Records Keep Coming

U.S. stocks notched another record-setting day, as the Santa Claus rally continues. It was more mixed internationally in equity markets. U.S. Treasury yields fell slightly, but the Dollar Index was higher, courtesy of a larger drop in European yields and continued uncertainty surrounding Brexit. Gold and oil were lower. Personal Income topped estimates with Personal Spending matching expectations. University of Michigan Consumer Sentiment hit a one and a half year high. Nike posted upbeat quarterly results, but disappointing margins pressured shares of the athletic and apparel maker, while shares CarMax fell after results fell short of estimates. For the week, the major indexes advanced solidly led by the Nasdaq’s 2.2% gain.

The Dow Jones Industrial Average (DJIA) was up 78 points (0.3%) to 28,455, the S&P 500 Index was up 16 points (0.5%) to 3,221 and the Nasdaq Composite gained 38 points (0.4%) to 8,925. In heavy volume before a holiday-shortened week, 2.8 billion shares were traded on the NYSE and 3.5 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.74 to $60.44 per barrel and wholesale gasoline was flat at $1.71 per gallon. Elsewhere, the Bloomberg gold spot price decreased $3.50 to $1480.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.3% to 97.67. Markets were up solidly for the week, as the DJIA added 1.1%, the S&P 500 Index advanced 1.7% and the Nasdaq Composite led the way with a 2.2% gain.

Nike Inc. (NKE $100) reported fiscal Q2 earnings-per-share (EPS) of $0.70, versus the $0.58 FactSet estimate. Revenues were up 12.0% year-over-year (y/y) to $10.3 billion, compared to the $10.1 billion expectation. The athletic shoe and apparel manufacturer said it saw strength across all geographies, and that digital sales jumped 38%, with a 70% surge in online sales in the U.S. on Black Friday. However, gross margins rose to 44%, slightly less than the 44.1% forecast, with the company saying that tariffs increased costs and weighed on profitability. Looking ahead, NKE said it sees full-year revenue to rise in the low double-digit range, whereas analysts are calling for 8% growth. Shares were lower.

CarMax Inc. (KMX $94) posted a 7.0% decline in Q3 profits to $1.02 per share, or an adjusted $1.04 per share, below the $1.16 FactSet estimate, as revenues climbed 1.4% y/y to $4.79 billion, above the estimated $4.71 billion. Same –store sales grew 7.5%, above the 6.0% increase forecast by analysts. KMX traded lower.

Domestic output remains steady, personal income and consumer sentiment beat forecasts

The final look (of three) at Q3 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 2.1%, unrevised from the second revision to match the Bloomberg forecast. Q2 GDP grew by an unrevised 2.0% rate. Personal consumption was upwardly revised to a 3.2% increase, versus expectations for it to remain at a 2.9% gain. Q2 consumption was unrevised at a 4.6% rise.

On inflation, the GDP Price Index was unrevised at a 1.8% increase, matching estimates, while the core PCE Index, which excludes food and energy, was unadjusted at a 2.1% increase, also matching forecasts.

Personal income (chart) increased 0.5% m/m in November, versus forecasts of a 0.3% rise and compared to October's upwardly-revised 0.1% rise. Personal spending increased 0.4%, matching forecasts, and following the prior month's unrevised 0.3% gain. The October savings rate as a percentage of disposable income was 7.9%. The PCE Deflator was up 0.2% m/m, in line with expectations and following the prior month's unrevised 0.2% rise. Compared to last year, the deflator was 1.5% higher, above October's upwardly-adjusted gain of 1.4% and besting expectations of a 1.4% increase. Excluding food and energy, the PCE Core Index ticked 0.1% higher m/m, in line with expectations and versus October's unadjusted 0.1% increase. The index was 1.6% higher y/y, above estimates of a 1.5% rise, and compared to October's upwardly-revised 1.7% gain.

The December final University of Michigan Consumer Sentiment Index (chart) rose to 99.3 versus expectations for it to remain at the preliminary 99.2 reading and compared to November's 96.8. The index posted the highest level since May 2018 as both the current conditions and expectations components of the survey improved. The 1-year inflation forecast dipped to 2.3% from November's 2.5% rate, and the 5-10 year inflation forecast fell to 2.2% from November's 2.5% pace, the lowest level since late 1970.

Treasuries were little changed with the yields on the 2-year and the 10-year notes remaining at 1.63% and 1.92%, respectively. The 30-year bond yield fell a single basis point to 2.34%. For a look at fixed income investing in the New Year, see Schwab's Chief Fixed Income Strategist Kathy Jones' 2020 Market Outlook: Fixed Income, in which she notes that ten-year Treasury yields should move higher in 2020 as recession fears ease. Kathy points out the lagged impact of the Federal Reserve's interest rate cuts, signs of stabilization in the global economy and a modest uptick in inflation expectations should provide a boost to intermediate- and long-term bond yields. However, she cautions that the risk to our outlook is the ongoing threat of trade tariffs weighing on business investment.

Trade remains the focal point of global markets

In China, officials said the nation will be able to meet its pledge to purchase more than $40 billion in agriculture products from the U.S. There had been increased skepticism about China's ability to hit the targets highlighted by the accord. Furthermore, comments from U.S. Treasury Secretary Steven Mnuchin indicated the Secretary is confident the accord will be signed in early January. The U.S. House passed the U.S., Mexico, Canada Agreement (USMCA) with bipartisan support. With trade remaining a key driver of market action and potentially fostering a wide range of outcomes for emerging market equities, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his commentary, Tied to Trade: What's Next for Emerging Market Stocks?

In global economic news, Q3 U.K. GDP was revised slightly higher and above forecasts, and consumer confidence in Germany remained positive. Japanese consumer price inflation rose modestly to match expectations. Financial Conduct Authority (FCA) Chief Executive Andrew Bailey has been tapped to replace a departing Mark Carney as the new governor of the Bank of England. The People's Bank of China (PBoC) opted to leave the benchmark lending rate unchanged, which came as a surprise after the bank cut the 14-day repo rate yesterday. The euro and yen were lower versus the U.S. dollar and the British pound continued its Brexit-fears induced slide. Bond yields were mostly lower in Europe and higher in Japan. For a look at next year's viewpoint for international markets, check Jeffrey Kleintop's, CFA, latest article, 2020 Global Market Outlook: New Heroes Needed, in which he notes that in 2020, global economic growth may depend on comprehensive trade deals and fiscal stimulus rather than actions by central bankers to reverse last year’s slowdown in manufacturing and business investment.

The U.K. FTSE 100 Index finished up 0.1%, France's CAC-40 Index and Germany's DAX Index added 0.8%, Spain's IBEX 35 Index increased 0.6%, Switzerland's Swiss Market was 1.0% higher and Italy's FTSE MIB Index rose 1.2%. The Shanghai Composite Index was down 0.4%, while the Hong Kong Hang Seng Index increased 0.3% and South Korea's Kospi Index was 0.4% higher. Japan's Nikkei 225 Index fell 0.2%. Australia's S&P/ASX 200 Index was 0.3% lower and India's S&P BSE Sensex 30 Index was little changed.

Stocks notch solid weekly gains on trade optimism and upbeat economic news

Stocks posted weekly gains, with the S&P 500 Index notching its tenth such out of eleven. Upbeat trade developments provided most of the sustenance for the solid advances, as a "phase one" deal between the U.S. and China appeared to remain on track, with comments from U.S. Secretary Steven Mnuchin that an accord could be signed by as early as next month solidifying the notion. Meanwhile, the U.S. House passed the long-elusive U.S., Mexico, Canada trade agreement (USMCA). The markets also found support from the monetary policy front as well, with the Bank of England holding steady on its stance and Sweden's central bank moving out of negative interest rate territory. Some Brexit worries resurfaced early in the week, as Prime Minister Boris Johnson set a hard deadline of December 2020 for the U.K. to reach a trade deal with the European Union, but on Friday the U.K. Parliament approved Johnson's withdrawal bill for the nation to leave the bloc in little over a month. The markets seemed to take the developments in stride, while also shrugging off the U.S. House's vote to impeach President Donald Trump.

Economic news also lent a hand to sentiment, as a larger-than-expected decline in existing home sales and a flat reading on the Leading Index was overshadowed by positive manufacturing and services reads, a surge in homebuilder sentiment, an increase in housing construction, a solid rebound in industrial production, and upbeat reads on personal income and consumer sentiment.

Next week will be shortened by the Christmas Day holiday on Wednesday and an early close of the U.S. markets the day prior, and the economic calendar will be fairly light as a result. New home sales will get the ball rolling, followed by durable goods orders, weekly initial jobless claims, the Richmond Fed Manufacturing Activity Index and MBA Mortgage Applications. As well, any news on the trade front has the capability to move the markets. As noted in our latest Schwab Market Perspective: Are We There Yet? Recent hiccups in U.S.-China trade talks and uncertainty around a "phase one" deal have reaffirmed that trade headlines continue to drive larger market swings. Key U.S. economic data has been on the weaker side—holding the United States back from participating in an emerging global manufacturing recovery. Negative interest rates around the world have created favorable financing conditions for manufacturing firms, harboring the global labor market from a downturn.

With many international markets also closed midweek in observance of the Christmas holiday, the international economic calendar will also be slim, with most of the reports worth noting coming from Japan with the nation expected to release the Leading Index, industrial production, CPI from Tokyo and trade data, while China will offer industrial profits and Spain will post retail sales near the end of the week.

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