Stocks Declined in Anticipation for Next Week’s Fed Decision
U.S. equities ended the day lower in heavy trading volume, posting another weekly decline, as the markets remained skittish amid inflationary concerns. Hot inflation reports released earlier this week solidified expectations that the Fed, and other central banks around the world, will remain ultra-aggressive with their monetary policy. The markets appeared to be pricing in a 75-basis-point rate hike as the most probable outcome for next week's Fed meeting. In equity news, FedEx offered earnings guidance that came in well below expectations, and also provided pessimistic comments on the global economy. As well, shares of GE fell after the company warned that continued supply chain issues will impact its cashflows. In light economic news, consumer sentiment, as reported by the University of Michigan, increased but at a lower rate than forecasted. Treasury yields were mixed, and the U.S. dollar was lower, while crude oil prices were mostly unchanged, and gold turned to the upside. Asia finished broadly lower despite upbeat data out of China, and Europe also saw losses, as the global markets remained uneasy amid the global inflation backdrop.
The Dow Jones Industrial Average declined 139 points (0.5%) to 30,822, the S&P 500 Index went down 28 points (0.7%) to 3,873, and the Nasdaq Composite lost 104 points (0.9%) to 11,448. In heavy volume, 7.5 billion shares of NYSE-listed stocks were traded, and 7.1 billion shares changed hands on the Nasdaq. WTI crude oil nudged $0.01 higher to $85.11 per barrel. Elsewhere, the gold spot price increased $6.30 to $1,683.60 per ounce, and the Dollar Index declined 0.1% to 109.67. Markets ended noticeably lower for the week, as the DJIA fell 4.1%, the S&P 500 dropped 4.8%, and the Nasdaq Composite tumbled 5.5%.
Shares of FedEx Corporation (FDX $161) plunged over 20% amid an earnings pre-announcement yesterday after the close that has rattled the Street. The package delivery and logistics company said it sees fiscal Q1 earnings-per-share (EPS) of $3.44, well short of the $5.14 estimate, on revenues of $23.2 billion, versus the $23.6 billion estimate. FDX also withdrew its full-year guidance. President and CEO Raj Subramaniam said, "Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, Q1 results are below our expectations." Following the announcement, the FDX head told CNBC's Jim Kramer in an interview that he believes the global economy is headed for a "worldwide recession." Shares of United Parcel Service Inc.(UPS $177) also fell following the news.
General Electric Company (GE $66) warned that ongoing supply chain disruptions could impact its cashflow forecasts. Speaking at a conference on Thursday, CFO Carolina Dybeck said the disorder in the supply chains have extended into the latter part of the year, which has in turn made delivery for products more difficult, with some orders now being pushed out into Q4. Nonetheless, she said the current quarter is expected to be in line, or marginally better, than Q2 and she sees strong organic growth in both its aerospace and healthcare divisions throughout the rest of the year. Shares of GE were lower.
The S&P 500 Index remained choppy following Tuesday's sharp drop that came on the heels of a hotter-than-expected August consumer price inflation report, which boosted Treasury yields and resumed the U.S. dollar's rally. For a look at the volatility, check out what our experts from the Schwab Center for Financial Research think in the article, Stock Market Volatility: Inflation Strikes Again. Given these conditions, Schwab recommends that investors stay disciplined. For stock investors, that means taking a sector-neutral approach and focusing on high-quality factors such as strong profit margins, high free-cash-flow yield, low volatility, and positive forward earnings revisions. Investors should also periodically rebalance their portfolios to maintain their strategic long-term allocations in the face of rapidly shifting markets.
Consumer sentiment rises, but a shade below estimates
The preliminary University of Michigan Consumer Sentiment Index (chart) for September showed that sentiment improved less than expected, rising to 59.5 from August's final reading of 58.2, but below the Bloomberg consensus estimate calling for a rise to 60.0. The index continued to move off the record low seen in June as the expectations component of the report increased noticeably to add to a modest rise in the current conditions portion. The 1-year inflation forecast decreased to 4.6% from 5.0% in August, and the 5-10-year inflation outlook decreased to 2.8%, from 3.0%, falling below the long-run range of 2.9%-3.1% for the first time since July 2021.
Treasury yields were mixed, as the yield on the 2-year note decreased 1 basis point (bp) to 3.85%, the yield on the 10-year note was unchanged at 3.45%, and the 30-year bond rate rose 4 bps to 3.52%.
The markets continued to grapple with how aggressive the Fed will remain with its monetary policy as containing inflation remains top priority. The U.S. dollar has been volatile recently but remains near multi-year highs.
Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, Rate Hikes, Quantitative Tightening, and Bond Yields, how in its quest to reduce inflation, the Federal Reserve appears set to continue to hike interest rates and reduce the size of its balance sheet. She offers a look at what this may mean for the bond market. Kathy also offers analysis of the greenback in her commentary, The Strong Dollar: Can It Continue? You can follow Kathy on Twitter: @KathyJones.
Later this morning, the only report on today's economic calendar is the preliminary University of Michigan Consumer Sentiment Index for September, expected to rise to 60.0 from August's final reading of 58.2.
Europe lost ground amid continued uneasiness
Stocks in Europe ended the day lower amid concerns over economic growth, the aggressive monetary policy of central banks globally, and continued volatility in the energy markets that kept investors on edge. The movement came on the heels of this week's sharp drop that was caused by hot consumer price inflation reports out of the U.S. The data in the U.S. has solidified expectations that the Fed will remain highly aggressive with its monetary policy to fight inflation, and recent inflation reports on this side of the pond will likely keep the Bank of England (BoE) and the European Central Bank aggressive as well. The markets digested more inflation data in the region, with consumer prices out of Italy and the Eurozone matching expectations but remaining severely elevated.
Amid the backdrop of elevated inflation pressures, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, Home Is Where the Inflation Is, how central banks that base inflation measures on rentals rather than home prices may persist in hiking rates, thus applying more economic brakes despite easing home sales. You can follow Jeff on Twitter: @JeffreyKleintop. The euro was slightly higher versus the U.S. dollar, while the British pound dropped versus the greenback. Bond yields in the Eurozone finished mostly higher, with Sweden and the Netherlands being the exceptions, while rates in the U.K were mixed.
France's CAC-40 Index, Spain's IBEX 35 Index, and Switzerland's Swiss Market Index fell 1.3%, the U.K. FTSE 100 Index was down 0.6%, Germany's DAX Index dropped 1.7%, and Italy's FTSE MIB Index traded 1.1% lower.
Asia stocks fall despite upbeat Chinese data
Stocks in Asia finished lower in the wake of weakness in the U.S. markets overnight, shrugging off better-than-expected economic data out of China. The global markets remain skittish and choppy after this week's drop that came amid a hotter-than-expected U.S. consumer price inflation report for August. The report has boosted the U.S. dollar and Treasury yields, while solidifying expectations that the Fed will remain aggressive with its monetary policy to try to restore price stability. Central banks in North America, Europe, and the U.K. have aggressively tightened monetary policies. Meanwhile, the Bank of Japan (BoJ) has abstained, and China's central bank has diverged and actually loosened its policy as it has continued to deploy COVID-related restrictions in parts of the country, which has negatively impacted economic growth.
Retail sales in China grew 5.4% y/y, well above estimates and its highest reading since February, industrial production also bested expectations with autos a bright spot, and fixed asset investment showed growth for the first time this year. However, housing prices fell noticeably amid the continued struggles in the real estate industry. The world's second-largest economy has also been hampered by regulatory crackdowns and geopolitical tensions with the U.S. Schwab's Jeffrey Kleintop provides commentary on China's situation in his article, China Q&A: Top 5 Questions, discussing various topics including inflationary concerns, currency movements, government policies, and more. Japan's Nikkei 225 Index fell 1.1%, with the yen continuing to trim a recent drop versus the U.S. dollar that followed the U.S. inflation data, but the yen remains near multi-decade lows that have come amid the BoJ's lack of keeping up with other key global central banks in monetary policy. China's Shanghai Composite Index dropped 2.3%, and the Hong Kong Hang Seng Index decreased 0.9%. India's S&P BSE Sensex 30 Index moved 1.8% to the downside, Australia's S&P/ASX 200 Index fell 1.5%, and South Korea’s Kospi index traded 0.8% lower.
Stocks back in the red for the week
Investors began the week looking to build on last week's momentum after snapping a three-week string of losses. However, those hopes were quickly dashed in the wake of a hotter-than-expected Consumer Price Index (CPI) report on Tuesday that paved the way for the Dow notching its worst day since June 2020. The rest of the August inflation picture didn't help matters, as the Producer Price Index (PPI) noted a rise in its core rate—which excludes food and energy—and the Import Price Index declined less than expectations. The data came despite the continued decline in crude oil prices of late. Adding to the uneasiness, FedEx and GE offered disappointing outlooks. Treasury yields soared, particularly on the short end of the yield curve, and the U.S. dollar saw a choppy trading week, remaining at multi-decade highs. The inflation data kept expectations high that the Fed is likely to keep its foot on the monetary policy tightening accelerator to stabilize pricing pressures. All sectors lost ground for the week, led by Information Technology and Communication Services issues, while Energy stocks were the better performers of the 11 sectors.
Next week, the economic calendar will be fairly light, but the spotlight will be on the Federal Open Market Committee's highly anticipated two-day monetary policy meeting, slated to begin on Tuesday and culminate on Wednesday with its interest rate decision. The markets are pricing in another 75 bp rate increase, while some rumblings on the Street have increased of the possibility of a 100 bp hike. Housing will be in focus, with the NAHB Housing Market Index, housing starts and building permits, existing home sales and the weekly read on MBA Mortgage Applications on deck. Other reports of note include: the August Leading Economic Index (LEI), initial jobless claims for the week ended September 17, the Kansas City Fed Manufacturing Index, and the first look at manufacturing and services PMIs for September from S&P Global.
The international calendar next week will also bring reports that could shape global stock action. Reports worth a mention include: Australia—Leading Index. Japan—CPI, department store sales, and the BoJ's monetary policy decision. Eurozone—Consumer confidence, along with German PPI and import prices. U.K.—Bank of England monetary policy decision, and public sector net borrowing. As well, the S&P Global Manufacturing and Services PMIs from across the globe are slated for release.
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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