Last Week's Record Run Pauses

Charles Schwab: On the Market

Posted: 10/9/2017 4:15 PM EDT

Last Week's Record Run Pauses

 

U.S. equities finished modestly lower, pausing from last week's rally that notched record highs, as investors weighed upbeat global economic sentiment and cautious tax-reform optimism, along with political and monetary policy uncertainties. Volume was lighter than usual with the U.S. economic calendar dormant and the bond markets closed for Columbus Day. The U.S. dollar dipped, while crude oil and gold were higher. News on the equity front focused on Dow member General Electric after announcing a plethora of management changes.

The Dow Jones Industrial Average (DJIA) decreased 13 points (0.1%) to 22,761, the S&P 500 Index fell 5 points (0.2%) to 2,545, and the Nasdaq Composite lost 10 points (0.2%) to 6,580. In light-to-moderate volume, 620 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.29 to $49.58 per barrel and wholesale gasoline was unchanged at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price was up $8.01 to $1,284.69 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 93.66.

Honeywell International Inc. (HON $144) was in focus after a Reuters report that the company is planning on spinning off its non-core assets and creating at least two publicly listed companies, per people familiar with the matter. HON has not commented on the report. Shares were higher.

Dow member General Electric Co. ( GE $23) also garnered attention following late-Friday's announcement that Jamie Miller has been named Chief Financial Officer as Jeffrey Bornstein will leave the company. GE also announced that two additional executives will leave the company and said today that Ed Garden, a founding partner of activist shareholder Trian Fund Management, has been elected to the Board. Shares finished lower.

Bond markets take a break, U.S. dollar pauses ahead of earnings and economic data

The economic calendar was void of any major releases today and the U.S. bond markets were closed in observance of the Columbus Day holiday. The yield on the 2-year note sits at 1.50%, the yield on the 10-year note is at 2.36%, and the 30-year bond rate is at 2.89%. Treasury yields and the U.S. dollar have rebound solidly to multi-month highs amid a continued positive global economic growth backdrop, with signs of inflation ticking higher, while the Fed is highly expected to announce another rate hike in December and begin the process of shrinking its behemoth $4.5 trillion balance sheet this month. This comes as uncertainty festers regarding who will be the next Chairman of the Fed. Also, fiscal policy optimism has nudged higher amid the recently-released tax reform framework, but it faces a long road as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend in his article, Tax Reform Framework Released, But The Road Ahead Is Long.

Inflation will remain in focus this week and the stock markets continue to trade in record high territory. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his commentary, Inflation May Be The Biggest Question For Investors In 2018, and Schwab's Chief Investment Strategist Liz Ann Sonders discusses the stock market's resiliency in her article, Comfortably Numb? An Update on Investor Sentiment. Follow Liz Ann and Jeff on Twitter: @lizannsonders and @jeffreykleintop. Read all these articles and other timely commentary from our Schwab experts on the Market Commentary page at www.schwab.com.

This brings us to this week's plethora of data that could drive volatility, beginning with tomorrow's NFIB Small Business Optimism Index, with economists expecting a reading of 105.4 for September, a slight uptick from August's 105.3 reading. For the rest of the week, the headlining events will be the Producer Price Index (PPI) and Consumer Price Index (CPI), the minutes from the Fed's September meeting, retail sales and the preliminary October University of Michigan Consumer Sentiment Index, as well as the JOLTS Job Openings report. However, the economic front will have to contend with the ramp up of Q3 earnings season, with the financial sector in focus as some banking heavyweights are slated to report.

As noted in the latest Schwab Market Perspective: Fourth Quarter Fun…or Folly?, the resiliency of stocks continues but risks of a pullback exist with signs of investor complacency and heightened political and geopolitical uncertainties. Earnings reporting season begins with elevated expectations and valuations, so the ability to hurdle the bar is getting tougher, but if surprises are biased to the upside, stocks should perform well. But that doesn't mean that there won’t be some Fed-induced volatility in the fourth quarter if inflation begins to kick in in earnest, it could push the Fed to be more aggressive than currently believed. Read more on the Market Commentary page at www.schwab.com.

Europe mostly higher on eased Spanish political concerns, Asia mixed

Most European equity markets finished modestly higher, with Spanish stocks leading to the upside following weekend protests against independence for Catalonia and amid a report from Bloomberg citing a call for dialogue with Spain from a member of the Catalan administration. This comes in the wake of last week's volatility stemming from the independence vote that was deemed illegal by national authorities. However, U.K. stocks saw pressure as the British pound gained ground on an upward revision to the nation's Q2 unit labor costs and as talk of a cabinet reshuffling by U.K. Prime minister Theresa May appeared to foster eased political uncertainty. However, U.K. Brexit negotiations entered a fifth round today as progress has been hard to come by and Brexit uncertainty continues to linger. The euro ticked higher versus the U.S. dollar even as German industrial production rose much more than expected and eurozone investor confidence improved more than projected. Bond yields in the region lost ground.

For analysis of political and Brexit uncertainties, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick. Fed uncertainty continues to fester amid the backdrop of hawkish sentiment toward the European Central Bank and the Bank of England. As such, Schwab's Jeffrey Kleintop, CFA, offers analysis in his article, How the Shift by Central Banks May Affect the Stock Market, on the Market Commentary page at www.schwab.com.

Stocks in Asia finished mixed as the markets digested Friday's noisy U.S. September nonfarm payroll report and a lackluster read on Chinese services sector activity. Caixin's China PMI Services Index declined to 50.6 in September from 52.7 in August, though continued to depict growth due to a reading above 50. Stocks in Hong Kong declined, but those in mainland China gained ground in a return to action following a week-long holiday break, during which optimism ramped up on the announcement that the People's Bank of China will lower the amount banks will have to keep on reserve for next year. Volume was lighter than usual as markets in Japan were closed for a holiday and South Korean markets remained on a holiday break. Stocks in Australia and India advanced. Check out Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's discussion of global investing in the video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page at www.schwab.com.

Tomorrow's international economic calendar will offer business confidence from Australia, trade data from Germany, and industrial and manufacturing production from France, Italy and the U.K.