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Markets Close Out Volatile Week Mixed

U.S. equities finished out a rocky week mixed, as investors appeared to assess the volatility in the Information Technology sector after being the main catalyst to a five-month surge off the March lows. The backdrop of massive monetary policy support from the Fed and other global central banks remained, while economic data continued to paint the recovery picture. However, U.S. lawmakers again failed to find common ground on a highly-anticipated new wave of fiscal relief, while the pivotal presidential election looms. The U.S. dollar declined as the euro remained strong, bolstered by yesterday's less-dovish monetary policy decision from the European Central Bank, and choppiness for the British pound persisted following a recent drop that has come amid heightened Brexit concerns. Treasury yields were mostly lower as bond prices nudged higher after a read on consumer price inflation showed continued recovery. Gold reversed course to trade lower and crude oil prices were little changed. In equity news, Peloton topped the Street's quarterly forecasts, along with Oracle, while analysts' appeared to scrutinize results from Chewy. Markets in Europe and Asia also finished mixed.

The Dow Jones Industrial Average increased 131 points (0.5%) to 27,666, the S&P 500 Index rose 2 points (0.1%) to 3,341, while the Nasdaq Composite decreased 66 points (0.6%) to 10,854. In moderate volume, 827 million shares were traded on the NYSE and 3.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.03 higher to $37.33 per barrel and wholesale gasoline was $0.01 lower at $1.09 per gallon. Elsewhere, the Bloomberg gold spot price fell $3.32 to $1,942.77 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.1% to 93.24. Markets were lower for the week, as the DJIA fell 1.7%, the S&P 500 declined 2.5% and the Nasdaq Composite lost 4.1%.

Peloton Interactive Inc. (PTON $84) reported fiscal Q4 earnings-per-share (EPS) of $0.27, compared to the $0.10 FactSet estimate, with revenues jumping 172.0% year-over-year (y/y) to $607 million, above the Street's forecast of $586 million. The fitness and wellness company said it played an important role in its members' lives as global communities continue to battle the COVID-19 pandemic, while its paid digital subscriptions grew 210% y/y in fiscal 2020. The company issued 2021 guidance that was well above analysts' expectations. Shares pared early gains and finished lower.

Oracle Corporation (ORCL $57) posted fiscal Q1 EPS of $0.72, or $0.93 ex-items, compared to the $0.86 expectation, with revenues rising 2.0% y/y to $9.4 billion, north of the projected $9.2 billion. The company said its cloud applications businesses continued their rapid revenue growth, along with its infrastructure businesses, and it is confident that its revenue will accelerate as we move on past COVID-19. ORCL traded to the downside.

  Chewy Inc. (CHWY $54) reported an unexpected adjusted Q2 operating profit, as its gross margin expanded by 190 basis points (bps), and revenues grew 47.0% y/y to $1.7 billion, above the Street's projection of $1.6 billion. The online pet supply company touted its advantageous positioning in the pet industry's race toward e-commerce. For Q2, CHWY's active customers came in above estimates, while its net sales per active customer slightly missed forecasts. The company raised its full-year revenue outlook. Shares finished lower.

   The stock markets have been wobbly as of late on the heels of an historic five-month surge that took the S&P 500 and the Nasdaq to all-time highs. For a look at the volatility in the equity markets, check out the Schwab Center for Financial Research's (SCFR) article, Big Tech Shares Dent Stock Market Recovery, as well as Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Crossroads: Shifting Tides in Stock and Labor Markets.

Moreover, 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 wild swings in the equity 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.

Consumer price inflation hotter than expected

The Consumer Price Index (CPI) (chart) rose 0.4% month-over-month (m/m) in August, versus the Bloomberg estimate of a 0.3% gain, and compared to July's unrevised 0.6% increase. The core rate, which strips out food and energy, also grew 0.4% m/m, versus expectations of a 0.2% gain and July's unadjusted 0.6% rise. Y/Y, prices were 1.3% higher for the headline rate, north of forecasts of a 1.2% increase and July's unadjusted 1.0% gain. The core rate was up 1.7% y/y, above projections calling for it to match July's unrevised 1.6% gain.

The Department of Labor said the rise in prices came as a sharp increase in used cars and trucks was the largest factor, but prices for gasoline, shelter, recreation, and household furnishings and operations also contributed. The report also noted that apparel, motor vehicle insurance and airline fares also rose, while education and personal care prices were among the few to decline.

Treasuries were modestly higher following the inflation data, as the yields on the 2-year note and the 30-year bond were down 2 bps at 0.13% and 1.42%, respectively, while the yield on the 10-year note was unchanged at 0.67%.

  Bond yields remain choppy and the rate on the 10-year note has oscillated in the range of 50-100 bps in the past five months as the markets grapple with the shakiness in the equity markets, recent relatively upbeat economic data and last month's shift in policy by the Fed 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. Meanwhile, 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.

Europe and Asia mixed amid myriad data and events

European equities finished mixed, with the markets remaining skittish amid the recent pressure on the Information Technology sector that has led a recent pullback from the surge seen since the plunge to the March lows. However, the backdrop of the massive support on the global monetary and fiscal policy fronts remained and recent economic data buoyed the recovery theme. The foreign exchange markets continued to garner attention. The euro was again higher versus the U.S. dollar, amplified by yesterday's monetary policy decision from the European Central Bank (ECB), which appeared to be less dovish regarding its reaction to the euro's move as of late than the markets had anticipated. Meanwhile, the British pound dipped in choppy action versus the greenback after coming under pressure as of late as concerns about the U.K. Brexit resurface. The uneasiness has come courtesy of the U.K. and European Union struggling to find common ground on a trade agreement ahead of a looming year-end deadline, causing concerns about the worst-case scenario of a "hard Brexit" to flare up.

In economic news, U.K. industrial and manufacturing figures for July both rose more than expected, while German consumer price inflation data remained soft. Bond yields in the region lost ground. 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 was up 0.5%, Germany's DAX Index ticked 0.1% lower, Italy's FTSE MIB Index was little changed, France’s CAC-40 Index rose 0.2%, Spain's IBEX 35 Index declined 0.8%, and Switzerland's Swiss Market Index gained 0.5%.

Stocks in Asia finished mostly higher to culminate the volatile week that has seen market leading technology issues pullback as the markets assess the recent charge off the March lows, amid festering U.S.-China tensions, the looming U.S. presidential election, and flared-up U.K. Brexit concerns. However, the massive amount of global monetary and fiscal relief measures and recent upbeat economic data have countered the aforementioned sources of hampered conviction. Schwab's Jeffrey Kleintop discusses in his article, Stock Market "Inequality" Hides a Big Change, how the recent imbalances in the stock market can lead to vulnerability, while noting how rebalancing portfolios may be valuable to help balance exposure to U.S. capitalization-weighted benchmarks relative to international stocks. Japan's Nikkei 225 Index rose 0.7%, with the yen relatively stable, and following a report that showed Q3 business conditions in the manufacturing sector unexpectedly improved. China's Shanghai Composite Index and the Hong Kong Hang Seng Index both advanced 0.8%. After the markets closed, China reported stronger-than-expected August lending figures, notably m/m jumps in new yuan loans and aggregate financing—a measure of total credit issued. South Korea's Kospi Index and India's S&P BSE Sensex 30 Index finished little changed. Australia's S&P/ASX 200 Index declined 0.8% amid weakness in technology and energy issues.

  Stocks continue soft patch as leaders pullback

U.S. stocks finished the shortened week lower as a cautiously-speculated pullback for the Information Technology sector and mega market capitalization stocks, which have led the charge off the March lows, continued to come to fruition. Also, the Energy sector saw heavy pressure amid a solid decline in crude oil prices. The markets appeared to take the opportunity to trim some profits in the aforementioned high-flying stocks as the potentially hotly-contentious presidential election loomed, with a highly-expected new round of fiscal relief remaining elusive on Capitol Hill. Moreover, U.S.-China tensions festered and Brexit uneasiness seemed to resurface. Stocks shrugged off more signs of economic recovery, with small business optimism improving more than expected and signaling increasing plans to hire, weekly initial jobless claims continuing to stabilize—albeit at still elevated levels—job openings unexpectedly jumping, and inflation statistics suggesting a modest warm up. The Materials sector was the lone sector to see green figures and Industrials outperformed, only dipping compared to noticeable weakness among the other major sectors. The Treasury yield curve flattened as choppiness remained and the U.S. dollar nudged higher, along with gold.

     Volatility is likely to persist next week as the markets return to full strength and the aforementioned headwinds could continue to cloud conviction. Also, next week's economic calendar is chock full of data/events that could move the markets, headlined by Wednesday's monetary policy decision from the fed, which will include updated economic projections and post-decision presser from Chairman Jerome Powell. The Fed's decision will be sandwiched between key September regional manufacturing reports, the Fed's industrial production and capacity utilization release for last month, August retail sales, September homebuilder sentiment, August housing starts and building permits, jobless claims for the week ended September 12th, the August Leading Index, and the preliminary September University of Michigan Consumer Sentiment Index.

The international economic calendar is also poised to deliver data that may elicit responses from the markets with releases of note including: Australia—employment change. China—retail sales and industrial production. India—inflation statistics and trade figures. Japan—the Bank of Japan monetary policy decision and trade balance. Eurozone—industrial production, inflation data and trade balance, along with German investor confidence. U.K.—Bank of England monetary policy decision, employment change, inflation statistics, and retail sales.

    As noted in our latest Schwab Market Perspective: Rotation, the U.S. stock market hit pause in early September, as investors took a harder look at market overconcentration and frothy sentiment. Meanwhile, global economies may be entering a new phase, and the Federal Reserve’s newly announced inflation policy is likely to keep U.S. rates lower for longer. For a look at our analysis of the current stock market environment, check out our latest, Schwab Sector Views: Concentrate on Sector Overconcentration, in which we discuss how we think that the Financials sector stands to potentially benefit from a shift to value-oriented stocks and a continued rebalancing of the markets. We conclude by pointing out how using alternatives to market-cap weighted funds—such as fundamental or equal-weight index funds–can help disperse the concentrated risk in the growth-oriented sectors.

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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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