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Markets Post Fresh Records Following Upbeat Labor Report

U.S. equities finished higher, posting a fifth-straight week of gains, while notching fresh record highs in the process. The moves came following an upbeat October labor report that showed a larger-than-expected increase in jobs created and a decline in the unemployment rate. Adding to the positive mood, Pfizer announced strong efficacy results regarding its oral antiviral COVID-19 pill. Earnings continued to trickle in and were mixed, with Peloton missing on both the top- and bottom-line and slashing its full-year outlook, while Expedia posted results that surprised to the upside. Treasuries were higher, pressuring yields, and the U.S. dollar was slightly lower with the British pound stabilizing a bit after yesterday's tumble that came in the wake of the Bank of England's surprising policy decision. Crude oil prices rebounded from a recent spate of losses and gold added to yesterday's rally. Europe finished mostly higher amid the positive COVID news and U.S. labor report, while markets in Asia were mostly lower with Chinese real estate issues seeing renewed pressure.

The Dow Jones Industrial Average rose 204 points (0.6%) to 36,328, the S&P 500 Index increased 17 points (0.4%) to 4,698, and the Nasdaq Composite gained 31 points (0.2%) to 15,972. In moderately-heavy volume, 897 million shares were traded on the NYSE and 5.5 billion shares changed hands on the Nasdaq. WTI crude oil increased $2.46 to $81.27 per barrel. Elsewhere, the gold spot price advanced $25.90 to $1,819.40 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 94.22. Markets were higher for a fifth-consecutive week, as the DJIA gained 1.4%, the S&P 500 increased 2.0%, and the Nasdaq Composite rallied 3.1%.

Shares of Pfizer Inc. (PFE $49) traded higher after the company announced that its oral antiviral COVID-19 pill showed an 89% reduction in risk of hospitalization or death in high-risk adults related to the virus. The company will cease further enrollment into the study due to the overwhelming efficacy demonstrated in these results, and the company's CEO said it plans to submit the data as part of its ongoing rolling submission to the U.S. FDA for Emergency Use Authorization (EUA) before Thanksgiving.

Peloton Interactive, Inc. (PTON $56) posted an adjusted fiscal Q1 loss of $1.25 per share, compared to the FactSet estimate of a $1.10 per share shortfall, with revenues rising 6.0% year-over-year (y/y) to $805 million, below the forecasted $809 million. The company cited unusual year-ago comparisons, demand uncertainty amidst re-opening economies, and widely-reported supply chain constraints and commodity cost pressures. The company reported gross margin and digital subscribers figures that were both below estimates. Looking ahead, the fitness equipment and media company said it sees a wider full-year adjusted loss, and it slashed its revenue guidance by as much as $1 billion. Shares tumbled over 30%.

Expedia Group, Inc. (EXPE $182) posted adjusted Q3 profits of $3.53 per share, topping analysts’ expectation of a $1.68, with revenues rising 97% y/y to $3.0 billion, above the forecasted $2.7 billion. Despite continued volatility in the travel recovery, the company said its net income and adjusted EBITDA for the quarter nearly matched its Q3 2019 levels driven by the superior performance from Vrbo and domestic travel along with improvements across virtually all lines of business. Shares rallied over 15%.

Q3 earnings season has moved swiftly past the halfway point, and per data compiled by Bloomberg, of the 446 S&P 500 companies that have reported thus far, roughly 68% have topped revenue forecasts and nearly 82% have bested profit projections. Compared to last year, sales growth has been approximately 19% higher and earnings are up about 42%.

Schwab's Chief Investment Strategist Liz Ann Sonders provides her latest article, You've Got to Earn It: Earnings Growth Strong, But Descending, discussing how earnings season has been stellar so far, although the growth rate is well off its prior quarter peak, while noting how profit margins will be in focus moving forward. Also, Director and Senior Investment Strategist with the Schwab Center for Financial Research (SCFR), David Kastner, CFA, provides his latest Schwab Sector Views: What if Inflation Persists?, noting how we don't believe a return to 1970s-style inflation is likely, but there is a worrisome scenario in which persistently sharp increases in prices could be a factor to reckon with—and if history is any guide, they could have an impact on sector performance.

Find all our market commentary on our Market Insights page and follow us on Twitter at @SchwabResearch.

October job growth tops expectations

Nonfarm payrolls (chart) rose by 531,000 jobs month-over-month (m/m) in October, well above the Bloomberg consensus estimate of a 450,000 rise, while September’s figure was upwardly-adjusted to an increase of 312,000. Excluding government hiring and firing, private sector payrolls increased by 604,000, versus the forecasted rise of 420,000, after increasing by a positively-revised 365,000 in September. The labor force participation rate remained at September’s 61.6% and came in lower that the forecasted increase to 61.7%.

The U.S. Bureau of Labor Statistics reported job growth to be widespread, with notable employment gains in leisure and hospitality, professional and business services, manufacturing, and in transportation and warehousing.Employment in public education declined. While the employment in leisure and hospitality increased by 164,000 in October and has risen by 2.4 million year-to-date, employment in this category is still down by 1.4 million since February 2020.

The unemployment rate fell to 4.6% from September’s 4.8% rate, versus expectations of a dip to 4.7%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—decreased to 8.3% from the prior month's 8.5% rate. Average hourly earnings rose 0.4% m/m, in line with projections, and versus September’s 0.6% rise. Y/Y, wages were 4.9% higher, in line with forecasts. Finally, average weekly hours dipped to 34.7 from September’s unrevised 34.8, where they were expected to remain.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $29.9 billion during September, more than the $16.0 billion forecast of economists polled by Bloomberg, while August's figure was adjusted downward to an increase of $13.8 billion from the originally reported $14.4 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, came in at $20.1 billion, a 7.2% y/y rise, while revolving debt, which includes credit cards, grew by $9.9 billion, an 11.8% y/y rise.

Treasuries were higher, as the yield on the 2-year note was down 3 basis points (bps) at 0.39%, the yield on the 10-year note declined 8 bps to 1.44%, and the 30-year bond rate was 9 bps lower at 1.88%.

Treasury yields have been volatile in the wake of this week’s Fed monetary policy decision, where it announced that it will begin to taper its monthly asset purchases by $15.0 billion per month, as widely expected. Schwab's Liz Ann Sonders provides a look at the Fed's decision in her latest article, Begin the Begin: Fed Announces Start of Tapering, noting how the Fed announced details of balance sheet tapering, but emphasized that the pace might be adjusted depending on inflation and economic trends heading into 2022.

Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, Bond Market Blues: High Inflation and Low Yields, with inflation likely to remain above the Fed's target of about 2.0% for some time due to supply-side constraints, we believe the Fed's policy response will be the big factor driving yields in the months ahead. Kathy points out that tapering isn't tightening, but it’s the first step along the road. Moreover, she adds that about half the members of the FOMC have indicated a preference for beginning to raise short-term rates next year. Kathy also highlights how the market is now pricing in a more aggressive pace of rate hikes than implied by the Fed's recent projections, and if the Fed lags behind those expectations, it may raise concerns that the central bank will have a hard time catching up.

Europe mostly higher amid positive COVID news, U.S. labor report, Asia mostly lower

European equities finished with most markets higher on the day following positive news on the fight against COVID-19 and today's U.S. labor report that showed unemployment ticked lower and job growth accelerated more than anticipated. In economic news in the region, German and French industrial production for September surprisingly dropped, and Eurozone retail sales were also unexpectedly lower for September. The data illustrated that supply-chain and inflationary pressures are likely continuing to hamper economic activity. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Inflation: Persistently Transitory, noting how persistently going from one transitory source of inflation to the next may keep inflation elevated for longer than markets currently anticipate. He also points how the lift to earnings from inflation may more than offset any compression on stock valuations from any tightening of financial conditions, given the more relaxed inflation mandates of central banks. Bond yields in the Eurozone and the U.K. were lower and the British pound modestly added to yesterday’s losses versus the U.S. dollar after the Bank of England held its monetary policy steady yesterday, which appeared to surprise the markets. The euro was little changed versus the greenback.

The U.K. FTSE 100 Index was up 0.4%, France's CAC-40 Index increased 0.6%, Italy's FTSE MIB Index gained 1.0%, Spain's IBEX 35 Index advanced 0.9%, and Germany's DAX Index nudged 0.1% higher, while Switzerland's Swiss Market Index fell 0.7%.

Shares in Asia finished mostly lower, with Hong Kong leading losses, where shares of Chinese property developer Kaisa Group were suspended amid the news that the company missed a payment on a wealth management product. Oil-related companies aided in leading the losses. In economic news, household spending in Japan fell less than expected for September. Schwab's Jeffrey Kleintop notes in his latest article, Will Services Offset Weakness in Manufacturing?, how services make up a larger portion of the global economy than manufacturing and have been sustaining the economic, jobs, and earnings outlook despite a slowdown in manufacturing due to well-publicized supply problems. However, corporate earnings are more dependent on manufacturing companies, and if the slowdown were to deepen or linger longer than expected, it could pose a risk to stocks more than the economy or jobs.

Japan's Nikkei 225 Index declined 0.6%, with the yen strengthening somewhat during the trading session. China's Shanghai Composite Index and the Hong Kong Hang Seng Index declined 1.0% and 1.4% respectively. South Korea's Kospi Index decreased 0.5% but Australia's S&P/ASX 200 Index rose 0.4%, while markets in India remained closed for a holiday.

Stocks extend rally, notching fresh record highs following a busy week

U.S. stocks extended their strong start to Q4, posting a fifth-straight weekly advance with the markets registering fresh record highs along the way. A persistently strong Q3 earnings season continued to provide the bulls sustenance, with results remaining mostly positive amid robust demand that kept profit margins healthy despite the festering impact of global supply-chain challenges and palpable inflation pressures. Participation broadened among the sectors, with growth— Consumer Discretionary and Information Technology—leading the way but value/cyclical issues—Materials, Industrials, and Energy—also contributed. The Health Care sector was the lone group to finish in the red. The markets successfully navigated through a busy week that saw heavy economic data, notably on services and manufacturing activity and culminating with Friday's upbeat labor report, join earnings season in painting a positive recovery backdrop. Moreover, the Fed's highly-anticipated monetary policy decision was cheered as the central bank expectedly announced the beginning of its asset purchase tapering campaign and threaded the needle by suggesting it will be patient in regard to raising interest rates. The Treasury yield curve flattened noticeably and the U.S. dollar moved higher, while crude oil prices fell for a second-straight week amid another larger-than-expected build in oil inventories and as OPEC+ decided not change its oil output plans.

As Q3 earnings season continues down the home stretch, next week's economic calendar may take on further focus, headlined by the development of the October inflation picture, courtesy of the releases of the Consumer Price Index (CPI) and Producer Price Index (PPI). The NFIB Small Business Optimism Index for October will also give us a look at how small businesses are dealing with the inflation, supply chain, and labor shortage challenges. Initial jobless claimsfor the week ended November 6 will offer a timely read on the labor front and the job openings and labor turnover survey (JOLTS) results will provide some color on the employment front in the wake of the strong October job growth. The all-important U.S. consumer will come into focus in the second-half of the week as the University of Michigan will deliver its preliminary November Consumer Sentiment Index. Finally, with the Fed commencing its tapering campaign and amid uncertainty regarding the liftoff date for rate hikes, a host of Fedspeak next week is likely to garner heavy scrutiny, with Fed Chairman Jerome Powell set to speak twice.

Next week's international economic calendar will also offer some reports that could move the markets with releases worth noting including: Australia—employment change. China—trade balance, lending statistics, CPI and PPI. Japan—machine tool orders and wage figures. Eurozone—industrial production and investor confidence, along with the German trade balance, CPI and PPI. U.K.—Q3 GDP, and industrial/manufacturing production.

As noted in our latest Schwab Market Perspective: Threading the Needle, we continue to believe that investors should maintain a focus on higher-quality segments of the market, which have outperformed this year. Also, make sure your portfolio is appropriately diversified across various asset classes—including international stocks—and sectors.

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