Market Awaits Netflix, Lockheed amid Data Outage

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. I'm Keith Lansford, and here is Schwab's early look at the markets for Tuesday, October 21st. In a week peppered with earnings, investors survey a host of reports from iconic names like Coca-Cola and Lockheed Martin this morning, followed by streaming leader Netflix after the close. The data gap continues, however, as the government shutdown remained in place as of this recording, despite some chatter about a possible resolution. In addition, investors eye the latest word on trade with China after President Trump threatened even higher tariffs Monday.

0:53Major defense firms highlight this morning's earnings calendar, but consumer-focused companies like Philip Morris and General Motors also loom. GM's results come after media reports that the average U.S. new car price climbed above$50 ,000 for the first time. While that may not be an issue for the affluent, it reinforces growing ideas that economic growth has become K-shaped, with the top 10 % of earners driving most of the gains, while less wealthy consumers pull back even on fast food purchases. Netflix is a possible barometer of consumer sentiment both in the U.S. and abroad. The streaming giant stopped reporting subscribership recently, so investors should consider watching what the company says about engagement and how long customers spend with its shows and other products.

1:43One concern possibly dragging shares is the possible threat from AI-generated content, which could conceivably challenge Netflix without the huge production budgets Netflix pays. Zions Bank Corporation, one of two banks which saw shares tumble last week on credit concerns, reported Monday and beat analysts' earnings forecasts, with Western Alliance Bank Corporation on tap this afternoon. Worries about the loan market eased early this week after several strong reports from other small regional banks, though volatility hasn't pulled back too much. Earnings from Zions, Western Alliance, and other several smaller banks this week could provide stability in the financial sector and across the market, assuming no further unpleasant surprises.

2:29It doesn't appear as if there's any contagion in the credit markets at this point, and unlike the situation in early 2023 when U.S. small bank struggles pulled down the overall market, there's no major sign yet of deposit flight out of the U.S. bank system, said Kevin Gordon, senior investment strategist at Schwab. The truth is that defaults have been rising for quite a while. They've just been in the form of distressed exchanges rather than Chapter 7 filings, so it hasn't been as visible to the markets, said Kathy Jones, Chief Fixed Income Strategist at Schwab. Much of the problem is in private credit markets, so it hasn't had a big impact on the publicly traded markets.

3:10The high yield spread over treasuries has begun to move up, but it still remains historically low. We expect it to widen further, and we have been cautious on high yield due to valuations for quite some time, so we remain cautious. Spreads can widen quite a bit from current levels. The SIBO Volatility Index, or VIX, which spun all the way to six-month highs near 29 last week, calmed to start the new week and fell below 19. That's still above the 14-16 level, where it was before the China tariff-related October 10th sell-off, but there's a chance it could return to those levels relatively quickly in coming days.

3:55While the S &P 500 index now sits just below its all-time high, the spread between realized and implied volatility, derived from the VIX indicator and options data respectively, is the widest in some time. How it evolves could offer clues to shifting investor sentiment and near-term market direction. Investors still expect a rate cut at the Fed's meeting next week and another in December, according to the CME FedWatch tool. Futures trading builds in 99 % chances of at least a 25 basis point cut on October 29th and similar chances of a follow-up cut in December. The shutdown makes the Fed's job difficult because policymakers won't get the normal flow of data.

4:39Instead, central bankers will likely rely on private data, regional Fed surveys, and other information. However, this Friday brings the September Consumer Price Index, University of Michigan Consumer Sentiment, and Flash S &P Global PMI readings. Speaking of which, early expectations for CPI look relatively firm, which might affect the futures market and how prices of possible December rate trim. As of early this week, analysts expect 0.4 % growth in headline CPI and 0.3 % in core CPI, equal to the growth in August for both measures. Core excludes volatile food and energy prices. Year-over-year core CPI growth is expected to climb 3.1%, well above the Fed's 2 % inflation target.

5:26In some ways, this reflects what analysts also expect to be decent gross domestic product growth for the third quarter. The government's first GDP estimate is expected next week, though it's up to Congress whether that happens. The latest Atlanta Fed GDP Now estimate for third quarter GDP was 3.9%, well above the average analyst estimate near 2.5%. Despite the expected growth and possible inflation, U.S. Treasury yields started the week where they left off last week, falling toward lows last seen during the Liberation Day stock sell-off of last April. The benchmark 10-year note yield fell two basis points Monday to 3.99%.

6:09Yields remain in a narrow range, but the trend is lower in anticipation of further Fed easing, Schwab's Jones said. Markets are pricing in two rate cuts by year-end based on comments from Fed Chair Powell. However, the scope for rate cuts is going to narrow if the inflation outlook doesn't improve soon. Though U.S. data was a no-show last week, a host of data from China over the weekend included third-quarter GDP, which rose 4.8 percent. That was the lowest in a year, and down from 5.2 percent in the second quarter, but in line with analysts' estimates. Trade was stronger than analysts had expected, and Beijing stuck with its estimate of 5 percent GDP growth for the full year.

6:55China is a huge trading partner for the U.S., and its economic growth can have implications here in the U.S. President Trump said he plans to visit China early next year. On Monday, major indexes charged out of the gate with 1 % gains. Strength in mega caps, especially Apple, meta platforms, and Tesla helped pave the way, even though NVIDIA lost ground. Hopes for improved trade relations after conciliatory language from the administration late last week helped the market, as did some murmurs that a solution to the shutdown might be approaching. Trump's latest threat of 157 % tariffs against China didn't seem to outweigh his recent more conciliatory tone.

7:39In sectors, communication services led the way, followed by industrials, materials, and financials. Infotech was fifth on the sector scorecard, despite solid gains from most of the names investors have grown familiar with this year, including Super Microcomputer, Palantir, and the PHLX Semiconductor Index. Banks were also strong after last week's hiccup, but some tech stocks went the other way, including Applovin and Oracle. In individual stock action Monday, Apple climbed almost 4 % to a new all-time high after getting an upgrade to buy from hold by Loop Capital. The firm's supply chain checks indicate iPhone shipments will expand through 2027 amid refresh and design cycles, the analyst said.

8:26Data from CounterPoint Research says the iPhone 17 outsold the iPhone 16 by 14 % over its first 10 days of availability in the U.S. in China, Briefing.com noted. Cleveland cliffs soared more than 21 percent after reporting earnings that beat estimates. The steelmaker said it sees clear signs of demand recovery for automotive-grade steel in the U.S. The company's earnings have been boosted by higher tariffs on imported steel, which has raised domestic prices. The Dow Jones Industrial Average climbed 515.97 points Monday, or 1.12%, to 46 ,706.58. The S &P 500 Index leaped 71.12 points, or 1.07%, to 6 ,735.13.

9:19and the Nasdaq Composite added 310.57 points, or 1.37%, to 22 ,990.54. This has been the Schwab Market Update Podcast. To stay informed, visit www.schwab.com slash marketupdate or follow us for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. Join us for another update tomorrow.

9:58For important disclosures, see the show notes and schwab.com slash market update podcast.