WASHINGTON – As I’ve noted before, September can be the cruelest month on Wall Street. But Tuesday, October 1, feels even crueler. After a positive opening, stocks quickly tanked, likely on two news bits Mr Market didn’t like at all. First, the widely followed Institute for Supply Management’s ISM index dropped below 50, a negative indicator. Even scarier for the investment banking industry, discount brokerage Charles Schwab Corp. (trading symbol: SCHW) announced it would eliminate most sales commissions for online stock trades on October 7.
That double-whammy proved too much for this fall’s tentative market, already wobbly from the Democrats’ latest Impeachment Follies on the Hill. As of 2:20 p.m. ET, the Dow is off approximately 324 points. The broader-based S&P 500 is down 34.50 points. And the tech-heavy NASDAQ, which spent most of September in correction mode, is off an unpleasant 85.25 points. All three averages are currently off over 1 percent on the day thus far.
ISM Index drops below the danger point
Want more specifics? Let’s first check in with Fox Business for additional details on that ISM index drop.
“U.S. stocks tumbled across the board, as selling accelerated into the afternoon, following a weaker than expected report on U.S. construction spending which was little changed in August and an even weaker report on manufacturing. The ISM September Manufacturing Index slipped to 47.8.
“A read below 50 signals contraction.
“As for construction spending, the Commerce Department reported a 0.1 percent rise, below the 0.4 percent economists were forecasting. The data point suggests a slowdown in residential projects.”
In other words, those following the ISM index think we’re in for Slowdown City. Meaning an incoming recession. At some point.
Schwab’s amazing announcement on retail commissions
The ISM index numbers were scary enough for traders and investors. As for that surprising yet not so surprising announcement from Schwab, the online Wall Street Journal has the details. (Note: Link may reside behind WSJ’s pay wall.)
“Charles Schwab Corp. said it would eliminate commissions on online stock trades, one of most dramatic moves yet in a broad-based price war that is crunching profitability across the financial sector.
“The move by Schwab—the largest e-broker, with 12 million brokerage customers—rattled online brokers that have been squeezed by investors’ expectation that fees for financial services should be low or even nonexistent. Shares of larger banks and brokerages also declined amid a 1% drop in the Dow Jones Industrial Average, reflecting soft U.S. data that reignited concerns about the economic outlook.
“Digital upstarts like Robinhood Markets Inc. help popularized the zero-commission model in the online-brokerage business. But the race to zero is also happening in other areas of finance, like asset management, where Vanguard Group and Fidelity Investments recently eliminated fees for many funds offered on their platforms, and financial advice, which some digital advisers are offering free of management fees.
“‘There are certain parts of finance that have become commoditized,’said Devin Ryan, an analyst at JMP Securities LLC. ‘Trading is one of them.’”
A trip back down Memory Lane
Regarding this astonishing news from Schwab, times do change on Wall Street. Back in the early-to-mid 1980s when I was in the brokerage business myself, I recall that the industry average commission per 100-share trade for a midrange-priced ($15-$30 per share) stock was $30-40 for a buy. And another $30-40 for the eventual sell.
I used to teach a community college stock market course around the same time, and always told the class to watch that purchase price and get the best deal. That’s because, given those round-trip commission figures, they’d need to make at least 1 point in the stock they just bought to break even! And those were the days when a 1-point move up or down was regarded as a pretty big move and when the Dow seemed pinned forever to roughly the 800 level.
Yes, you read that right. 800. Not even 8,000. We’re hovering close to 27,000 on the Dow right now.
“I need to ‘think about it'”
I eventually got out of the brokerage business. Too much in the way of conflicts of interest in my book, trying to help customers while being pushed by the brokerage house to crank out more and more commission business and IPO action.
And as if that wasn’t bad enough, I’d often advise small clients of pretty decent investment opportunities. They’d hem and haw and “think about it” – that dreaded dead-end comment that all salesguys know is BS. And they’d never get back to me, until they wanted the next “tip.” I later learned that most of these clowns had their big account over at one of those upstart discount houses. They’d use my advice, then turn around and make the trade at the discount house, which, as part of its low-commission structure, provided zero investment advice. Just fast and efficient trade execution.
That made economic sense for those fair-weather customers, of course. But it wasted my time, so I tended to get unavailable when these people gave me yet another call. Why should I provide them with actual investment advice since they alleged placed most of their trades with a discount house that offered no advice at all? Didn’t make economic sense for me.
A growing upstart brokerage named Charles Schwab
One of those discount houses was Charles Schwab. Both my two-timing customers and Schwab proved increasingly annoying. But if you try to be objective about life, you can also see the handwriting on the wall. The gradual computerization of the investment business somehow signaled the beginning of a very different investing environment.
There was no online trading in those days, as Al Gore had not yet invented the Internet. Brokerage customers still had to call guys like me for quotes and trendlines, which we could immediately access via our green-screen Quotron machines.
But you could see that something was coming. As pioneering Atari and Commodore Vic 20 computers were displaced by more powerful TRS-80s and Apple IIs, personal computing started to become a reality in the 1980s. What would these machines do next?
Sometime in the 1990s – I don’t remember exactly when – outfits like Schwab began to shift from telephone oriented trading to allowing customers to get on the Internet and initiate buys and sells on their own. In the process, commissions slowly and surely began to drop yet again.
By that time, I was long gone from the business. And, figuring if you can’t beat ‘em, join ‘em, I actually moved my brokerage accounts (full disclosure) to Schwab in the early 1990s. It was still the telephone-trade era then, before home trading took over as the way to go.
The new age of online trading begins
With today’s much faster Internet speeds, I suspect this is the way most people invest right now, unless they still need personal advice. In which case they still have to pay for it. But not nearly as much as they did in the 1980s.
All of which gets us back to 2019 and Schwab’s astonishing yet logical announcement. Today, there are lots of other ways brokerage houses can make money besides generating commissions. That includes the float they make on idle cash and the tiny but still present management fees they charge on in-house ETFs. So why not just eliminate the commission obstacle entirely and face the Final Frontier of investing? (Before Elizabeth Warren takes all the toys away.)
Schwab’s announcement added to today’s market woes by scaring the brokerage and financial sectors into a red-ink retreat. But they’ll get over it. I never worry about these guys failing to make megabucks or mega-bonuses. It’s just that those numbers might be a little smaller this year. So it goes. As a semi-retired dude, my numbers are a little smaller, too.
Nasty Tuesday continues
Meanwhile, Mr Market remains in a snit as we approach the 3 p.m. hour. Averages have improved somewhat. But the funky atmosphere remains. And so, too, does the increasing fear that partisan politics in The Swamp is now seriously engaging all the good that Trump has done so far for the US economy. One can’t shake the idea that, having failed in all other attempts to send that annoying President Trump to the showers, the seriously compromised US intelligence community, the rest of the Deep State, and their left-wing, globalist Democrat allies on the Hill are now prepared to gin up a 2020 recession, one just bad enough to kill off a second Trumpian term by pissing off the Deplorable voters he’s seriously helped thus far.
All other news aside, this is the Sword of Damocles, I think, that’s really got Wall Street more than a bit unnerved. We should feel the same way. Let’s all resolve to be careful here, and nimble when we need to be. We live in treacherous times.
– Headline image: Damocles sits on a throne, looking apprehensively at a sword suspended above him. Dionysius is standing next to him and gestures at the sword. The two men are surrounded by servants, courtiers, and guards. Public domain photo and description of painting via Wikipedia.