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Posted: 9/21/2018 4:15 PM EDT

Stocks End Solid Week Mixed

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U.S. equities finished out the week mixed, with the Dow and S&P 500 again at or near record highs, and the Nasdaq seeing pressure amid renewed scrutiny toward tech stocks. Trade concerns continued to cool to add to the buoyancy, but investors may be looking ahead to changes to the Global Industry Classification Standard's sectors coming. Treasury yields were mixed and the U.S. dollar rebounded from a recent bout of weakness, as reports from Markit on business activity diverged. Meanwhile, crude oil prices were mixed and gold was lower.

The Dow Jones Industrial Average (DJIA) rose 87 points (0.3%) higher to 26,744, the S&P 500 Index was up nearly 2 points (0.1%) to 2,930, and the Nasdaq Composite lost 41 points (0.5%) to 7,987. In heavy volume, as a result of quadruple witching—the simultaneous expiration of stock and index futures and options contracts—2.6 billion shares were traded on the NYSE and 3.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.46 to $70.78 per barrel and wholesale gasoline was unchanged at $2.00 per gallon. Elsewhere, the Bloomberg gold spot price fell $8.20 to $1,998.98 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 94.21. Markets were mixed for the week, as the DJIA rallied 2.3%, the S&P 500 Index rose 0.8%, while the Nasdaq Composite declined 0.3%.

Micron Technology Inc. (MU $45) reported fiscal Q4 earnings-per-share (EPS) of $3.56, or $3.53 ex-items, versus the $3.33 FactSet estimate, as revenues rose 38.0% year-over-year (y/y) to $8.4 billion, north of the projected $8.3 billion. However, the chipmaker's Q1 EPS, revenue and gross margin guidance came in a bit shy of expectations, with the company noting that its margins will be impacted in the near-term by the increased tariffs on Chinese goods. Shares were lower.

Adobe Systems Incorporated (ADBE $261) announced an agreement to acquire Marketo, a cloud platform for B2B marketing engagement, for $4.75 billion. Shares lost ground.

Dow member McDonald's Corporation (MCD $164) announced that it will raise its quarterly cash dividend by 15.0% to $1.16 per share. The company also increased its cash return to shareholder target for the 3-year period ending 2019 to about $25.0 billion. Shares gained ground.

September business activity reports mixed

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output accelerated more than expected, rising to 55.6 in September from August's 54.7 figure, and compared to the Bloomberg estimate calling for a slight rise to 55.0. However, the preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector unexpectedly slowed, decreasing to 52.9 from August's 54.8 figure, versus expectations to nudge higher to 55.0. Readings above 50 for both indexes denote expansion.

Treasuries were mixed, as the yield on the 2-year note rose 1 basis point (bp) to 2.81%, while the yields on the 10-year note and the 30-year bond moved 1 bp lower to 3.06% and 3.20%, respectively.

Treasury yields extended a recent run that has been bolstered by the backdrop of continued solid economic data, which has kept expectations of a Fed rate hike next week almost a certainty, while the U.S. dollar has recovered from a drop as of late that has come courtesy of trade concerns being held in check. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article,Waiting (Was) the Hardest Part, But Wage Growth is Finally Kicking In, the pace of job gains, coupled with a multi-decade low in unemployment claims, are more than sufficient to keep the unemployment rate trending down—which also means wage pressures should intensify. Liz Ann also offers her latest video, A Closer Look at U.S. Tariffs, providing analysis of what’s been happening with trade and tariffs and two things that she thinks are not getting the attention that they deserve.

Europe and Asia higher following record highs in the U.S.

European equities finished mostly higher to close out a solid weekly gain, as U.S. markets continued to rally to fresh record highs and following a solid advance in Asia. The lack of an escalation in trade concerns between the U.S. and China appeared to continue to buoy conviction, while materials issues led the advance. The euro dipped versus the U.S. dollar, while the British pound fell sharply amid festering Brexit uncertainty. The Brexit uneasiness remained as U.K. Prime Minister Theresa May said that talks regarding the region's exit from the European Union (EU) are at an impasse after EU leaders rejected her plan yesterday at a summit in Austria this week. May reiterated that no deal is better than a bad deal and that the U.K. must and will continue to prepare for a no-deal outcome. Bond yields in the region finished mostly lower, while Markit's read on Eurozone business activity in the manufacturing and services sectors showed growth was a bit smaller than expected for September. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the global landscape in his articles, Where Will The Next Crisis Come From? and U.S. Bonds Have an Important Message for International stocks.

Stocks in Asia finished mostly higher on the heels of yesterday's move back to record highs in the U.S. that has come courtesy of the lack of an escalation in trade tensions after China and the U.S. exchanged more tariffs with rates that were below what had been initially feared. Japanese equities gained ground, extending a recent run with the yen losing some ground following an in line increase in the nation's core consumer price inflation, while a separate report showed the nation's manufacturing growth accelerated this month. Mainland Chinese stocks and those traded in Hong Kong rallied amid the tempered trade concerns, and as the government announced measures to try to boost consumption. Markets in South Korea and Australia moved higher as well, but Indian listings dropped in their return to action following yesterday's holiday amid continued skittishness, despite the recent fall in the U.S. dollar. Recent pressure on India's currency and lingering uneasiness toward the emerging markets were met with flared-up worries toward the nation's financial sector. Schwab's Jeffrey Kleintop, CFA, offers his latest article, Emerging Market Stocks: What We Are Watching, in which he discusses the signs we will be closely monitoring to see if the drop this year is typical volatility or something leading to a deeper and more prolonged downturn.

Dow and S&P 500 post strong weekly gain back to fresh record highs

The Dow and S&P 500 rallied on the week, posting fresh record highs, despite an escalation in trade tensions between China and the U.S. as they traded more tariffs. However, the markets appeared to react positively as both tariff rates were less than originally feared. Materials and industrials registered solid gains on the relative trade optimism, and the U.S. dollar fell to continue a recent soft patch to help the technology sector nudge higher despite lingering scrutiny of the sector. Financials led to the upside as Treasury yields rallied, with the 10-year note rate breaching the 3.00% mark. Energy issues were also noticeably higher as crude oil prices rallied for a second-straight week in the wake of hurricane Florence's landfall in the east coast, the greenback's weakness, another drop in crude oil inventories and Iranian sanctions. Housing data dominated the economic calendar, with homebuilder sentiment and housing starts topping forecasts, and existing home sales stemming a monthly losing streak, while building permits surprisingly fell. Other reports showed economic output remained solid, as Leading Indicators continued to rise and regional manufacturing activity remained solidly in expansion territory.

The solid economic foundation has the probability of a Fed rate hike next week near 100%, but the accompanying statement and economic projections, as well as the subsequent press conference from Chairman Jerome Powell, are likely to face intense scrutiny. The markets are a bit less certain of a December rate increase, as cooler-than-expected August inflation data has countered signs that wage growth is picking up, while an escalation in global trade tensions may curb the Fed's appetite and/or need to aggressively tighten policy.

As noted in the latest Schwab Market Perspective: Healthy Skepticism?, the likelihood of a December rate increase could ebb and flow depending on incoming economic data between now and then. We are only now getting to a positive real rate on the short end of the curve, so it’s appropriate to continue to cheer still-fairly loose financial conditions; but with the tightness in the labor market and the Fed also shrinking its balance sheet, inflation could pick up further from here, causing some volatility to return to the markets. Although the Fed is poised to garner the most attention next week, other economic reports due that could be market catalysts include: Consumer Confidence, new home sales, preliminary durable goods orders, the final revision of Q2 GDP, personal income and spending, and the final University of Michigan Consumer Sentiment Index.

International reports due out next week that deserve a mention include: China—industrial profits and the Caixin PMI Manufacturing Index. Japan—retail sales and industrial production. Eurozone—economic confidence and consumer price inflation estimates, as well as German business confidence and unemployment change. U.K.—final Q2 GDP and consumer confidence.

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