After an AI Sell-Off, Market Awaits Sentiment News

0:05Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

0:18I'm Colette O 'Claire, and here is Schwab's early look at the markets for Friday, November 7th. The worst week on Wall Street in more than a month wraps up today with more data that could guide the Federal Reserve. The University of Michigan's preliminary November consumer sentiment arrives at 10 a.m. Eastern Time after a spike in layoffs and concerns about AI valuations brought pressure. The Nasdaq 100, which tracks the largest infotech firms, suffered its third heavy sell-off in the last month on Thursday. The speculative and momentum sentiment that helped lift many tech shares, including some with no profits, appears to be fading a bit, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

1:04Consensus is 54.0 for headline sentiment, up slightly from 53.6 in October, but still near historic lows, according to Briefing.com. The report also tracks inflation expectations, and the long-run price outlook climbed in the final reading last month to 3.9 percent from 3.7 percent. The Federal Reserve watches the longer-term number with an eye on keeping inflation fear in check. Though the government is closed as of this recording and most official data are now six weeks out of date, a few private reports, along with company earnings, paint a mixed picture of U.S. economic health. After October's ADP employment data topped expectations Wednesday, a monthly layoffs report from outplacement firm Challenger Gray and Christmas painted a grim picture of the jobs market Thursday.

1:56Challenger reported 153 ,000 layoffs in October due to cost-cutting in AI, hiring slow to a 14-year low. This is now the worst year for layoffs since 2020, when the labor market was decimated by COVID-19. Challenger job cut announcements jumped by 99 ,000 in October, and the year-to-date total now exceeds one million, said Kevin Gordon, head of macro research and strategy at the Schwab Center for Financial Research. Tech and warehousing sectors led the increase. In another private report Thursday, workforce analytics firm Reveglio Labs reported a decline of 9 ,000 in October payrolls. With the government temporarily out of the data collection business, these private reports are getting more attention, but none likely captures all the metrics tracked by Washington.

2:46The ADP employment report on Wednesday showed better-than-expected October jobs growth at private employers. Sentiment is a small report, and it's unclear how much it will reflect this week's news. The market's recent struggles might be evidence of the shutdown's pressure on the economy, with workers going unpaid, along with uncertainty due to lack of data. The shutdown also hurts companies, which face longer waits for government permits or other regulatory needs. Ultimately, it could hurt the Wall Street banks if it slows demand for initial public offerings, and airlines have to cut back flights by 10 percent due to an order by the Federal Aviation Administration with air traffic controllers going unpaid.

3:27Yields gave back Wednesday's gains Thursday after the layoff report. The 10-year Treasury note yield had rallied to a one-month high above 4.15 percent on signs of U.S. economic resilience, but the heavy layoff suggested soft spots and the yield fell a hefty six basis points to 4.09 percent. The dollar also weakened on the job cut news, though it's not far from recent peaks. Expectations for a December Federal Reserve rate cut rose to nearly 69 percent by late Thursday, according to the CME FedWatch tool, from 62 percent earlier this week. However, Chicago Fed President Austin Goolsbee said Thursday he's uneasy about cutting rates given the data darkness.

4:11He echoed Fed Chairman Jerome Powell's recent observation about needing to slow down when driving in the fog. The Fed cut rates by 25 basis points two meetings in a row. Its next decision comes on December 10th. Well-known Fed dove Governor Stephen Myron speaks at 3 p.m. Eastern Time today. Several treasury auctions next week could give investors a sense of demand for U.S. debt at this uncertain moment. Poor auction results might send yields higher, raising concern about borrowing costs for companies, consumers, and the government. Stay tuned later today for the latest earnings update. Last week, FACSET pegged third-quarter S &P 500 earnings growth at nearly 11 percent, but also noted that the S &P 500 index traded at a three-year high in terms of forward price-to-earnings, or P.E., at 23 to 1.

5:08Earnings next week are sparse, but the company's reporting include heavy hitters like Applied Materials, Cisco, CoreWeave, and Walt Disney. Applied Materials is a semiconductor equipment and services provider, giving insight into demand across that important sector. Constellation Energy, a big beneficiary of AI spending on power, reports this morning. The other thing to watch today, over the weekend and early next week, is for any progress on resolving the shutdown. There is no question that pressure is increasing on senators to find a resolution to the shutdown, which is now the longest in history, said Michael Townsend, Managing Director for Legal and Government Affairs at Schwab.

5:52While the administration has found workarounds to pay military personnel, it's not clear how much longer that can continue. Perhaps the biggest pressure point of all is increasing delays at airports, where air traffic controllers and TSA agents have been staging sick-outs as a protest against being forced to work without pay. That's led to flight delays and huge security lines. With the Thanksgiving holiday travel period now less than three weeks away, public frustration is putting pressure on both sides to find a resolution, Townsend added. Bipartisan discussions in the Senate about finding compromise picked up steam this week, but haven't involved senior party leaders or the president.

6:36A quick resolution is far from a slam dunk, but there's a growing sense on both sides of the aisle that the shutdown has become unsustainable, Townsend said. Major indexes rolled back Thursday after Wednesday's gains and are well off their weekly highs. The speculative and momentum sentiment that helped push many tech shares, including some with no profits, appear to be fading a bit. This could cause some pain for investors in those names, but might also ultimately mean more money flowing into quality AI stocks and the mega-cap tech names instead. The market clawed back early Thursday afternoon from early lows, but dip buying didn't emerge in any significant way and indexes slid the final hour to close well off their highs.

7:25Whether it's this week's lopsided underperformance in tech overall, Bitcoin's recent downside breach of the$100 ,000 level, or the Russell 2000's move below its 50-day simple moving average for the first time in three months, there's evidence of deleveraging in the speculative and momentum space, Schwab's Peterson said. This could have some negative repercussions for stocks, or it could result in rotation as money flows into higher-quality tech stocks or those sectors with more attractive valuations. From a technical perspective, Thursday was a disappointing day for bulls as the S &P 500 index closed below its 20-day moving average, now at 6 ,748, for the first time since October 17.

8:13The 20-day line has been a significant source of support for the index over the last six months, though mid-October featured a six-day stretch of closes below that level. Sector-wise, money flowed into defensive areas like health care, energy, and consumer staples yesterday as risk sentiment remained weak. The three sectors most exposed to the Magnificent Seven and Semiconductors, Communication Services, Infotech, and Consumer Discretionary, rounded out the very bottom of sector performance list. Only two of 11 S &P 500 sectors ended higher. Checking individual stock performance Thursday, shares of rideshare company Lyft rose more than 5 % on strong earnings in a quarter that saw gross bookings climb 16%.

9:05CarMax tumbled more than 24 % after the company announced the surprise departure of its CEO effective December 1. Investors also frowned on the company's financial outlook. Duolingo dropped 25 % Thursday as the language learning platform company shared soft guidance. Crypto-related shares tumbled as risk-off sentiment pushed Bitcoin futures down 3 % Thursday. DoorDash fell 17 % Thursday as investors eyed the company's spending plans. Qualcomm dropped 3.6 % yesterday despite easily beating analysts' earnings and revenue expectations and provided guidance that exceeded the fact-set consensus. Qualcomm reported double digit growth in major product areas.

9:53Tesla fell 3.5 % as investors awaited news from the company's shareholder meeting on a proposed$1 trillion pay package for CEO Elon Musk. Advanced micro devices fell 7 % as selling accelerated in chip stocks, apparently as investors grew nervous about valuations. The Dow Jones Industrial Average fell 398.70 points Thursday, or 0.84%, to 46 ,912.30. The S &P 500 Index dropped 75.97 points, or 1.12%, to 6 ,720.32. And the Nasdaq Composite gave back 445.80 points, or 1.90%, to 23 ,053.99. This has been the Schwab Market Update Podcast. To stay informed, visit schwab.com slash market update or follow for free in your favorite podcasting app.

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