline

U.S. stocks decreased for a third-straight week as the fallout from last week's hawkish commentary from Fed Chairman Jerome Powell was accompanied by commentary from Central Bank officials that dampened hopes of a potential Fed pivot on the horizon. The Treasury yield curve steepened with rates on the mid-to-long end of the curve jumping, while the U.S. dollar resumed its rally, notching fresh multi-year highs. Friday's U.S. labor report did little to assuage investors' concerns of any softening stance from the Fed, as the markets are still pricing in the likelihood of a 75 bp increase to the Central Bank's fed funds target. News on the economic front was mixed, as the ISM Manufacturing Index suggested inflation and supply chain constraints may be starting to ease, and new orders returned to expansion territory. However, housing data remained hampered by the rising rates and elevated home prices, with mortgage applications falling for a third-straight week and residential spending dropping. All sectors finished lower for the week, led by the heavyweight Technology sector, and Energy issues also saw pressure as crude oil prices continued to drop. Gold prices moved lower for the third week, likely bogged down by the strength in the U.S. dollar and some signs of easing inflation pressures.

Next week, as earnings season is in the books, the economic calendar will likely remain in focus, though the docket will be relatively quiet amid the holiday-shortened week. Reads on services sector activity could command attention, headlined by the ISM's Services Index. The Fed's Beige Book could also garner some scrutiny as the Central Bank prepares for its monetary policy decision scheduled for September 21. Other reports that are due out that deserve a mention include the trade balance, initial jobless claims for the week ended September 3, and consumer credit.

Next week's international calendar will be highlighted by a plethora of Services PMI reports out of Australia, China, Japan, the Eurozone, and the U.K. However, we will get some monetary policy decisions out of Australia and the Eurozone, with the former expected to raise rates by 50 bps and the latter forecasted to deliver a 75-bp increase. Other reports due out that could move the markets include Australia's Q2 GDP report and trade balance, China's trade balance, inflation figures and lending statistics, Japan's household spending, Eurozone retail sales, and investor confidence, along with German factory orders and industrial production. The U.K. will offer its 12-month inflation outlook.

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