Schwab Market Update

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In choppy trading, U.S. equities finished lower, extending last week's rout amid continued anxiety surrounding the persistent rise in bond yields and whether the Fed will continue to tighten policy in the face of such, as well as lasting trade fears, notably between the U.S. and China. Treasury yields nudged lower following a September retail sales report that was mixed and crude oil prices were higher, while the U.S. dollar dipped and gold gained ground.

The Dow Jones Industrial Average (DJIA) fell 89 points (0.4%) to 25,251, the S&P 500 Index decreased 16 points (0.6%) to 2,751, and the Nasdaq Composite declined 66 points (0.9%) to 7,431. In moderate volume, 821 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.44 to $71.78 per barrel and wholesale gasoline was unchanged at $1.94 per gallon. Elsewhere, the Bloomberg gold spot price gained $8.48 to $1,225.53 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 95.08.

Bank of America Corp. (BAC $28) reported fiscal Q3 earnings-per-share (EPS) of $0.66, versus the $0.62 FactSet estimate, as revenues rose 4.0% year-over-year (y/y) to $22.8 billion, above the projected $22.6 billion. The company's net interest income grew y/y and topped the Street's forecast and its fixed income trading was roughly in line with expectations, though commercial loan growth, investment banking fees and its equity trading activity were shy of estimates. The company noted that responsible growth, backed by a solid U.S. economy and a healthy U.S. consumer combined to deliver the highest quarterly pre-tax earnings in its history. Shares traded lower.

L3 Technologies Inc. (LLL $221) and Harris Corporation (HRS $173) announced an agreement to combine in an all stock merger of equals to form a global defense technology company. Under the terms of the deal, L3 shareholders will receive a fixed exchange of 1.30 shares of Harris common stock for each share owned. Upon completion of the deal, Harris shareholders will own approximately 54% and L3 shareholders will own about 46% of the combined company. Shares of both companies were solidly higher.

Retail sales report mixed, regional manufacturing activity tops forecasts

Advance retail sales (chart) for September nudged 0.1% higher month-over-month (m/m), below the Bloomberg forecast of a 0.6% gain, and matching August's unrevised figure. Last month's sales ex-autos were down 0.1% m/m, versus expectations calling for a 0.4% rise, and August's gain was negatively-revised to a 0.2% increase. Sales ex-autos and gas were flat m/m, compared to estimates of a 0.3% gain, and August's increase was adjusted downward to a 0.1% rise. However, the control group, a figure used to calculate GDP, grew 0.5%, compared to projections of a 0.4% gain, though August's growth was revised negatively to a flat reading.

Sales at food services & drinking places fell solidly—though Hurricane Florence has been cited as a possible impact. However, most other categories were higher, headlined by gains in autos, furniture, electronics and appliances, clothing, and nonstore retailers—which includes online activity. The control group figure was also a bright spot, suggesting the all-important U.S. consumer remained healthy to close out Q3.

As noted in the latest Schwab Market Perspective: Always Be Prepared, recent stock market action reminds us how quickly things can change. It’s also a reminder that seemingly-subtle shifts in the direction of fundamental data can lead to significant moves in the markets. Heading into this month, markets were breathing easier over the apparent trade agreement among the United States, Mexico and Canada; however, the potential higher stakes battle continues to escalate with China, which has been one of the market risks we've been citing all year. Add to mix the ongoing tight labor market, and a seemingly more hawkish Federal Reserve and you had the recipe for a major pullback. The correlation between bond yields and stocks has shifted to an inverse relationship; both here and globally, which could be sounding a further warning sign for investors.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers his latest Schwab Sector Views: Health Care—The Right Prescription for Your Portfolio?, noting that we believe the sector has further upside left, and its defensive characteristics may become more attractive if economic growth slows.

The Empire Manufacturing Indexshowed output from the New York region moved further into a level denoting expansion (a reading above zero) for October. The index increased to 21.1 from September's unrevised 19.0 level, with forecasts calling for a rise to 20.0.

Business inventories (chart) rose 0.5% m/m in August, matching forecasts and following July's upwardly-revised 0.7% gain.

Treasuries inched higher, as the yield on the 2-year note was flat at 2.85%, while the yields on the 10-year note and the 30-year bond ticked 1 basis point lower to 3.15% and 3.33%, respectively.

The recent jump in yields and flared-up concerns that the Fed may be on the verge of the policy mistake in the face of a host of simmering global risks were at the heart of the pullback last week and Schwab's Chief Fixed Income Strategist Kathy Jones and Fixed Income Director, Collin Martin, CFA, discuss in the video, How High Might Bond Yields Rise?, and Kathy provides analysis in her latest article, Will the Fed Go Too Far in This Cycle? 3 Indicators to Watch.

Although a ramping up earnings season will likely command attention, this week's economic calendarwill bring some key reports that could compete for market interest, continuing tomorrow with the Federal Reserve's September industrial production and capacity utilization report, with economists projecting production to have increased 0.2% m/m and utilization to have ticked higher to 78.1%, as well as the Job Openings and Labor Turnover Survey (JOLTS) release, forecasted to show the measure of unmet demand for labor fell slightly to indicate 6.90 million jobs were available to be filled in October. Housing data will also come into focus, courtesy of the NAHB Housing Market Index, expected to have inched lower to a level of 66 for October, but well above the level of 50 that separates good and poor conditions. For a closer look at the housing sector, check out our article, Housing Data: What Does It Mean for the Economy?

Europe mostly higher in choppy trading, Asia sees pressure

European equities finished mostly higher in choppy action, following last week's global market pullback as concerns ramped up toward the recent rise in global bond yields and concerns the Fed will continue to tighten policy despite a host of potential risks. The euro was higher versus the U.S. dollar and bond yields in the region are mixed. The British pound nudged slightly higher as U.K. Brexit remained in focus with Prime Minister Theresa May speaking to Parliament today ahead of a European summit later this week, noting that a few critical issues remain after talks hit a snag over the weekend. Moreover, Italian budget uncertainty lingered and with global volatility remaining in the wake of last week's selloff, check out our infographic, When Markets Dip, Don't Drop Out, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, What's In Store For Global Stocks In Q4?.

Stocks in Asia finished noticeably lower, with the global markets remaining uneasy regarding rising borrowing costs, flares-up Fed concerns, political uncertainty in Europe and persistent trade worries. Japanese equities fell, with the yen gaining ground, and those traded in mainland China and Hong Kong also saw solid declines. South Korean securities and shares Australian moved to the downside, but markets in India advanced, with late-Friday's cooler-than-expected consumer price inflation report and stronger-than-expected industrial production data appearing to help ease some of the uneasiness toward the nation's festering banking system uneasiness, concerns about the impact of the surge in crude oil prices, and the aforementioned bond yield moves. Also, the lingering uneasiness toward this year's drop in the rupee and festering concerns toward emerging markets has contributed to the pullback in the nation's stock markets, and Schwab's Jeffrey Kleintop, CFA, offers his article, Emerging Market Stocks: What We Are Watching.

For tomorrow, the international economic calendar will offer CPI and PPI from China, import/export prices and the Zew Economic Sentiment Survey from Germany, labor statistics from the U.K., trade data from the Eurozone, and CPI from Italy.

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