Bulls Shrug Off Soft Labor Report, Post Solid Weekly Gains

U.S. equities finished higher, to cap off a week of gains and recapturing all of last week's declines, despite another monthly nonfarm payroll report that showed the sobering impact of the pandemic. Optimism of further fiscal relief after the Senate paved the way for a new bill to be signed appeared to overshadow the much softer-than-expected jobs report. Meanwhile, another dose of encouraging COVID-19 vaccine news also buoyed the markets, courtesy of Dow member Johnson & Johnson's filling for an Emergency Use Authorization of its single-shot candidate. Earnings season remained robust, highlighted by Ford's unexpected adjusted profit, along with results from Pinterest and Activision Blizzard. In other economic news, the trade deficit narrowed by a smaller amount than expected. Treasuries were mixed and the U.S. dollar lost ground to trim a recent rebound, while gold recovered somewhat from yesterday's drop and crude oil prices continued to grind higher. Europe finished mixed but posted widespread gains for the week, while markets in Asia were mostly higher.

The Dow Jones Industrial Average rose 92 points (0.3%) to 31,148, the S&P 500 Index was up 15 points (0.4%) at 3,887, and the Nasdaq Composite increased 79 points (0.6%) to 13,856. In heavy volume, 938 million shares were traded on the NYSE and 6.6 billion shares changed hands on the Nasdaq. WTI crude oil added $0.62 to $56.85 per barrel. Elsewhere, the Bloomberg gold spot price grew $16.28 to $1,810.31 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.6% to 91.00. Markets were solidly higher for the week, as the DJIA gained 3.9%, the S&P 500 advanced 4.7%, and the Nasdaq Composite jumped 6.0%.

Ford Motor Company (F $12) reported a Q4 loss of $0.70 per share, or earnings-per-share (EPS) of $0.34 excluding items that the company believes do not provide useful perspective on underlying business results and trends, versus the FactSet estimate calling for a loss of $0.07 per share. Revenues declined 9.0% year-over-year (y/y) to $36.0 billion, below the Street's forecast of $36.8 billion. F also announced plans to invest at least $22.0 billion in electrification through 2025, nearly twice what the company had previously committed to electric vehicles, as well as plans to invest about $7.0 billion on autonomous vehicles over 10 years through 2025. Shares were higher.

Shares of Pinterest Inc. (PINS $82) rose after posting Q4 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $299.2 million, topping the Street's forecast of $225.6 million, with revenues rising 76.0% y/y to $706.0 million, north of the expected $646.0 million. The image sharing social media service aimed at people to trade ideas noted that its global monthly active users grew 37.0% y/y. PINS said it continues to navigate uncertainty given the ongoing COVID-19 pandemic and other factors and its current expectation is that Q1 revenue will grow in the low-70% range y/y.

Dow member Johnson & Johnson (JNJ $164) announced that it has filed with the U.S. Food & Drug Administration (FDA) for Emergency Use Authorization (EUA) of its investigational single-shot COVID-19 vaccine candidate. JNJ said it intends to distribute the vaccine to the U.S. government immediately following the EUA and expects to supply 100 million doses to the U.S. in the first half of 2021. JNJ traded to the upside.

Activision Blizzard Inc. (ATVI $102) reported Q4 EPS excluding deferrals of $1.21, compared to the forecasted $1.18, with revenues rising 21.5% y/y to $3.1 billion, exceeding the expected $2.8 billion. The interactive entertainment company said it saw the benefits of fundamental changes to its core franchises, including deeper and more consistent engagement with current and new players across multiple platforms, which helped its Call of Duty franchise cap off a record year. ATVI issued full-year guidance that was above estimates, while also announcing a 15.0% increase of its quarterly cash dividend to $0.47 per share, and a new two-year stock repurchase program of up to $4.0 billion. Shares rallied.

Keep up with our latest views on the markets, including the implications of the changed political front, the outlook for 2021 amid the backdrop of progress on the COVID-19 vaccine rollout, optimism of further fiscal relief, and our view of the recent disruption in the markets, on our Market Insights page on www.schwab.com and follow us on Twitter @SchwabResearch.

January jobs report misses, trade deficit narrows less than anticipated to close out the week

Nonfarm payrolls (chart) rose by 49,000 jobs month-over-month (m/m) in January, compared to the Bloomberg consensus estimate of a 105,000 rise, and following December's downwardly adjusted decline of 227,000. Excluding government hiring and firing, private sector payrolls increased by 6,000, versus the forecasted rise of 163,000 after falling by a negatively revised 204,000 in December. The labor force participation rate dipped to 61.4% from December's 61.5% rate, where it was expected to remain.

The unemployment rate dropped to 6.3% from December's 6.7% rate, where it was expected to remain. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—declined to 11.1% from the prior month's 11.7% rate. The number of permanent job losers, at 3.5 million, changed little but is 2.2 million higher than the pre-pandemic level in February 2020. The number of long-term unemployed—those jobless for 27 weeks or more—at 4.0 million, was about unchanged and accounted for 39.5% of the total unemployed. However, the number of persons on temporary layoff decreased by 2.7 million, down noticeably from the recent high of 18.0 million in April 2020 but is 2.0 million higher than its February level.

Average hourly earnings gained 0.2% m/m, compared to projections of a 0.3% gain, and December's upwardly revised 1.0% increase. Y/Y, wages were 5.4% higher, well above estimates of a 5.0% increase. Finally, average weekly hours increased to 35.0 from December's unrevised 34.7 rate, where it was forecasted to remain.

The Department of Labor said notable job gains in professional and business services and in both public and private education were offset by losses in leisure and hospitality, in retail trade, in health care, and in transportation and warehousing. Manufacturing employment snapped a string of 8 months of growth, dipping 10,000 which was a bit of a surprise given the positive employment components of January regional and national PMI reads on the industry.

The report likely exacerbated the sense of urgency for lawmakers to pass further fiscal relief measures as even though the unemployment rate dropped and y/y earnings growth easily topped forecasts, they resulted from the dip in the labor force participation rate—a concerning signal—and as average earnings were skewed by the continued loss of lower paying jobs. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Scar Tissue: Weak Jobs Report Emphasizes COVID's Scars, how additional fiscal relief can help to bridge the chasm created by the pandemic, but the nature and depth of the COVID crisis and the attendant recession means there will likely be longer-term scars that will take time to heal.

The trade balance (chart) showed that the December deficit narrowed by a smaller amount than anticipated, coming in at $66.6 billion, compared to forecasts of $65.7 billion, after November's upwardly revised deficit of $69.0 billion. Exports rose 3.4% m/m, and imports gained 1.5%.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $9.7 billion during December, below the $12.0 billion forecast of economists polled by Bloomberg, while November's figure was adjusted downward to an increase of $13.9 billion from the originally reported $15.3 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $12.7 billion, a 4.8% increase y/y, while revolving debt, which includes credit cards, fell by $3.0 billion, a 3.6% y/y decline.

Treasuries were mixed, as the rate on the 2-year note was down 2 basis points (bps) at 0.09%, while the yield on the 10-year note gained 3 bps to 1.17% and the 30-year bond rate was 5 bps higher at 1.98%.

The Treasury yield curve has steepened this week as longer-term rates have moved higher amid the optimism of progress on the COVID-19 front and optimism of further fiscal relief, while the U.S. dollar has gained some traction, rebounding from the drop to multi-year lows in 2020. Schwab's Chief Fixed Income Strategist Kathy Jones discusses the moves in Treasury yields and the U.S. dollar in her article, Why Longer-Term Treasury Yields Are Rising. She notes that in our view, the market is looking beyond current conditions and focusing on the future, where prospects suggest stronger growth and potentially higher inflation down the road.

Europe mixed amid flood of data and positive developments in the U.S., Asia mostly higher

European equities closed out the week mixed, with the Financials and Consumer Discretionary sectors gaining ground, while Industrials slipped. Optimism of further progress in the U.S. on the COVID-19 rollout, bolstered by Johnson & Johnson applying for an EUA for is vaccine candidate, and signs that further fiscal relief may be in the offing in the wake of the disappointing January labor report overseas, appeared to help the markets, but stocks may have paused a bit after this week's solid rally. The markets also digested a host of earnings reports in the region, headlined by BNP Paribas SA (BNPQY $26) as the French lender's stronger-than-expected earnings lifted its shares. In economic news, German factory orders fell more than expected in December. The euro traded higher versus the U.S. dollar, and the British pound also gained ground on the greenback. Bond yields in the region and the U.K. were mostly higher.

With volatility likely to remain as the markets grapple with the frothiness in the equity markets amid the K-shaped economic recovery, notably in the U.S., Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, Your Portfolio May Be Less Diversified Than You Think. He points out how investors with a large home bias may not be nearly as diversified across sectors as they believe and risk missing their financial goals as longer-term trends tend to shift with the start of a new global economic cycle. Jeff urges investors to consider rebalancing portfolios back toward international stocks as years of U.S. stock outperformance may have caused a drift away from longer-term asset allocation targets. He adds that fortunately, obtaining global diversification has never been easier or less expensive.

The U.K. FTSE 100 Index lost 0.2% and Switzerland's Swiss Market Index traded 1.0% to the downside, while Germany's DAX Index was little changed, France's CAC-40 Index gained 0.9%, Spain's IBEX 35 Index rose 1.1%, and Italy's FTSE MIB Index increased 0.8%.

Stocks in Asia finished mostly to the upside amid continued optimism overseas in the U.S. on progress on the COVID-19 vaccine rollout and optimism of further fiscal relief, while global economic data, notably manufacturing has provided a positive backdrop. The markets awaited today's key U.S. labor report and as the Reserve Bank of India (RBI) held its monetary policy stance unhanged. Japan's Nikkei 225 Index gained 1.5%, with the yen holding onto a recent slide, while India's S&P BSE Sensex 30 Index ticked 0.2% higher, adding to the week's sharp rally that came amid optimism regarding the government's budget (spending) plans. Australia's S&P/ASX 200 Index gained 1.1%, with the nation's December retail sales being revised at a smaller drop than had been expected. South Korea's Kospi Index rose 1.1%, with automakers continuing to climb in the wake of yesterday's reports that Apple Inc. (AAPL $137) is reportedly close to reaching a deal with automakers Hyundai Motor Company (HYMTF $58) and Kia Motors Corporation on manufacturing autonomous electric vehicles. Hong Kong's Hang Seng Index advanced 0.6% but China's Shanghai Composite Index declined 0.2%.

Schwab's Jeffrey Kleintop discusses the Top Five Global Investment Risks In 2021, noting that they are all surprises to the consensus view: problems with the vaccine rollout, geopolitical and trade tensions do not subside, fiscal and/or monetary policy tightens, a "zombie" economy, and interest rate/dollar shock. He reiterates how having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome are keys to successful investing.

Stocks bounce back with a bullish fever

After a weekend of licking their wounds, the bulls bounced back with a fervor to begin February with the volatility from last week's retail trading frenzy cooling, allowing focus to return to the main catalysts that have led the markets to frothy valuations and sentiment. Signs that the containment of the COVID-19 virus and variants may be beginning to turn a corner, along with further progress on the vaccine rollouts contributed fuel to the sharp snapback. Moreover, talks regarding further fiscal stimulus measures were deemed constructive, leading to the Senate passing the $1.9 trillion 2021 budget plan to pave the legislative road to a reconciliation that would allow Democrats to enact President Joe Biden's fiscal relief package without Republican votes. Global economic data for January also painted a positive backdrop, highlighted by Manufacturing PMIs across the major world economies, and stronger-than-expected Services PMIs out of the U.S., the world's largest economy.

Earnings season also continued to post elevated beat rates, with revenues tracking at an approximated 75% pace and earnings at roughly 81%, per data compiled by Bloomberg from the 292 S&P 500 companies that have reported thus far. Compared to last year, sales growth is at a 2.4% pace, and profits are on track to be 6.8% higher, amid broad expansion across the major sectors, except for the Industrials sector. The U.S. dollar bounced off multi-year lows on the week, the Treasury yield curve steepened further, gold saw pressure and crude oil prices continued to grind higher to levels not seen since before the pandemic. Energy was the standout performer on the week, leading a broad-based rally among the major sectors, along with Financials and Communications Services. For our analysis of the major market sectors, check out our Schwab Sector Views: New Era in Washington.

Next week, with earnings season heading to the backstretch, the economic calendar could garner more focus, with some key reports on inflation, the labor market and consumer sentiment. Given the increased expectations of higher prices, Wednesday's Consumer Price Index could command some attention, while in the wake of Friday's soft labor report, initial jobless claims for the week ended February 6 with offer a more timelier read on the painfully elevated level of unemployment, and the week will culminate with the preliminary February University of Michigan Consumer Sentiment Index. Other reports that are worth noting include the January NFIB Small Business Optimism Index, particularly its hiring plans and most significant constraints on hiring components, as well as the JOLTS job openings report. The midweek speech to the Economic Club of New York from Federal Reserve Chairman Jerome Powell is also a potential event that the markets will likely scrutinize.

The international economic calendar next week also has the potential to deliver some market moving data points, notably: China—lending statistics and inflation figures. Japan—labor and real cash earnings reports and machine tool orders. Eurozone—investor confidence, along with German industrial production and trade balance. U.K.—industrial/manufacturing production, trade balance and Q4 GDP.

As noted in our latest Schwab Market Perspective: A Narrow Path Up, U.S. stocks have continued to climb amid optimism about a vaccine-led economic recovery, but it's a narrow path and buoyant investor sentiment could easily be deflated by bad news. Although global economic growth has struggled, an acceleration in vaccinations in major countries could support stronger growth in the second quarter. Meanwhile, after months of languishing near record lows, 10-year Treasury yields have risen to their highest level since March 2020, as the bond market focuses on the potential for stronger growth and higher inflation in 2021.

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Bulls Shrug Off Soft Labor Report, Post Solid Weekly Gains

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