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Stocks Snap Three-week Losing Streak

U.S. equities rallied strongly to end the week and posted positive weekly returns for the first time in three weeks. Optimism surrounding U.S.-China trade fueled the rally after a tweet from President Trump said that “good things” are happening. News from across the pond added to the day’s high spirits with comments following a meeting between British Prime Minister Boris Johnson and Irish Premier Varadker offering hope that a dreaded, no-deal Brexit can be avoided. Treasury yield rose sharply for a second straight day, while the U.S. dollar was off again. Oil joined other risky assets in the rally and gold sold off. Earnings news was also positive with Fastenal Company beating expectations and Wendy’s Company announcing a nice revision to its sales-growth guidance.

The Dow Jones Industrial Average (DJIA) rose 320 points (1.2%) to 26,817, the S&P 500 Index added 32 points (1.1%) to 2,970 and the Nasdaq Composite increased 106 points (1.3%) to 8,057. In light volume, 863 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.36 higher to $52.81 per barrel and wholesale gasoline increased $0.02 to $1.64 per gallon. Elsewhere, the Bloomberg gold spot price declined $7.64 to $1,486.43 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was fell 0.4% to 99.28. Markets were higher for the week, a first for the past three weeks, as the DJIA added 0.9%, the S&P 500 Index gained 0.6 % and the Nasdaq Composite increased 0.9%.

Fastenal Company (FAST $36) reported Q3 earnings-per-share (EPS) of $0.37, versus the $0.35 FactSet estimate, as revenues rose 7.8% year-over-year (y/y) to $1.4 billion, roughly in line with expectations. The wholesale distribution of industrial and construction supplies company noted that the general slowing in economic activity experienced in Q2 continued, though it saw higher unit sales related primarily to the contribution from its industrial vending and onsite locations and to a lesser extent its higher product pricing implemented to mitigate the impacts of general and tariff-related inflation. FAST maintained its outlook for full-year net capital expenditures. Shares were up in excess of 15%.

Wendy's Company (WEN $21) is gained solid ground after the fast-food chain announced that it expects full-year global sales growth to be at the high end of its prior guidance of 3-4%, with North American sales projected to be up 4.4%, above the expected 2.4% gain.

October consumer sentiment hits three-month high

The October preliminary University of Michigan Consumer Sentiment Index

(chart) rose to 96.0 from September's read of 93.2, and north of the Bloomberg expectation of a dip to 92.0. The index continued to rebound off of the near three-year low in August and posted the highest level since July as both the current conditions and expectations components of the index gained ground. The 1-year inflation forecast fell to 2.5% from September's 2.8% rate, and the 5-10 year inflation forecast dropped to 2.2% from 2.4%.

The Import Price Index (chart) rose 0.2% month-over-month (m/m) for September, versus the Bloomberg projection of a flat reading, and following August's upwardly-revised 0.2% decrease. Compared to last year, prices were down 1.6%, compared to forecasts of a 2.1% decline and August's upwardly-revised 1.8% fall.

Treasuries fell for the second straight day, with the yield on the 2-year note gaining 4 basis points (bps) to 1.59%, the yield on the 10-year note advancing 6 bps to 1.73%, and the 30-year bond rate rising 3 bps to 2.20%. Volatility in the markets has ramped up after last week's disappointing manufacturing and non-manufacturing data that exacerbated recession concerns and boosted expectations of further Fed rate cuts this year, but concerns were countered somewhat by Friday's mixed September nonfarm payroll report. Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Welcome to the Working Week: A Look at the State(s) of Employment, noting that trends matter at least as much as levels; with payrolls and job openings having already rolled over, and unemployment claims on the watch list. Liz Ann cautions investors to be wary when you hear "the consumer is strong so there’s no risk of a recession."

Global equities rally as trade and Brexit concerns fade

European and Asian equities finished higher amid optimism surrounding progress on the U.S.-China trade front. President Donald Trump and Chinese Vice Premier Liu met today to conclude a second day of negotiations that the President characterized as going "very well." Moreover, U.K. Brexit concerns were tempered somewhat following yesterday's meeting between British Prime Minister Boris Johnson and Irish Premier Varadker, with both noting that they could see a pathway to a possible deal. The developments eased concerns of a no-deal divorce from the European Union that has caused elevated pressure on the markets. The British pound jumped versus the U.S. dollar on the developments, and the euro also traded to the upside, while bond yields in the region were mixed. German consumer price inflation was unrevised, as expected, remaining at its previously reported low level for September.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his commentary Q&A on Brexit: The Options and Implications for Investors, how we see five main options for Brexit in the coming months; three result in a near-term resolution while two options result in a further delay or "no deal" Brexit. Also, Jeff delivers his latest article, Passing the Baton: Signs of Fiscal Stimulus Emerge,

noting that after monetary policymakers took action to lower interest rates and ease financial conditions, they have been asking for fiscal policymakers to enact stimulus though stepped-up government spending and tax cuts. Jeff adds that global central bankers may be starting to get their wish – with a growing list of countries unveiling fiscal stimulus over the past two months, concluding that if this is the start of a broader trend, it may bolster business leaders' global economic growth outlook for 2020.

In Asia, major markets moved higher. Japan, China, Hong Kong, South Korea, India and Australia all finished in the green. While the move was likely primarily driven by U.S.-China trade talks, there was some progress made in the less publicized trade spat between South Korea and Japan. India's S&P BSE Sensex 30 Index moved higher, despite a report showing the nation's industrial production surprisingly fell in August. While trade news was generally positive today, trade concerns have been a major source of volatility in the currency markets and paired with elevated global recession risks, have led to negative bond yield across a good portion of the globe. As such, Schwab's Director of International Research, Michelle Gibley, CFA, offers her article, Currency Wars: Is a Weaker Currency Good or Bad?, and Schwab's Jeffrey Kleintop, CFA, discusses in his commentary, Negative Interest Rates And The Future Of Investing, how investors' increasing focus on income may lead to long-term shifts in portfolios that favor international stocks.

Stocks overcome early pressure to snap string of weekly losses

U.S. stocks seemed poised for a fourth-straight weekly decline early in the week as the markets appeared cautious with high-level talks between the U.S. and China looming. The announcements of the U.S. blacklisting some Chinese tech companies and placing new visa restrictions on Chinese officials appeared to further complicate the path toward a trade deal. However, hopes of some sort of a U.S.-China trade deal resurfaced to boost the markets and the S&P 500 posted a solid advance for the first time in four weeks, with comments from both sides suggesting a partial deal may be in the offing. Also, U.K. Brexit concerns faded a bit following a recently rare sign of potential progress. The markets shrugged off the prolonged strike at General Motors Company (GM $35) and pension plan changes at General Electric Company (GE $9), as well as caution ahead of next week's unofficial start to Q3 earnings season. Economic data was mixed but seemed to be overshadowed by the flared-up trade optimism. Small business optimism slipped more than expected, reads on wholesale and consumer price inflation remained subdued, and job openings declined, but jobless claims unexpectedly fell and remained at a historically low level, consumer credit rose, mortgage applications jumped for a second-straight week, and consumer sentiment continued a rebound. Treasury yields surged as elevated Fed rate cut expectations were tempered somewhat and crude oil prices posted solid weekly gain, though the U.S. dollar fell, along with gold prices. Most sectors advanced, led by materials, industrials, consumer discretionary and financials, while the defensively-natured consumer staples and utilities notched weekly losses. As noted in the Schwab Center for Financial Research's latest, Schwab Sector Views: Don't Buy Expensive Just Because It's Defensive, recession concerns have some investors eyeing defensive stalwarts, but some of the classic defensive sectors currently come at a high price.

Next week, along with a heavy dose of key economic data and likely continued focus in the aftermath of the U.S.-China trade talks and the Brexit deadline drawing near, Q3 earnings results could have a heavy say in the markets direction, with results from the financial sector pouring in to unofficially kick off the season. Housing will be in focus, with the releases of the NAHB Housing Market Index, along with housing starts and building permits, while manufacturing will also likely command attention, courtesy of regional manufacturing reports and the Fed's industrial production and capacity utilization data. The Fed's beige book—an anecdotal read on business activity across the nation—will be released to help policymakers prepare for their two-day monetary policy meeting scheduled to end on October 30th. However, the headlining economic reports could be the releases of the Leading Index and retail sales, given the heightened recession concerns that have thus far been countered by signs that the all-important consumer remains healthy.

As noted in our latest Schwab Market Perspective: Déjà vu, stocks continue to face pressure and volatility has resurfaced; as trade tensions have heated up yet again, and mixed economic data has fueled investor hesitation. Although September's jobs report posted a new low in the unemployment rate, some weaknesses are appearing in key leading indicators in the labor market. Global equities have failed to make gains in the past 20 months, but positive earnings growth in the coming quarters may provide a boost for prices.

International economic reports due out next week that deserve a mention include: Australia—employment change. China—lending statistics, trade balance, inflation data, industrial production, retail sales, and Q3 GDP. India—inflation data and trade balance. Japan—industrial production and inflation statistics. Eurozone—industrial production, trade balance and inflation data, along with German investor sentiment. U.K.—employment change, inflation statistics and retail sales.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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