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Stocks Claw Back, but Losses Persist

In a rollercoaster of a session heading into the Labor Day holiday weekend, U.S. equities were able to claw out of a deep hole to finish with modest losses. After getting an initial bump following the August labor report, stocks surrendered those gains and accelerated to the downside. However, technology issues, which fueled yesterday's rout, recovered somewhat to settle with modest losses. Some mixed signals from the Labor Report appeared to also foster uncertainty about a resolution to the stalemate on Capitol Hill regarding an elusive new round of fiscal relief measures to add to the caution. Treasury yields were higher as bonds declined and the U.S. dollar finished little changed, while gold ended higher in choppy action and crude oil prices were sharply lower. In equity news, Broadcom and DocuSign both offered quarterly results that were mostly above estimates. Markets in Europe and Asia finished lower.

The Dow Jones Industrial Average declined 159 points (0.6%) to 28,133, the S&P 500 Index shed 28 points (0.8%) to 3,427, and the Nasdaq Composite decreased 145 points (1.3%) to 11,313. In heavy volume, 960 million shares were traded on the NYSE and 4.3 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $1.60 to $39.77 per barrel and wholesale gasoline was $0.02 lower at $1.18 per gallon. Elsewhere, the Bloomberg gold spot price rose $3.07 to $1,933.98 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 92.77. Markets were lower for the week, as the DJIA fell 1.8%, the S&P 500 declined 2.3% and the Nasdaq Composite lost 3.3%.

Broadcom Inc. (AVGO $363) reported fiscal Q3 earnings-per-share (EPS) of $1.45, or $5.40 ex-items, versus the $5.24 FactSet estimate, as revenues rose 6.0% year-over-year (y/y) to $5.8 billion, roughly in line with the Street's forecast. The semiconductor and infrastructure software solutions company issued Q4 revenue guidance that was above expectations, noting that its outlook reflects a strong anticipated ramp in wireless, as well as the continuing surge in demand for networking from cloud and telecom customers, more than offsetting expected softness in enterprise. Shares were higher.

DocuSign Inc. (DOCU $216) posted a Q2 loss of $0.35 per share, or EPS of $0.17 ex-items, compared to the projected profit of $0.08 per share. Revenues grew 45.0% y/y to $342 million, topping the forecasted $319 million, with subscriptions revenues gaining 47.0% y/y. The eSignature solutions company said in an accelerating digital world where business can be conducted from anywhere, the need to agree electronically and remotely has never been stronger, as shown in its 61.0% y/y billings growth. The company added that it is just scratching the surface of its Agreement Cloud opportunity and believe it is increasingly becoming an essential cloud-software platform for organizations of all sizes. DOCU raised its full-year revenue and billings outlook and announced Cynthia Gaylor as its new Chief Financial Officer. Shares fell despite the results and outlook as "work from anywhere" stocks that have enjoyed a boost from the changing landscape of the COVID-19 disruption continued to pullback decisively.

The stock markets saw an initial boost in the wake of today's nonfarm payroll report, but the enthusiasm faded and losses accelerated to add to yesterday's selloff that took the S&P 500 and Nasdaq off of all-time highs as discussed by the Schwab Center for Financial Research (SCFR) in the article, Big Tech Shares Dent Stock Market Recovery. Moreover, amid the ramped up volatility, SCFR Senior Vice President Mark Riepe offers his latest commentary, New to Investing? How to Start Smart and Manage Your Risk, delivering key risk management principles and some tips on how to get started and to follow throughout your investing career.

Finally, for timely commentary amid the unprecedented times in the markets, you can follow the experts from the SCFR on Twitter at @SchwabResearch, and you can visit Schwab's Market Insights page to find more analysis and strategies on the current market environment.

August employment report mostly better than expected

Nonfarm payrolls (chart) increased by 1,371,000 jobs month-over-month (m/m) in August, compared to the Bloomberg forecast of a 1,350,000 rise, and following July's downwardly-adjusted gain of 1,734,000. Excluding government hiring and firing, private sector payrolls grew by 1,027,000, versus the forecasted rise of 1,325,000 after advancing by an upwardly-revised 1,481,000 in July. The labor force participation rate rose to 61.7% from July's 61.4% rate, versus an expected increase to 61.8%. The report showed notable job gains in retail trade, professional and business services, leisure and hospitality, and in education and health services, while the increase in government employment largely reflected temporary hiring for the 2020 Census.

The unemployment rate fell to 8.4% from July's 10.2% rate, versus forecasts of a decline to 9.8%. Average hourly earnings rose 0.4% m/m, versus projections of a flat reading and compared to July's downwardly-revised 0.1% gain. Y/Y, wages were 4.7% higher, above estimates of a 4.5% increase. Finally, average weekly hours ticked higher to 34.6 from July's unrevised 34.5 rate, where it was forecasted to remain.

The wage gains, the drop in the unemployment rate, and the rise in the employment-to-population ratio—measuring the proportion of the country's working age population that is employed—are welcome signs but the report still included the time period where the special programs to support the COVID-19 disruption were intact but now some have expired. Also, it is important to remember that payrolls are still shy by more than 11 million jobs compared to the record pre-pandemic levels. Also, another concerning component of the report was the fact that the number of permanent job losses was noticeably higher compared to the prior month and has risen by 2.1 million since February.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Stock Market Reaction to Expiring COVID-19 Programs, how if not extended or replaced, the fading support for the unemployed raises the risk of weakening economic momentum, turning the V-shaped recovery into a W.

Treasuries were lower following the jobs data, as the yield on the 2-year note moved 2 basis points (bps) higher to 0.14%, the yield on the 10-year note gained 10 bps to 0.72%, and the 30-year bond rate advanced 13 bps to 1.47%.

The yield curve steepened last week on the heels of the Fed's shift in policy as discussed by Schwab's Chief Fixed Income Strategist Kathy Jones in her article, Federal Reserve Announces Inflation Goal Shift: What It Means for Investors, but has flattened this week ahead of the jobs data and amid the ramped-up volatility. Schwab's Fixed Income Strategist, Collin Martin, CFA, discusses in his latest article, Why Own Bonds When Yields Are So Low?, how we believe fixed income investments still have a place in a well-diversified portfolio.

Please note: All U.S. markets will be closed on Monday in observance of the Labor Day holiday.

Europe falls after yesterday's selloff and today's U.S. jobs data, Asia also broadly lower

European equities have turned back below the flatline in late-day action amid heating up volatility in the wake of the sharp downside move in the U.S. yesterday and as the initial lift from the U.S. employment report faded. However, the euro and British pound traded lower versus the U.S. dollar, which has shown signs of rebounding from a recent more than two-year low. The markets also digested a smaller-than-expected rise in German factory orders. Bond yields in the region were higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Confidence Is Everything: 3 Things May Shake It, how the virus progression as schools and universities reopen, the ramifications of the U.S. election, and the outcome of post-Brexit trade talks are potential developments that could threaten confidence that has fueled the resiliency in the global equity markets.

The U.K. FTSE 100 Index and France’s CAC-40 Index were down 0.9%, Germany's DAX Index fell 1.7%, Spain's IBEX 35 Index declined 0.2%, Italy's FTSE MIB Index trading 0.8% lower, and Switzerland's Swiss Market Index was down 0.7%.

Stocks in Asia finished broadly lower with the global markets reacting to the sharp pullback from record highs in the U.S. yesterday that came despite recent global manufacturing and services sector data that has suggested the economic recovery continues. The sharp selloff in the U.S. was led by the tech sector and the mega-capitalization stocks that had seen a surge off of the March lows. Schwab's Chief Investment Strategist Liz Ann Sonders had noted in her article, High Hopes: S&P 500 Hits All-Time High Amid Pandemic/Recession, how market breadth leading up to the pullback had been underwhelming and the concentration of the largest five stocks was a risk. Also, the markets may have treaded with some caution ahead of the key August employment data out of the world's largest economy of the U.S. Japan's Nikkei 225 Index declined 1.1% as the yen firmed amid the market uneasiness, while Australia's S&P/ASX 200 Index dropped 3.1%. China's Shanghai Composite Index decreased 0.9% and the Hong Kong Hang Seng Index traded 1.3% lower. South Korea's Kospi Index descended 1.2% and India's S&P BSE Sensex 30 Index fell 1.6%.

Stocks snap five-week winning streak as markets skim froth off of leaders

After rallying for five months since the March lows, U.S. stocks pulled back noticeably to stymie a five-week winning streak for the S&P 500. The markets took the opportunity to trim some of the sharp gains seen from the leading Information Technology, Communications Services and Consumer Discretionary sectors. Although the markets moved broadly lower some of the sectors that lagged during the charge back to record highs, such as Financials, Industrials and Energy, outperformed. Stocks shrugged off further signs of global economic recovery, courtesy of a host of upbeat August manufacturing and service sector activity data that preceded Friday's favorable Labor Report, as well as the Fed's persistent pledge to utilize all of its ammunition to foster a recovery in the troubled labor markets. The U.S. dollar rebounded from a 28-month low while the Treasury yield curve flattened after steepening last week on the Fed's shift in its monetary policy framework. Crude oil and gold prices finished lower on the week.

With next week being shortened by the Labor Day holiday, the economic docket will also be relatively light. However, inflation data is poised to be prominent, as we will get the releases of the Consumer Price Index (CPI) and the Producer Price Index (PPI). Moreover, the labor market will likely continue to garner attention as the markets digest the releases of the JOLTS Job Openings report, initial jobless claims for the week ended September 5th, and the employment plans component of the NFIB Small Business Optimism Index.

The international economic front is also set to deliver some key data points/events. China will report its August trade figures, CPI and PPI, and last month's lending statistics. Data out of Japan includes July household spending and earnings reports, Q2 GDP, and core machine orders. Investor confidence for September and the European Central Bank's monetary policy decision headline the docket for the Eurozone, along with Germany's industrial production and trade balance figures for July. Rounding out the week, the U.K. will release its industrial/manufacturing production data and unveil its inflation target for the next twelve months.

The ramp-up in volatility seen this week was not too surprising as Schwab's Chief Investment Strategist Liz Ann Sonders had been warning about for some time, most recently in her article, High Hopes: S&P 500 Hits All-Time High Amid Pandemic/Recession. Liz Ann's caution had stemmed from the signs of froth in the market and among some behavioral measures of investor sentiment; not to mention traditional valuation metrics that are historically-stretched. She points out that this is not an environment in which greed should dominate investment decisions; but instead one for discipline around diversification and periodic rebalancing. She concludes that momentum can power the stock market beyond fundamental supports; which is why John Maynard Keynes' view from the 1930s remains oft-quoted: "Markets can stay irrational longer then you can stay solvent."

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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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