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Stocks Head Into the Weekend Mixed

U.S. equities finished mixed and near the flat line heading into the weekend, as early upbeat sentiment surrounding U.S.-China trade optimism and positive economic data was tempered by caution ahead of a number of key central bank meetings next week. Retail sales came in above expectations and scored a sixth-straight month of gains and consumer sentiment bounced off a near three-year low. Treasury yields were solidly higher and the U.S. dollar ticked lower, while crude oil prices declined and gold was also down. News on the equity front was light, as Broadcom topped earnings forecasts but the Street scrutinized its outlook.

The Dow Jones Industrial Average (DJIA) rose 37 points (0.1%) to 27,220, the S&P 500 Index lost 2 points (0.1%) to 3,007 and the Nasdaq Composite declined 18 points (0.2%) to 8,177. In moderate volume, 812 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.24 lower to $54.85 per barrel and wholesale gasoline was unchanged at $1.55 per gallon. Elsewhere, the Bloomberg gold spot price declined $11.70 to $1,487.56 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.1% at 98.21. Markets were higher for the week, as the DJIA increased 1.5%, the S&P 500 Index gained 1.0% and the Nasdaq Composite advanced 0.9%.

Broadcom Inc. (AVGO $290) reported fiscal Q3 earnings-per-share (EPS) of $1.71, or $5.16 ex-items, versus the $5.13 FactSet estimate, as revenues rose 9.0% year-over-year (y/y) to $5.5 billion, in line with the Street's expectations. The company said its broad portfolio of semiconductor and infrastructure software solutions continued to drive sustained revenues and robust cash flow despite a challenging market back-drop. AVGO added that looking at the semiconductor solutions segment, it believes demand has bottomed out but will continue to remain at these levels due to the current uncertain environment. The company reaffirmed its full-year revenue outlook, which it lowered in June. Shares were lower.

Retail sales continue to rise, September consumer sentiment rebounds from multi-year low

Advance retail sales (chart) for August rose 0.4% month-over-month (m/m), versus the Bloomberg forecast of a 0.2% increase, and July's 0.7% rise was upwardly-revised to a 0.8% gain. Last month's sales ex-autos were flat m/m, compared to expectations of a 0.1% gain and July's unrevised 1.0% increase. Sales ex-autos and gas ticked 0.1% higher, compared to estimates of a 0.2% gain, and July's unadjusted 0.9% increase. The control group, a figure used to calculate GDP, increased 0.3%, matching projections, and compared to July's downwardly-revised 0.9% increase.

This was the sixth-straight month of gains as strong sales of autos and building materials, along with continued solid online activity, led the way to more than offset some weakness in clothing and furniture sales, as well as a drop for department stores.

The September preliminary University of Michigan Consumer Sentiment Index (chart) rose to 92.0 from August's read of 89.8, and north of the 90.8 expectation. After the index posted the lowest level since October 2016 in August, it rebounded as both the current conditions and expectations components of the index gained ground. The 1-year inflation forecast ticked higher to 2.8% from 2.7%, but the 5-10 year inflation forecast fell to 2.3% from the previous 2.6% rate.

Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, offers his latest Schwab Sector Views: Cracks in the Consumer Picture?, noting that a healthy American consumer is often cited as the reason a potential recession remains a low possibility in the near future. But he notes that history has shown that by the time some popular consumer-related economic readings have definitively turned negative, a recession is already in place. Brad discusses how there appear to be some cracks forming that should be paid attention to—they could be nothing to worry about, but they could be a canary in the coal mine.

The Import Price Index (chart) declined 0.5% m/m for August, matching projections, and following July's downwardly-revised 0.1% increase. Compared to last year, prices were down 2.0%, in line with forecasts and compared to July's downwardly-revised 1.9% fall.

Business inventories (chart) rose 0.4% m/m in July, above forecasts of a 0.3% gain, and versus June's unadjusted flat reading.

Treasuries were solidly lower following the data, as the yield on the 2-year note rose 7 basis points (bps) to 1.80%, while the yields on the 10-year note and the 30-year bond jumped 12 bps to 1.90% and 2.38%, respectively. For a look at the volatility in the fixed income markets, see Schwab's Chief Fixed Income Strategist Kathy Jones' latest article, Bond Market: Why Is Everything Upside Down?

Stocks have been threatening record highs, bond yields continue to recover, the U.S. dollar has slipped, crude oil prices modestly added to a down week, and gold finished lower. Eased trade tensions between the U.S. and China have been a main source of support for stocks and bond yields, as the U.S. briefly delayed increased tariffs on China and President Donald Trump said the U.S. could consider an interim trade deal with China, which made further trade concessions regarding the agriculture front. Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Chop, Chop, Chop: Stocks' Choppy Behavior Around Trade News, noting that it continues to be a difficult environment in which to trade around short-term news; even if short-term news is having an outsized impact on day-to-day and month-to-month market behavior. As she often says, investing should always be a process over time; never about a moment in time. Liz Ann concludes that there are no free lunches in the business of investing; but sticking to the tried-and-true disciplines around diversification and periodic rebalancing is as close as it gets.

Meanwhile, the markets continue to grapple with the easing of monetary policy from global central banks, with the European Central Bank (ECB) moving deeper into negative interest rate territory yesterday and resuming quantitative easing measures with open-ended asset purchases to begin November 1st. This sets the stage for next week's monetary policy decisions from the Fed, Bank of Japan and Bank of England. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest video, Are Central Banks Guardians of the Economy?, discussing how he believes investors think central banks are guardians of the economy with all these superpowers to defeat any threats to the economy, but he discusses how that's not really how it works.

Europe and Asia higher on trade and ECB stimulus

European equities were mostly higher, as the markets digested the upbeat consumer data out of the U.S., while financials led the way with bond yields rising and as yesterday's increased stimulus measures from the European Central Bank (ECB) included eased lending facility terms for banks. Yesterday, the ECB announced a 10 bps cut to its deposit facility rate to -0.50%, while announcing the resumption of open-ended asset purchases of 20 billion euros a month starting November 1st,. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Negative Interest Rates And The Future of Investing, discussing how investors' increasing focus on income may lead to long-term shifts in portfolios that favor international stocks. U.K. Brexit worries seemed to ease a bit, as Prime Minister Boris Johnson is expected to meet face-to-face for the first time with European Commission President Jean-Claude Junker on Monday, which appeared to foster some hope of a deal. The news came after the prospect of a no-deal exit from the European Union was recently tamped down after some parliamentary defeats for Boris Johnson. In economic news, the Euroze trade surplus unexpectedly widened in July. The euro gained ground on the U.S. dollar and the British pound rallied.

Stocks in Asia finished higher, buoyed by the continued thawing of U.S.-China trade tensions as the former briefly delayed increased tariffs on the latter and U.S. President Trump said he would consider an interim trade deal, but added that he would prefer to get a whole deal done. Also, China made further trade concessions by adding some U.S. agriculture products to its exemptions from additional tariffs. Schwab’s Liz Ann Sonders offers her article, War (What is it Good For?), noting that although the consumer side of the economy has remained resilient, the fact that businesses and capital investment are squarely in the crosshairs of a worsening trade war, means we need to keep a close eye on the stability in the line that divides the manufacturing and consumer sides of the U.S. economy. The markets appeared to also get some support from the increased stimulus measures announced yesterday from the European Central Bank. Stocks in Japan increased, with the yen continuing a recent drop, while those traded in Hong Kong also advanced. Australian securities ticked higher, and shares in India rose amid the eased trade concerns and following late-yesterday's economic reports that showed consumer price inflation accelerated at a smaller rate than expected for August and its industrial production rose much more than expected in July. Markets in mainland China and South Korea were closed for holidays.

Stocks rally for third-straight week

Keeping up with the choppiness theme seen since January 2018, U.S. stocks posted a string of three-straight weekly rallies, which came on the heels of four-straight weekly drops, with trade remaining the main catalyst. U.S.-China tensions continued to thaw with both sides offering conciliatory measures as a face-to-face meeting approaches early next month. U.S. economic data continued to keep recession concerns in check, with a surge in consumer credit, a drop in jobless claims and somewhat warmer inflation statistics joining Friday's upbeat retail sales and consumer sentiment reports. Adding to the backdrop, geopolitical concerns continued to cool, while China announced more banking sector stimulus measures and the European Central Bank eased monetary policy further to try to boost their slowing economies.

Risk on sentiment ensued, with Treasury yields surging to help financials lead the stock markets back to striking distance of record high territory again and ease ramped-up concerns about the recent tumble in bond rates. As risk appetites swelled, cyclically-sensitive sectors such as materials and industrials were among the top weekly performers. The energy sector also rallied even as crude oil prices fell amid flared-up supply concerns as the International Energy Agency warned of a stockpile glut and reports suggested President Donald Trump may be weighing moderating sanctions on Iran. The U.S. dollar slipped in volatile world currency action as the markets digested the aforementioned events, while gold dipped but remain near multi-year highs. However, defensively-natured sectors of consumer staples and real estate underperformed, along with the technology sector amid heightened regulatory pressure.

With stocks in rally mode, next week's monetary policy decision from the Federal Open Market Committee (FOMC) is poised to be the next catalyst for the markets to contend with. Although another 25 bp cut to its target fed funds rate has been priced in when the two-day meeting concludes on Wednesday, the FOMC's

updated economic projections and subsequent press conference from Fed Chairman Jerome Powell is likely to be highly scrutinized, given the thawed trade tensions and continued relatively solid economic data. The decision will be sandwiched between other key data points throughout the week such as regional manufacturing reports, industrial production and capacity utilization, housing starts and building permits, the Leading Index and existing home sales (economic calendar).

As noted in our latest Schwab Market Perspective: Confusion or Conviction?, U.S. equity indexes have emerged out of their recent tight range, but persistent economic and trade uncertainties have not dissipated. The economic picture is mixed, as manufactur-ing continues to weaken but the consumer/services segments remain strong. The European Central Bank eased again, but there are doubts as to whether monetary policy is losing its effect and if a fiscal response is necessary.

Next week's international economic docket will also be robust and potentially market moving, courtesy of: Australia—employment change. China—industrial production, retail sales and fixed asset investment. Japan—Bank of Japan monetary policy decision, trade balance and consumer price inflation. Eurozone—construction output, consumer price inflation and consumer confidence, along with German investor confidence. U.K.—Bank of England monetary policy decision, inflation statistics and retail sales.

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