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Stocks End Week on High Note

U.S. stocks finished out a down week on a positive note that came amid hotter-than-expected October inflation reports out of the U.S. and China. Investors also sifted through other economic reports released today that showed November consumer sentiment hit a 10-year low, and job openings remained robust as a record number of workers quit their jobs. The headlining story on the equity front was the announcement from Dow member Johnson & Johnson that it will split its consumer health business into a separate publicly-traded company. Treasuries were mostly lower to modestly steepen the yield curve after the bond markets were closed yesterday for Veterans Day. The U.S. dollar was slightly lower, while gold saw a modest increase, and crude oil prices finished to the downside. Markets in Europe and Asia finished mixed to close out the week.

The Dow Jones Industrial Average rose 179 points (0.5%) to 36,100, the S&P 500 Index increased 34 points (0.7%) to 4,683, and the Nasdaq Composite gained 157 points (1.0%) to 15,861. In moderate-to-light volume, 3.7 billion shares of NYSE-listed stocks were traded, and 5.3 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.80 to $80.79 per barrel. Elsewhere, the gold spot price advanced $3.10 to $1,867.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 95.11. Markets were lower for the week, as the DJIA declined 0.6%, the S&P 500 decreased 0.3%, and the Nasdaq Composite shed 0.7%.

Dow member Johnson & Johnson (JNJ $165) announced its intention to separate its consumer health business into a new publicly traded company, aimed at creating two global leaders that are better positioned to deliver improved health outcomes for patients and consumers through innovation, pursue more targeted business strategies and accelerate growth. JNJ said the separation is designed to enhance operational performance and strategic flexibility, benefiting patients and consumers, while unlocking value for all stakeholders. The new consumer health company is expected to complete the separation in 18 to 24 months. The company said following the planned separation, the new JNJ would remain the world's largest and most diverse healthcare company and continue its commitment to lead in global healthcare R&D and innovation, with a portfolio that blends its strong pharmaceutical and medical device capabilities focused on advancing the standard of care through innovation and technology. Shares traded higher.

Q3 earnings season is heading toward the finish line, and per data compiled by Bloomberg, of the 460 S&P 500 companies that have reported thus far, roughly 68% have topped revenue forecasts and nearly 81% 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.

Consumer sentiment unexpectedly falls in November

The November preliminary University of Michigan Consumer Sentiment Index (chart) decreased to 66.8, versus the Bloomberg estimate calling for a modest rise to 72.5 from October's 71.7 reading. The index hit a ten-year low as both the current conditions and the expectations portions of the index deteriorated. The 1-year inflation forecast rose to 4.9% from October's 4.8% rate, matching forecasts, and the 5-10 year inflation forecast remained at the prior month's 2.9% level.

The University of Michigan said, "Consumer sentiment fell in early November to its lowest level in a decade due to an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation."

As labor shortage remains a drag on business sentiment, the Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, showed a retreat to 10.44 million jobs available to be filled in September, from August's upwardly-revised 10.63 million rate. However, the consensus estimate called for a 10.30 million level. The report showed the hiring rate remained at August's 4.4%, and separations rose to 4.2% from the prior month's 4.1% pace. The quit rate increased to 3.0% from August's 2.9% rate as a record 4.4 million quit their jobs, according to Bloomberg.

Treasuries dipped after the bond markets were closed yesterday for the Veterans Day holiday. The yield on the 2-year note was little changed at 0.51%, while the yield on the 10-year note ticked 2 basis point (bp) higher to 1.58%, and the 30-year bond rate rose 4 bps to 1.95%.

Treasury yields have been volatile and have moved higher in the wake of this week's hotter-than-expected October wholesale and consumer price inflation figures, with the latter registering the highest y/y pace in over 30 years. Also, the choppiness in the bond markets has come on the heels of last week's Fed's monetary policy decision, where it announced that it will begin to taper its monthly asset purchases by $15.0 billion per month. Schwab's Liz Ann Sonders provides a look at the Fed's decision in her 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.

European and Asia markets mixed amid inflation focus

European equities finished out the week mixed with the markets continuing to grapple with rising inflation pressures after this week's hotter-than-expected reads on U.S. and Chinese inflation reports. The higher inflation data, which coupled with the festering global supply chain challenges have fostered some of the recent market volatility, and uncertainty regarding the path of monetary policies. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Will Shortages Lead to Gluts?, noting how the global economy may be closer to the end of supply chain problems than the beginning. He points out how markets tend to look six to twelve months into the future, and they may soon begin to consider the possibility that some shortages may start to ease, and gluts may have started to form by the second half of next year. If that happens, we may see some easing of inflation pressures. In economic news, industrial production in the Eurozone dipped in September by a smaller amount than anticipated. The Energy sector saw some pressure as crude oil prices declined, and the Financials sector dipped with bond yields in the Eurozone and the U.K. mostly lower. The Health Care sector was the worst performer, likely weighed down by a drop in shares of AstraZeneca Plc. (AZN $59) after the company reported earnings that missed expectations. The euro was little changed versus the U.S. dollar, while the British pound gained modest ground.

The U.K. FTSE 100 Index was down 0.5%, and Spain's IBEX 35 Index declined 0.1%, while Germany's DAX Index ticked 0.1% higher, France's CAC-40 Index gained 0.5%, Italy's FTSE MIB Index rose 0.4%, and Switzerland's Swiss Market Index advanced 0.8%.

Stocks in Asia finished most higher to close out the week that has seen the markets volatile as they sift through a host of key global economic data, including persistently rising inflation pressures, headlined by surges in Chinese producer prices and U.S. consumer prices. Schwab's Jeffrey Kleintop 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. The markets also digested yesterday's results from China's "Singles' Day," on online sales event that came in stronger than the performance posted in 2020 and easily exceeded sales activity seen in the U.S. on Black Friday and Cyber Monday.

Japan's Nikkei 225 Index rose 1.1%, with the yen losing some ground during the session, China's Shanghai Composite Index moved 0.2% higher, and the Hong Kong Hang Seng Index traded 0.3% to the upside. Moreover, Australia's S&P/ASX 200 Index gained 0.8%, South Korea's Kospi Index jumped 1.5%, and India's S&P BSE Sensex 30 Index advanced 1.3%.

Stocks post weekly decline, snapping string of record highs

U.S. stocks finished lower on the week, after racking up a string of record highs as of late. As a strong Q3 earnings season headed toward the finish line, investors appeared to take the opportunity to harvest some of the recent gains. The markets remained hyper-focused on inflation and the implications regarding the path of monetary policies, and October reports came in well above expectations, headlined by a more than 30-year high in consumer price inflation. Treasury yields moved higher across the yield curve with a noticeable rise on the short end, and the U.S. dollar also gained ground. Sector performance was mixed, with cyclically-natured Materials a standout winner for the week, while Consumer Discretionary saw noticeable pressure and Energy stocks slumped as crude oil prices were choppy as oil inventories continued to rise. Gold prices rose for the second-straight week following the inflation readings and as the markets wrestled with if the Fed may have to expedite its plan to taper asset purchases and then begin to lift interest rates.

Next week, along with the major retailers putting the finishing touches on Q3 earnings season, the economic calendar will be headlined by the October retail salesreport, which is projected to continue to show solid growth. Housing data will also be in focus, courtesy of the releases of the NAHB Housing Market Index, along with housing starts and building permits. Some timely reads on regional manufacturing activitywill hit the tape, with November reads out of New York and Philadelphia. Other releases that could garner some attention include, the Fed's industrial production and capacity utilization report, the Leading Economic Index, initial jobless claims for the week ended November 13, and business inventories. Given the inflation outlook and the ensuing Fed uncertainty, next week's roster of speeches from Fed officials could also compete for market attention.

International economic reports due out next week that could move the markets include: China—retail sales and industrial production. India—wholesale price inflation and trade balance. Japan—Q3 GDP, trade balance, core machine orders, and consumer price inflation figures. Eurozone—Q3 GDP, trade balance, and final consumer price inflation data. U.K.—inflation statistics, employment change, retail sales, and consumer confidence.

Schwab's Liz Ann Sonders provides her commentary, The Beast of Burden of Inflation, discussing how the age of abundance has given way to an age of scarcity, while the pro-cyclical version of inflation may have given way to the counter-cyclical version.

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