The broad market indexes sold off strongly from the beginning of the session as investors and fund managers continued yesterday's action. Selling may have been spurred on by the report released by payroll processing company Automatic Data Processing, Inc. (ADP).
This report, which attempts to give a preview of the government's nonfarm payroll report, calculates the estimated change in the number of employed people. The report missed its estimate by a small amount, but if that news wasn't bad enough, crude oil inventories came in much higher than estimated, sending energy stocks lower still and suggesting that the downward move in stocks may be driven by fears of decreased consumer demand. Whether or not that is the case, the selling appears to be much more than a mere sector rotation.
Investors may have also been soured after news that sent the financial sector lower yesterday. Discount broker The Charles Schwab Corporation (SCHW) announced that it would lower commissions to zero in response to competition from firms such as Betterment and Robinhood, which offer app-driven broker services with no commissions.
Investors Rethink Schwab's Valuation
When San-Francisco based Charles Schwab announced that it would offer trades with zero-dollar base commission cost, investors responded quickly to reevaluate the share price for the company. Investors have likely established a valuation for the company based on the assumption that one of the company's main revenue sources is the commissions earned from self-directed traders. It;s not a surprise that removing that particular revenue source would naturally have a big impact on these investors' perceptions about what the company is worth.
The company appeared prepared for that perception change because it attempted to blunt its impact. In Schwab's announcement, it gave a number to help investors understand that the impact of this move may not be as drastic as it seems. The company spelled out that this move would create a loss of revenue (in this area) of about $100 million dollars per year. Perhaps the company figured that this paltry sum was unimportant. (After all, what's nine figures between friends, right?) Perhaps Schwab figured that, if it simply explained this well enough, investors would warm to the idea since, after all, it could mean many new customers driving revenue in other ways. Not a chance.
The market seemed to respond to the number with an unimpressed reaction, as if to say, "Uh, more like $5 billion." Investors sold Schwab's stock price down by more than five dollars per share (about 12%) in two days of trading, reducing the company's market capitalization by 50 years worth of lost commissions. Either the market is overreacting or there is possibly more negative news yet to come from the company, not to mention the sector at large.
Schwab's Volley Kicks off Broker's Price War
The price action for shares of Charles Schwab was drastic indeed, but the influence of the announcement had a broader reach than the company's own shares. Shares of its competitors, TD Ameritrade Holding Corporation (AMTD), E*TRADE Financial Corporation (ETFC), Interactive Brokers, Inc. (IBKR), and others took a similar hit to share prices. The chart below shows that high-service brokers such as Raymond James Financial, Inc. (RJF), or Waddell & Reed Financial, Inc. (WDR) fared better than others.
The Bottom Line
U.S. stock indexes fell for the second day in a row, showing that investors are clearly more than a little worried about the future return on stocks. Some investors are hedging their portfolios with gold or bonds. One of the bigger impacts in the market may have come from Schwab's announcement that ended the race to zero in discount broker commissions.
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