Disappointing Data, Mixed Earnings Sink Stocks

U.S. stocks fell in the final session of a bumpy week ahead of a three-day holiday weekend, with Financials issues seeing pressure following mixed results from the banking sector to unofficially kick off Q4 earnings season. The markets appeared to shrug off President-elect Joe Biden's $1.9 trillion fiscal plan that included increased direct payments to some households. Treasuries gained ground to trim a recent rise in yields, and the U.S. dollar moved higher. Meanwhile, gold and crude oil prices traded lower. The moves followed a host of economic data that was headlined by a third-straight monthly decline in retail sales for December and a larger-than-anticipated dip in January consumer sentiment, while industrial production continued to rebound. In equity news, Dow member JPMorgan Chase & Co topped Q4 earnings forecasts but offered some cautious commentary, while results from Citigroup and Wells Fargo were mixed, and Exxon Mobil is reportedly facing an SEC investigation. Europe finished mostly lower, while markets in Asia were mixed.

The Dow Jones Industrial Average lost 177 points (0.6%) to 30,814, the S&P 500 Index was down 27 points (0.7%) at 3,768, and the Nasdaq Composite decreased 114 points (0.9%) to 12,999. In heavy volume, 1.2 billion shares were traded on the NYSE and 6.3 billion shares changed hands on the Nasdaq. WTI crude oil dropped $1.21 to $52.36 per barrel. Elsewhere, the Bloomberg gold spot price tumbled $20.06 to $1,826.47 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 90.77. Markets were lower for the week, as the DJIA fell 0.9%, the S&P 500 decreased 1.5%, and the Nasdaq Composite declined 1.5%.

Dow member JPMorgan Chase & Co. (JPM $139) reported Q4 earnings-per-share (EPS) of $3.79, including a credit reserve release of $2.9 billion, or $3.07 ex-items, compared to the FactSet estimate of $2.62. Revenues rose 3.4% year-over-year (y/y) to $30.1 billion, north of the Street's forecast of $28.7 billion. Net interest income came in a bit above forecasts, provisions for credit losses unexpectedly fell, investment banking fees topped estimates, its equity trading results were above expectations, and its fixed income trading activity came is shy of estimates.

JPM's Chief Executive Officer (CEO) Jamie Dimon said, "While we reported record profits of $12.1 billion, we do not consider the reserve takedown of $2.9 billion to represent core or recurring profits—essentially reserve calculations—while done extremely diligently and carefully, now involve multiple, multi-year hypothetical probability-adjusted scenarios, which may or may not occur and which can be expected to introduce quarterly volatility in our reserves. While positive vaccine and stimulus developments contributed to these reserve releases this quarter, our credit reserves of over $30 billion continue to reflect significant near-term economic uncertainty and will allow us to withstand an economic environment far worse than the current base forecasts by most economists. Consumer spending continued to recover, as reflected in combined debit and credit card spend being up for the full quarter." Shares were lower.

Citigroup Inc. (C $64) posted Q4 EPS of $2.08, topping the forecasted $1.34, as revenues declined 10.0% y/y to $16.5 billion, below the projected $16.7 billion. The company's net interest income roughly matched forecasts, along with its investment banking revenues, while its revenues from its fixed income and equity trading units both topped expectations. However, its provision for credit losses was above forecasts. C said given the Federal Reserve's decision regarding share repurchases, as it has excess capital it can return to shareholders, it plans to resume buybacks during the current quarter. Shares traded to the downside.

Wells Fargo & Company (WFC $32) reported a Q4 profit of $0.64 per share, including charges related to restructuring and customer remediation accruals, as well as a benefit from a release of credit reserves, compared to the expected $0.59. Revenues declined 9.7% y/y to $17.9 billion, south of the forecasted $18.1 billion. Net interest income of $9.3 billion came in roughly in line with forecasts and its provision for credit losses dropped. WFC said although its financial performance improved, its results continued to be impacted by the unprecedented operating environment and the required work to put its substantial legacy issues behind it. Shares were sharply lower.

With the Financials sector unofficially kicking off Q4 earnings season, check out our latest Schwab Sector Views: New Era in Washington, or analysis of our outperform ratings on the Financials and Health Care sectors, and our underperform outlooks for the Utilities and Consumer Staples sectors.

In other equity news, Exxon Mobil Corporation (XOM $49) is trading solidly lower after a Wall Street Journal report noting that the company is being investigated by the U.S. Securities and Exchange Commission (SEC) regarding its methodology for valuing its assets in the Delaware basin of the Permian. The report adds that the probe follows a whistleblower complaint alleging that employees were pressured to use unrealistic assumptions around the pace of drilling in order to boost its valuation. XOM has not commented on the report.

For a look at the impact of the changed political front and for our outlooks on equities, bonds and the global markets for 2021, visit our Market Insights page on www.schwab.com and be sure to follow us on Twitter @SchwabResearch.

Retail sales and producer prices miss, January consumer sentiment dips more than expected

Advance retail sales (chart) for December fell 0.7% month-over-month (m/m), versus the Bloomberg forecast of a flat reading and following November's negatively-adjusted 1.4% decline from a previously-reported 1.1% drop. Last month's sales ex-autos dropped 1.4% m/m, compared to expectations of a 0.2% decrease and November's figure was unfavorably revised to a 1.3% decline from a 0.9% fall. Sales ex-autos and gas were down 2.1% m/m, compared to estimates of a 0.3% decline, and November's reading was adjusted lower to a 1.3% decrease from a 0.8% drop. The control group, a figure used to calculate GDP, declined 1.9% m/m, versus projections of a 0.1% increase and November's downwardly-adjusted 1.1% decrease from a 0.5% decline.

The disappointing report came as nonstore retail sales—which includes online activity—fell, along with sales of electronics & appliances and food & beverages, while activity at food services & drinking places and department stores also dropped. However, sales of motor vehicles, building materials, clothing and gasoline all posted gains. The data shows the impact of the reinstated COVID-19 measures aimed at containing the resurging virus cases, while likely illustrating the sense of urgency of delivering further fiscal relief that President-elect Joe Biden detailed last night in his $1.9 trillion plan.

The January preliminary University of Michigan Consumer Sentiment Index (chart) declined to 79.2 versus expectations of a dip to 79.5 from December's 80.7 reading. The larger-than-expected decrease for the index came as both the current conditions and the expectations portions of the index declined. The 1-year inflation forecast jumped to 3.0% from December's 2.5% rate, and the 5-10 year inflation forecast increased to 2.7% from December's 2.5% level.

The Federal Reserve's industrial production (chart) rose 1.6% m/m in December, comfortably above estimates of a 0.5% gain, and versus November's upwardly-revised 0.5% increase. Manufacturing and mining output both rose solidly, accompanying a jump in utilities production. Capacity utilization increased to 74.5% versus forecasts calling for a modest gain to 73.6% from the prior month's upwardly-revised 73.4% rate. Capacity utilization is 5.3 percentage points below its long-run average.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in December rose 0.3% m/m, below forecasts of a 0.4% gain and compared to November's unrevised 0.1% increase. The core rate, which excludes food and energy, increased 0.1% m/m, south of estimates of a 0.2% rise and matching November's unadjusted increase. Y/Y, the headline rate was 0.8% higher, in line with projections to match the prior month's unadjusted gain. The core PPI increased 1.2% y/y last month, below estimates of a 1.3% gain, and compared to November's unrevised 1.4% rise.

The Empire Manufacturing Index, a measure of activity in the New York region, declined to 3.5 in January from 4.9 in December, and below forecasts of a rise to 6.0. However, a reading above zero denotes growth. The report marks the seventh-straight month of expansion, as employment growth decelerated but the expansion in new orders accelerated.

Business inventories (chart) rose 0.5% m/m in November, matching forecasts, and compared to October's upwardly-revised 0.8% gain.

Treasuries were higher following the data and yesterday's comments from Federal Reserve Chairman Jerome Powell who suggested the Central Bank will remain highly accommodative for some time to help the employment front recover. Powell's comments came amid some mixed commentary this week from other Fed officials that raised some uncertainty regarding the timing of when the Fed will begin to cut back on asset purchases. The rate on the 2-year note was down 1 basis point (bp) at 0.13%, while the yields on the 10-year note and the 30-year bond declined 3 basis points (bps) to 1.09% and 1.85%, respectively.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her article, 2021 Fixed Income Outlook: Calmer Waters, how we see the potential for 10-year Treasury bond yields to trade in a range of 1% to as high as 1.6% in 2021. Amid the recent climb in yields Kathy also discusses whether Bonds Still Provide Diversification.

Please note: the U.S. markets will be closed on Monday in observance of the Martin Luther King Jr. holiday.

Europe mostly lower following data and despite U.S. fiscal plans, Asia mixed

European equities finished mostly lower, with the markets digesting some disappointing economic data on both sides of the pond, while sifting through details of further fiscal relief out of the world's largest economy of the U.S. The markets also continued to focus on the rollout of COVID-19 vaccines as cases and variants persist, along with the mixed results from the U.S. banking sector. Ahead of the disappointing reads on U.S. retail sales, consumer sentiment and regional manufacturing activity, U.K. manufacturing and industrial production data for November both came in below estimates, though the Eurozone trade surplus came in higher than expected for November. The euro and British pound were lower versus the U.S. dollar, which continued to rebound, while bond rates in the core Eurozone region moved higher, and yields in the U.K. were mostly lower.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the Top Five Global Investment Risks In 2021. Jeff points out that the top five global risks for investors in 2021 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.

The U.K. FTSE 100 Index was down 1.0%, France's CAC-40 Index declined 1.2%, Germany's DAX Index fell 1.4%, Spain's IBEX 35 Index dropped 1.7%, and Italy's FTSE MIB Index decreased 1.1%, while Switzerland's Swiss Market Index gained 0.2%.

Stocks in Asia finished mixed to conclude the week, with the markets digesting details of further fiscal relief measures out of the U.S., which included increased direct payments to households, while awaiting some key U.S. banking sector results later today. Chinese and Hong Kong markets avoided negative territory despite the U.S. adding Chinese smartphone maker Xiaomi to the blacklist. China's Shanghai Composite Index finished little changed and the Hong Kong Hang Seng Index gained 0.3%. Japan's Nikkei 225 Index declined 0.6%, with the yen holding yesterday's gain, and Australia's S&P/ASX 200 Index finished near the unchanged mark. Emerging markets also seemed to see pressure amid the rebounding U.S. dollar, with India's S&P BSE Sensex 30 Index falling 1.1% and South Korea's Kospi Index dropping 2.0%, after the Bank of Korea kept held its monetary policy stance unchanged. The markets also paid attention to the rollout of COVID-19 vaccines as cases continue to rise, and Schwab's Jeffrey Kleintop notes in his article, A Vaccine: The Best 2020 Holiday Gift, how a vaccine being administered globally has lifted the stock markets around the world. But he cautions that the reality of the rollout faces risks that could extend the time frame for mass immunizations. Jeff adds that we expect markets to be volatile in coming months while the threat of new lockdowns weighs against the hope of recovery, although we believe we may be on the verge of a period of international stock market outperformance.

Stocks retreat from record highs

After posting fresh record highs to begin 2021, U.S. stocks retreated from all-time highs in a choppy week. The markets appeared a bit defensive, benefitting the Real Estate and Utilities sectors, amid festering concerns about the impact of the persistent surge in COVID-19 cases and variants that showed up in this week's economic docket. Ahead of Friday's softer-than-expected retail sales, regional manufacturing and consumer sentiment, small business optimism fell more than anticipated, initial jobless claims unexpectedly jumped, and the Fed's read on the nation's business activity, known as the Beige Book, noted some impact of the measures reimplemented to contain the virus resurgence.

As such, high-flying growth sectors—Communications Services and Information Technology—were the worst performers, while cyclically-sensitive—Materials, Consumer Discretionary and Industrials—sectors also saw pressure. Financials finished little changed as the markets digested mixed banking sector results to unofficially kick off Q4 earnings season and as the recent noticeable steepening of the Treasury yield curve paused. Interest rates cooled off somewhat following some subdued inflation readings, President-elect Joe Biden's plan for further fiscal relief and as Fed Chairman Jerome Powell suggested the Central Bank is still likely far from changing its extremely accommodative monetary policy. The U.S. dollar rebounded from a recent tumble that culminated with last week's drop to a level not seen since the Spring of 2018, and gold pulled back. Crude oil prices rested after a rally as of late though the Energy sector continued to grind higher.

Next week, shortened by Monday's holiday, Q4 earnings season will kick into a higher gear to likely garner heavy attention but the economic calendar will also compete for market attention. Housing data will be on display, courtesy of the January NAHB Housing Market Index, along with December reads on housing startsand building permits and existing home sales. Manufacturing activity is poised to potentially move the markets, with the January Philadelphia Fed Manufacturing Index and Markit's preliminary Manufacturing PMI for this month, and we will get another timely read on the painfully-elevated level of unemployment in the form of initial jobless claims for the week ended January 16. Fedspeak, which ramped up this week, will be quiet a week ahead of the Central Bank's first monetary policy meeting for 2021 set to conclude on January 27.

Along with a host of global Manufacturing PMIs, next week's international economic calendar will also provide some data points that have the potential to command attention including: Australia—employment change, consumer confidence and retail sales. China—Q4 GDP, industrial production and retail sales. Japan—industrial production, the trade balance and the Bank of Japan's monetary policy decision. Eurozone—the European Central Bank monetary policy decision, consumer price inflation and construction output, along with Germaninvestor confidence. U.K.—inflation statistics, consumer confidence and retail sales.

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.

Important Disclosures

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Disappointing Data, Mixed Earnings Sink Stocks

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