Closing Market Update

The major equities indexes had their worst weeks since March as a hawkish-sounding Fed, high Treasury yields, and economic concerns weighed.

U.S. equities slipped Friday and were down for the week, as investors fretted over historically high Treasury yields, surging oil prices, and a Federal Reserve that looks unlikely to deliver relief from its aggressive interest rate policy anytime soon.

With little major economic news to end the week and the third-quarter earnings season still a couple weeks away, investors were left to chew over the outlook for the economy and inflation following the Fed's mid-week policy meeting, which ended with no change to benchmark rates but a warning that another hike could happen in the near future. The yield for the 10-year Treasury yield (TNX) eased slightly but remained near a 16-year high posted earlier this week.

Schwab Senior Investment Strategist Kevin Gordon says market fundamentals point toward a period of sluggishness.

The ratio of advancing stocks versus declining stocks is "looking weak and getting worse," Kevin says. Only 20% of S&P 500® Index (SPX) stocks are now trading above their respective 50-day moving averages, the lowest since March, he notes.

"The path of least resistance is down as long as market breadth continues to deteriorate," he adds.

Here is where the major benchmarks ended:

  • The S&P 500 Index was down 9.94 points (0.2%) at 4,320.06, down 2.9% for the week and the lowest since mid-June; the Dow Jones Industrial Average (DJIA) was down 106.58 points (0.3%) at 33,963.84, down 1.9% for the week; the Nasdaq Composite (COMP) was down 12.18 points (0.1%) at 13,211.81, down 3.6% for the week.
  • The 10-year Treasury note yield (TNX) was down about 4 basis points at 4.436%.
  • Cboe's Volatility Index (VIX) was down 0.34 at 17.20.

The past week was particularly rough for smaller companies and other parts of the market considered to have exposure to recession risks. The small-cap Russell 2000 Index (RUT) sank 3.4% this week and ended Friday at its lowest point since June 1. The Dow Jones Transportation Index (DJT) also reflected recession concerns, dropping over 2% for the week. The energy sector was down for the week despite crude oil futures holding near 10-month highs of more than $90 a barrel.

The U.S. Dollar Index (DXY) strengthened for the 10th consecutive week and on Friday touched its highest level since early March, reflecting expectations interest rates will remain at historical highs.

Read all our market commentary on our Insights & Education page, and you can follow us at @SchwabResearch.

Read all our market commentary on our Insights & Education page, and you can follow us at @SchwabResearch.

Stocks on the move

The following companies had stock price moves driven by quarterly earnings, analyst ratings, or other news:

  • Activision Blizzard (ATVI) rose 1.7% after reports suggesting Microsoft's (MSFT) restructured deal to acquire the video game publisher had resolved antitrust concerns raised by U.K. regulators. Microsoft was down 0.7%.
  • Deere (DE) fell 1.2% after Canaccord Genuity downgraded the farm and agricultural equipment maker's stock to "hold" from "buy," citing slower growth for sales of tractors and other agricultural equipment.
  • Costco Wholesale (COST) rose 0.6% after HSBC initiated coverage of the retailer with a "hold" rating and $600 price target, about 7% above current levels. HSBC said U.S. retail is a "vast market set for further growth."
  • Faraday Future Intelligent Electric (FFIE) shares jumped 6% after the electric vehicle start-up announced several executives had voluntarily agreed to reduce their salaries and stock compensation.
  • Ford (F) shares rose more than 2% after CNBC reported the automaker was making headway in negotiations with the United Auto Workers union as its strike continues. Other auto stocks were mixed, with Stellantis (STLA) up 0.4% and General Motors (GM) shares down slightly.
  • Scholastic (SCHL) shares tumbled more than 12% after the publishing and media company reported quarterly earnings and revenue that fell short of expectations.
  • Seagen (SGEN) shares rose 3.5% following reports the biotech company's bladder cancer treatment had succeeded in a clinical trial.
  • Snap. Inc. (SNAP) rose about 1.5% after Bloomberg reported the messaging service has gained more than 5 million subscribers for its subscription product Snapchat+.
  • Squarespace (SQSP) rose more than 4% after UBS initiated coverage of the stock with a "buy" rating, saying the company has a solid product suite and growing brand awareness.

The third-quarter earnings season will kick off around mid-October, but next week will feature results from a few major companies. Micron Technology (MU) is expected to report results Wednesday. Shares of the semiconductor maker have gained about 38% this year thanks to the hype surrounding artificial intelligence. Sports apparel giant Nike (NKE) is expected to report results for its fiscal 2024 first quarter on Thursday.

Fed outlook

The latest gathering of the Federal Open Market Committee (FOMC), the Fed's policy-setting arm, ended Wednesday, but the effects lingered as investors grappled with the likelihood that the central bank's "higher-for-longer" rate stance may indeed go on for a long time.

As expected, the Fed held its benchmark funds target at 5.25% to 5.50%, a 22-year high. But in a post-meeting press conference, Fed chair Jerome Powell noted that because inflation remains above the Fed's 2% long-term target, the central bank would be "prepared to raise rates further, if appropriate." Additionally, the Fed's updated "dot-plot" projection for the path of rates included one more hike this year and effectively removed two cuts from 2024, disappointing investors who'd been hoping for multiple cuts.

Collin Martin, a fixed income strategist at the Schwab Center for Financial Research, notes that Treasury yields had eased from the historical highs hit mid-week, when the 10-year yield rose to just under 4.50%.

Still, a steady decline in yields "seems unlikely given the Fed's 'higher-for-longer' policy," Collin says. "While yields should decline down the road, a tight labor market and resilient economy should keep most Treasury yields range-bound in the near-term. Yields could drift modestly higher, but upside is limited as we still believe the Fed is near its peak" with rates.

Despite the Fed's recent comments, the market appears confident the central bank will keep rates on hold beyond this month. Late Friday, investors were pricing in a 72% implied probability the Fed will hold rates at the current level following its next policy meeting, which ends November 1, based on the CME FedWatch Tool. That's little changed from a week ago.

Several economic numbers are due next week that could offer further clues to the path of the economy and inflation.

They include consumer confidence for September and new home sales for August on Tuesday, followed by the durable goods report for August on Wednesday. Thursday brings the final estimate for second-quarter Gross Domestic Product (GDP), which last month was reduced to 2.1% from 2.4%.

Of particular interest is next Friday's Personal Consumption Expenditure (PCE) prices, the inflation metric watched most closely by the Fed. The PCE, like other inflation gauges, has showed receding price pressures for much of the year. In July, the overall PCE was up 3.3% from the same month in 2022. The closely followed core rate, which excludes volatile food and energy prices, was up 4.2% year-over-year.