Stocks | September 23, 2021

Schwab Market Update

Stocks Recover from Monday's Nosedive

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U.S. equities rallied for a second-straight session to bounce back from Monday's plunge, as debt contagion concerns out of China moderated further, while the markets appeared to remain upbeat regarding yesterday's Fed monetary policy decision. Although the Fed left its interest rate policy unchanged, it hinted that tapering of asset purchases could begin soon if the economy continues to progress broadly as expected. Investors also sifted through a host of September manufacturing and services reports that showed growth in the U.S., Eurozone and the U.K. slowed, but remained comfortably in expansion territory. Moreover, U.S. Leading Indicators accelerated and posted a sixth-straight monthly gain, but the moderation in jobless claims reversed for a second consecutive week. Treasuries fell, providing a boost to yields, and the U.S. dollar was lower amid a rally in European currencies after the Bank of England suggested it may be moving closer to tightening policy, in the wake of the European Central Bank's announcement earlier this month to recalibrate its asset purchases. Crude oil prices rose and gold was sharply lower. In equity news, Dow member Salesforce.com raised its guidance and Darden Restaurants posted stronger-than-expected Q1 results. Europe finished mostly higher following the Fed and Bank of England decisions, while markets in Asia mixed amid lingering Chinese debt issues.

The Dow Jones Industrial Average jumped 507 points (1.5%) to 34,765, the S&P 500 Index rose 53 points (1.2%) to 4,449, and the Nasdaq Composite advanced 155 points (1.0%) to 15,052. In moderate volume, 796 million shares were traded on the NYSE and 4.1 billion shares changed hands on the Nasdaq. WTI crude oil increased $1.07 at $73.30 per barrel. Elsewhere, the gold spot price dropped $30.70 to $1,748.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.4% to 93.06.

Dow member Salesforce.com Inc. (CRM $278) gained solid ground after the company raised its full-year revenue guidance, while also issuing a 2023 revenue forecast that came in above the FactSet estimate. The company's announcement came ahead of today's investor day presentation.

Darden Restaurants Inc. (DRI $159) reported fiscal Q1 earnings-per-share (EPS) of $1.76, north of the Street's forecast of $1.64, as revenues grew 51.0% year-over-year (y/y) to $2.3 billion, topping the expected $2.2 billion. The parent of the Olive Garden restaurants said its same-store sales for the quarter rose 47.5% y/y, compared to the estimated 44.3% gain. The company raised its full-year guidance and announced an additional $750 million share repurchase program. Shares rallied. 

September and October have historically been blustery months for stock market performance as discussed in the Schwab Center for Financial Research's Quarterly Market Outlook: Is Seasonal Volatility Ahead?. The markets are volatile amid the flared-up real estate debt concerns out of China, Fed tapering expectations following yesterday's monetary policy decision, and the continued stalemate among lawmakers on whether to raise the debt ceiling, while the Delta variant and supply chain challenges continue to fester.

Amid this backdrop, Schwab's Chief Investment Strategist Liz Ann Sonders provides her latest article, 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.

Jobless claims rise, business activity remains solid, leading indicators extend winning streak

Weekly initial jobless claims (chart)came in at a level of 351,000 for the week ended September 18, versus the Bloomberg estimate of 320,000 and compared to the prior week's upwardly-revised 335,000 level. The four-week moving average dipped by 750 to 335,750, and continuing claims for the week ended September 11 rose by 131,000 to 2,845,000, well above estimates of 2,600,000. The four-week moving average of continuing claims declined by 15,750 to 2,804,000.

The preliminary Markit U.S. Manufacturing PMI Index for September declined to 60.5 from August's unrevised 61.1 figure but remained solidly in expansion territory as denoted by a reading above 50. Estimates called for the index to dip to 61.0. The preliminary Markit U.S. Services PMI Index showed growth (above 50) for the key U.S. sector also decelerated more than expected, declining to 54.4 from August's 55.1 figure, and compared to forecasts of a dip to 54.9.

When looking at the composite index of output from both sectors, Markit said, "Private sector firms in the U.S. signaled a solid expansion in output during September, albeit at the slowest pace for a year and one that was much softer than that seen at the start of the summer. The overall upturn was weighed on by the weakest increase in service sector business activity in the current 14-month sequence of growth." Markit noted that ongoing virus restrictions continued to impede activity, adding that challenges finding suitable candidates and difficulties retaining employees hamstrung employment, and the rate of cost inflation was the quickest for four months due to supply chain disruptions and material shortages.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for August rose 0.9% month-over-month (m/m), above estimates calling for a 0.7% gain and July's downwardly-revised 0.8% increase. The LEI was positive for the sixth-straight month due mostly to positive net contributions from ISM new orders, jobless claims, building permits, credit, and interest rate spread, which more than offset a negative contribution from consumer expectations.

The September Kansas City Fed Manufacturing Activity Index fell more than expected but remained comfortably at a level depicting expansion (a reading above zero). The index decreased to 22 from August's 29 reading, and compared to forecasts calling for a decline to 25.

The markets continue to digest yesterday's Fed monetary policy decision where the Central Bank hinted that formal details of balance sheet tapering may come in November, while there were notable changes in economic/inflation projections and rate hike expectations. Liz Ann Sonders provides analysis of the decision in her latest commentary, Fed Tapering Coming Soon; Dots Plot Has Thickened

Treasuries were lower after the yield curve flattened yesterday following the Fed's decision, as the yield on the 2-year note ticked 2 basis points (bps) higher to 0.26%, the yield on the 10-year note rose 11 bps to 1.41%, and the 30-year bond rate gained 12 bps to 1.92%.

The only item on tomorrow's economic calendar is new home sales, forecasted to show a 1.0% m/m rise for August to an annual rate of 715,000 units.

Europe mostly higher following central bank decisions, Asia mixed amid Chinese debt issues

European equities finished mostly higher, with the global markets digesting yesterday's monetary policy decision out of the U.S. that hinted that tapering of its asset purchases may be coming soon, but held off on offering a definitive start date. The announcement came as the Fed raised its near-term inflation outlook but downgraded its GDP forecast. Moreover, the markets reacted to today's monetary policy decision from the Bank of England (BoE), which left its stance unchanged but suggested the central bank was moving closer to tightening policy amid increased expectations of rising inflation pressures. The BoE's decision came on the heels of the European Central Bank's announcement earlier this month that it will recalibrate its asset purchases. The euro and British pound rallied versus the U.S. dollar, and bond yields in the Eurozone and the U.K. rose broadly, with rates in the latter noticeably higher. Some preliminary September business activity reports in the region were sifted through, with manufacturing and services sector growth in both the U.K. and Eurozone slowing but remaining comfortably in expansion territory. The slowdowns came as supply chain issues continue to hamper global economic activity, while the intensified real estate debt crisis and regulatory crackdowns in China are exacerbating sentiment.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Payback Time With a Potential Payoff. Jeff notes 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 ticked 0.1% lower, while France's CAC-40 Index was up 1.0%, Germany's DAX Index and Switzerland's Swiss Market Index advanced 0.9%, Spain's IBEX 35 Index increased 0.8%, and Italy's FTSE MIB Index rose 1.4%.

Stocks in Asia finished mixed, with trading remaining choppy in the wake of the festering uncertainty regarding the implications of debt problems at the world's most indebted property developer, China Evergrande Group (EGRNY $9). The markets have been roiled this week amid a global drawdown that came from contagion concerns out of China, as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, Director of International Research, Michelle Gibley, CFA, and Senior Investment Research Specialist, Kevin Gordon, in their latest commentary, China Woes Drive Stocks to Biggest Drop Since May. Moreover, the global markets are digesting yesterday's Fed monetary policy decision that hinted at potential tapering of monthly asset purchases "soon." In economic news, Australia's preliminary September manufacturing growth accelerated solidly, though its services sector output remained in contraction after improving slightly. Also, South Korea's y/y export growth slowed but remained strong. China's Shanghai Composite Index rose 0.4% and the Hong Kong Hang Seng Index advanced 1.2% following yesterday's holiday. South Korean markets also returned from an extended holiday break, with the Kospi Index declining 0.4% in the first trading session of the week. Australia's S&P/ASX 200 Index rose 1.0% and India's S&P BSE Sensex 30 Index rallied 1.6%, posting fresh record highs. Volume was lighter than usual as markets in Japan were closed for a holiday.

Tomorrow's international economic calendar will hold CPI from Japan, as well as confidence figures from Italy and Germany.

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