U.S. stocks surged Friday, led by a rebound in the financial and energy sectors. But it was also the last day of the third quarter for 2016. On the last day of the calendar quarter, something called "window dressing" occurs, meaning funds buy the top-performing equities and sell the worst performing in an effort improve the appearance of a fund's performance. On average, this leads to market strength.
Just Thursday, Deutsche Bank saw its worst day in five years after a number of hedge funds pulled out collateral because the bank faces a $14 billion demand from U.S. authorities for its mortgage-backed securities sales practices. Renewed "too big to fail" concerns about the European banks were the catalyst to send the Dow Jones industrial average lower by nearly 200 points before recovering as the financials rebounded.
Shares of Deutsche Bank surged nearly 15 percent Friday after French news agency AFP reported that the bank was nearing a settlement with the U.S. Department of Justice regarding mortgage bonds. The amount of the settlement was reported to be $5.4 billion, which is significantly less than the headline number.
Tech sector shines
Out of the 11 S&P 500 sectors, technology was the clear winner in the third quarter, up 12 percent. As a result, the tech-heavy Nasdaq Composite Index gained 9 percent, its best quarter since 2013. Within the sector, semiconductors drove the strength with a gain of 22 percent due to consolidation speculation. Nasdaq's outperformance was also driven by double-digit gains in the mega-cap Nasdaq stocks: Apple, Microsoft, Amazon and Facebook.
Traders now turn their attention to what will be a busy quarter for the markets with a national election just five weeks away, a potential interest rate hike, earnings and the key retail holiday selling season. Mike Castino, senior vice president of Exchange-Traded Products at U.S. Bancorp, said retail investors should go back to basics when potential volatility is on the horizon.
"Go back to the old standard and have three buckets," Castino said. "Have your short-term money to trade with. Intermediate-term investments for college expenses or a car. And, long-term money for retirement or very young children with college on the horizon — the money that you don't panic with as the market goes through cycles."
Trading week ahead
China markets will be closed for the week for the National Day holidays.
The all-important Employment Situation Report will be released Friday. The employment data give the most comprehensive report of how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers provide the best way to gauge the current state, as well as the future direction, of the economy. With policymakers assessing data to guide their rate decisions, the quality of the September employment report and revisions from August could affect the timing of an interest rate hike.
There are only two more Federal Open Market Committee meetings in 2016, in November and December, in which the Federal Reserve will deliver its decision to raise interest rates or keep them unchanged. Markets may also get some clues about the Fed's mood with eight speakers scheduled throughout the week.
Other key data include September Motor Vehicle Sales, ISM Manufacturing, International Trade, and Weekly Crude Oil and Natural Gas Inventories.
It is the last week before earnings season ramps up into high gear, but there are a few widely watched companies reporting quarterly results: Darden. Micron, Monsanto, Constellation Brands, Yum! Brands.
