Regional Bank Earnings, Volatility in Spotlight

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 Friday, October 17th. Wall Street remains on tender hooks, with volatility elevated and new anxiety surfacing almost daily. Earlier this week, concerns about trade with China dominated. then on Thursday, sudden worries about credit issues after the recent bankruptcies of two auto industry firms dragged major indexes down from early gains. The KBW-NASDAQ regional banking index fell more than 3 % Thursday, and focus now turns to small banks reporting this morning, including Ally Financial, Fifth Third Bank Corp., Truist, Comerica, and Regions Financial.

1:03Executives will likely face questions about loans on the books as well as the general credit environment. Even some of the largest banks discussed a rise in net charge-offs or loans banks made that they think they won't collect on. For JPMorgan Chase, these amounted to$2.6 billion in the third quarter, up from$2.1 billion a year ago. The auto industry bankruptcies became a topic in JPMorgan Chase CEO Jamie Dimon's post-earnings comments to analysts earlier this week, as he said, quote, when you see one cockroach, there's probably more, end quote. Though some of the large U.S. banks that reported solid results had exposure to the bankrupt auto loans and parts firms, they also have huge Wall Street trading and investment banking businesses that make them less vulnerable to a few loans going bad.

1:56That isn't necessarily the case for smaller regional banks. Less than three years ago, the S &P 500 index suffered a major blow when several regional banks went under, and the market has a long memory. There have been some headline-grabbing defaults lately, which begs the question whether these are one-off issues or potential canaries in the coal mine, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research. The headline defaults don't surprise us much since the default rate has been elevated for almost two years now, yet the credit markets have mostly shrugged off those risks.

2:34Spreads have risen a little lately but are still low by historical standards. Low spreads don't offer much compensation if these default headlines continue and are a key reason why fixed-income investors might want to consider investment-grade bonds, Martin added. Lack of official data during the government shutdown could be a factor in Wall Street's recent sensitivity, though credit issues aren't anything to toy with. Lacking the usual flow of economic numbers, investors might be more focused than usual on what they can glean from earnings and private data. With the government shutdown now in its third week as of this recording, reports missed yesterday included producer prices, retail sales, and weekly jobless claims.

3:20It's unclear when that data might become available, and the shutdown now includes the period when the government collects data for the October jobs report to due early next month. That raises questions about when that report can come out, even as investors have no information on September job growth.

3:41In Data Thursday, the Philadelphia Fed Index fell to negative 12.8 from the prior reading of positive 23.2. Analysts had expected positive 9.1, according to Briefing.com. Manufacturing activity in the region was mixed in early October, the report said, with shipments declining but new orders up. Treasure yields slipped after the news. Meanwhile, Federal Reserve Governor Christopher Waller spoke Thursday and expressed support for rate cut. On the brighter side, the NEAHB Wells Fargo Housing Market Index rose to 37 in October, a six-month high that might indicate improved homebuilder sentiment. However, 37 still isn't historically a very strong reading, with 50 representing the dividing line between optimism and less optimism.

4:33The credit picture and relatively weak data ganged up on Treasury yields yesterday as the benchmark 10-year yield closed below 4 % for the first time since early April after Tariff Liberation Day. The two-year yield fell 7 basis points to 3.43%, a three-year low. Crude oil posted its lowest settlement since early May, below$58 per barrel, and the market generally displayed a risk-off mentality that seemed to gather steam into Thursday's close. Investors still expect a rate cut at the Fed's October 28th and 29th meeting and another one in December, according to the CME FedWatch tool. Futures trading builds in 100 % chances of at least a 25 basis point cut this month and 3 % chances of a 50 basis point cut.

5:22While the market expects another rate cut in December, that seems less certain based on stubborn inflation. After a flurry of Fed speeches earlier this week, none are on the central bank's official calendar today. That could come as a relief considering all the volatility, and policymakers enter their pre-meeting quiet period next week. In comments yesterday, Waller said business investment is concentrated in AI, not widespread. He thinks the Fed can cut rates by 25 basis points and then see what happens, and added that a strong growing economy and zero jobs growth aren't two things that go together.

6:04Healthy earnings initially lifted stocks Thursday as Wall Street focused on strong results from Taiwan semiconductor manufacturing that propelled gains for chip firms. Earnings from TSM and chip equipment maker ASML earlier this week raised hopes that AI momentum continues and semiconductors were one region of Wall Street that managed to avoid some of Thursday's selling. Checking the technical picture, the S &P 500's 50-day moving average near 6 ,550, a level that roughly matches last Friday's low, remains critical as support. It wasn't seriously tested even in Thursday's heavy selling. The SIBO Volatility Index, or VIX, jumped more than 22 % yesterday to the highest level since May at above 25 amid the credit worries.

6:54The VIX hasn't really settled down since last Friday's quick elevator ride higher. Rallies that occur in times of elevated VIX sometimes have a show-me aspect, meaning they contain an element of doubt until perceived uncertainty dies down. That's showing up this week as early session rallies in the S &P 500 index haven't lasted. Checking VIX futures, investors don't expect any near-term calm, as VIX values for the rest of the year are mostly in the 22 range, now actually below the spot price after a long period of contango when futures were more expensive than spot VIX. In individual stock action on Thursday, Taiwan Semiconductor Manufacturing initially gained but then ended up falling 1.6 percent, despite the company topping earnings expectations with a 39 percent rise in profits.

7:50Revenue also surpassed estimates. The chip manufacturer raised its revenue forecast and expects sales growth in the mid-30 percent range annually. Nvidia managed a 1 % rise Thursday but remains near the bottom of its recent range. Shares are near an upward trend line on the charts at$180 that goes back to early September and has provided technical support on every test. Nvidia is off sharply from record highs amid concerns about competition, including advanced microdevices, which has been on a roll lately. Salesforce jumped 4 % Thursday, lifted by its forecast for more than$60 billion in revenue in 2030.

8:33Growth is re-accelerating, the company said at its annual conference, CNBC reported. It expects a year-over-year growth rate of more than 10 % between 2026 and 2030. Hewlett-Packard Enterprise sagged more than 10 % yesterday, hit by below-consensus guidance the company delivered at its analyst meeting. Hewlett Packard Enterprise said its growth rates are adjusted for its recent acquisition of Juniper Networks, Barron's reported. Zion's Bancorp took the hardest blow from the flare-up in credit concerns Thursday, falling 13 percent, despite earnings that beat expectations. The company is taking a$50 million charge-off due to activity by two commercial and industrial borrowers, Barron's reported.

9:20Western Alliance Bancorp fell 10 percent, also on concerns about its loan book, Barron said. Sector-wise, Infotech was alone in the green Thursday, followed by defensive health care and real estate. It was little surprise that financials finished dead last with even some of the major bank shares losing ground. The Dow Jones Industrial Average pulled back 301.07 points Thursday, or 0.65%, to 45 ,952.24. The S &P 500 index dropped 41.99 points or 0.63 % to 6 ,629.07, and the NASDAQ composite gave back 107.54 points or 0.47 % to 22 ,562.54. This has been the Schwab Market Update podcast. To stay informed, visit www.schwab.com slash market update or follow us for free in your favorite podcasting app.

10:29And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. I'll be back with another update Monday.

10:43For important disclosures, see the show notes and schwab.com slash market update podcast.