Lack of a Fiscal Deal Weighs on Sentiment

U.S. equities finished lower on the day, but were able to squeak out weekly gains for all the major indexes, as the vaccine optimism that has driven stocks to fresh record highs was countered by Congress' struggle to pass a fiscal relief and government funding deal with a shutdown hours away. An elusive Brexit trade deal ahead of the rapidly approaching year-end deadline also weighed on sentiment, as well as the persistent rise in virus cases. In equity news, FedEx's Q2 results and guidance faced some scrutiny on the Street, while Darden Restaurants' results and guidance showed the continued impact of the pandemic, and Moderna's vaccine received a recommendation for Emergency Use Authorization by an FDA advisory panel. Treasuries were mixed and the U.S. dollar bounced modestly off of a multi-year low, while gold was slightly lower and crude oil prices were higher. News on the economic front was light, but Leading Indicators extended a positive streak to seven months. Europe finished lower, while markets in Asia were mixed.

The Dow Jones Industrial Average fell 124 points (0.4%) to 30,179, the S&P 500 Index lost 13 points (0.4%) at 3,709, and the Nasdaq Composite declined 9 points (0.1%) to 12,756. In very heavy volume, as a result of quadruple witching day—the simultaneous expiration of options and futures contracts on equities and indexes—3.1 billion shares were traded on the NYSE and 6.7 billion shares changed hands on the Nasdaq. WTI crude oil was $0.70 higher at $49.24 per barrel and wholesale gasoline gained $0.01 to $1.40 per gallon. Elsewhere, the Bloomberg gold spot price lost $6.09 to $1,879.33 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.2% to 90.98. Markets were higher for the week, as the DJIA was 0.4% higher, the S&P 500 increased 1.3%, and the Nasdaq Composite jumped 3.1%.

FedEx Corporation (FDX $276) reported fiscal Q2 earnings-per-share (EPS) of $4.55, or $4.83 ex-items, compared to the $4.01 FactSet estimate, as revenues grew 19.1% year-over-year (y/y) to $20.6 billion, topping the Street's forecast of $19.4 billion. FDX said its operating results increased due to volume growth in FedEx International Priority and U.S. domestic residential package services and pricing initiatives across all transportation segments. The company added that these factors were partially offset by costs to support strong demand and to expand services, variable compensation expense, and COVID-19-related costs.

FDX said it is not providing a forecast for fiscal-year 2021 earnings and maintained its capital spending forecast for the year at $5.1 billion. FDX added that while the overall environment remains uncertain, it expects earnings growth in the second half of 2021 driven by the anticipated heightened demand for its services. Shares finished lower.

Darden Restaurants Inc. (DRI $116) posted fiscal Q2 EPS of $0.74, versus the projected $0.71, as revenues declined 19.4% y/y to $1.7 billion, roughly in line with forecasts. The parent of Olive Garden said its same-store sales fell 20.6% y/y, compared to the expected 18.3% drop. DRI issued mixed Q3 guidance based on recent performance trends, uncertainty surrounding further capacity limits and dining room closures, and the duration of these impacts. The company also increased its quarterly dividend by 23.3% to $0.37 per share. Shares were lower.

Progress on the COVID-19 vaccine front continued as Moderna Inc's (MRNA $140) candidate received a recommendation from an advisory panel to the U.S. Food and Drug Administration (FDA) to receive Emergency Use Authorization (EUA). This paves the way for the FDA to grant formal EUA, which could come as early as today, while the rollout of Pfizer Inc's (PFE $38) and BioNTech SE's (BNTX $104) vaccine is already under way. Shares of all these companies were lower.

Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Rise Up: Vaccines Brought Broader Market Participation, how the market's tenor changed in early September as economic optimism began to pick up; kicked into even higher gear since positive vaccine news erupted. Liz Ann notes that rotations have been in fits-and-starts; and with changing characteristics; however, euphoria and speculative froth has become a risk heading into 2021. She concludes that investors should maintain discipline around diversification and rebalancing.

Finally, political developments in Georgia may continue to garner some attention as the state is set to hold runoff Senate elections in early January that will determine the composition of Congress amid President-elect Joe Biden's administration as discussed in our podcast, Georgia's Runoff Carries Outsized Impact.

As 2021 draws near, check out our outlooks for equities, bonds and the global markets, as well as our latest Schwab Sector Views: Could 2021 Be Normal? on our Market Insights page on www.schwab.com, and follow us on Twitter at @SchwabResearch.

Leading indicators top forecasts to end economic week

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for November rose 0.6% month-over-month (m/m), above the Bloomberg estimate of a 0.5% gain and following October's upwardly-revised 0.8% increase. The LEI has been positive for seven-straight months after the plunges in March and April, due to positive net contributions from jobless claims, ISM new orders, building permits and stock prices.

Treasuries finished mixed, as the yield on the 2-year note was down 2 basis points (bps) at 0.11%, while the yield on the 10-year note ticked 1 bp higher to 0.94%, and the 30-year bond rate gained 2 bps to 1.69%.

The Treasury yield curve has steepened this week and the greenback has extended a recent tumble in the wake of the Federal Reserve's monetary policy decision this week, as discussed by Schwab's Liz Ann Sonders in her article, The Song Remains the Same: Fed Keeps Rates/Balance Sheet Steady. She discusses how the Federal Open Market Committee (FOMC) kept rates near-zero and maintained the pace and size of Treasury/MBS purchases to its balance sheet. Liz Ann points out that financial conditions remain loose, credit spreads low and access to capital ample, while the FOMC's quarterly update to economic projections show slightly improved assumptions about GDP and unemployment; but no change to inflation and rate assumptions.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest 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, reflecting the prospects for real economic growth to recover at a faster pace amid the backdrop of the vaccine rollout and potential for further fiscal stimulus.

Europe declines, Asia mixed as vaccine rollout continues, but U.S. and U.K. deals remain elusive

European equities finished out the week lower, as the optimism surrounding the progress on the potential rollout of multiple COVID-19 vaccines succumbed to uncertainties over the still-elusive agreements on U.S. fiscal relief and a Brexit trade deal between the U.K. and European Union ahead of rapidly-approaching deadlines. Also, some of the luster regarding the COVID-19 vaccine continued to be dulled by uneasiness regarding the near-term impacts of some reinstated restrictions on activity in response to the persistent elevated levels of the virus on both sides of the pond. Energy and Financials cooled a bit from a recent run, but economic data in the region was relatively positive, highlighted by a stronger-than-expected December reads on German business confidence in the current situation and expectations of conditions in the future. Also, U.K. retail sales for November came in above estimates. The euro and British pound traded lower versus the U.S. dollar, which has paused after a recent tumble to multi-year lows. Bond yields in the Eurozone were mixed but rates in the U.K. saw some pressure.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, A Vaccine: The Best 2020 Holiday Gift, how a COVID-19 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.

The U.K. FTSE 100 Index and Germany's DAX Index were down 0.3%, Italy's FTSE MIB Index and Switzerland's Swiss Market Index dipped 0.2%, France's CAC-40 Index declined 0.4%, and Spain's IBEX 35 Index dropped 1.4%.

Stocks in Asia finished mixed in the final session of the week, as the markets assessed the optimism of the COVID-19 vaccine rollout, which has bolstered the global equity markets since early November, with the near-term headwinds associated with the persistent elevated virus cases, notably in the U.S. and Europe. International stocks, particularly Emerging Markets, have also been underpinned by the continued tumble in the U.S. dollar and Schwab's Jeffrey Kleintop notes in his 2021 Global Outlook: New Cycle, New Leadership, how we expect a near-term economic double-dip for the global economy to give way to a vaccine-led broad recovery in 2021. The Bank of Japan's (BoJ) monetary policy decision capped off a heavy week on the central bank front, which included dovish tones and actions from the Fed in the U.S. and the Bank of England. The BoJ announced a six-month extension of its emergency financial support measures for the corporate sector and announced that it will conduct an assessment for further effective and sustainable monetary easing to provide economic support and achieve its inflation target that has been elusive for some time. The decision came after Japan reported that its national consumer price inflation for November continued to be down y/y.

Japan's Nikkei 225 Index declined 0.2%, with the yen softening late in the session, and China's Shanghai Composite Index decreased 0.3%, but both were higher on the week. The Hong Kong Hang Seng Index traded 0.7% to the downside and Australia's S&P/ASX 200 Index fell 1.2%, amid some weakness in the Energy, Financials and Information Technology sectors. However, South Korea's Kospi Index ticked 0.1% higher and India's S&P BSE Sensex 30 Index gained 0.2%.

Stocks continue to grind out all-time highs

U.S. stocks got back on the weekly winning track with the Dow, S&P 500 and Nasdaq posting multiple record highs. The bulls continued to hammer the bears with COVID-19 vaccine optimism as the U.S. joined the U.K. in administering the vaccine. Moreover, the bullish backdrop was complemented by the Fed and other key global central banks continuing (and in some respects expanding) extraordinary accommodative monetary policy measures, as well as faint hopes of a U.S. fiscal relief agreement and a U.K. Brexit trade deal. However, economic data showed signs of the impact of some reinstated restrictions on activity amid the rising COVID-19 cases in the U.S. and Europe, with the former's initial jobless claims reaccelerating and retail sales coming in softer-than-expected for a second-straight month. The housing sector remained robust, with U.S. housing construction activity data topping forecasts, and global manufacturing activity for December came in stronger than expected to counter still sluggish services sector output. The Information Technology sector led the week's gains, along with Consumer Discretionary and Materials issues, though the Energy sector trimmed a recent rally despite the continued rise in crude oil prices. The Treasury yield curve steepened slightly, gold prices moved higher and the U.S. Dollar Index extended a recent tumble to more than a 30-month low.

Next week will be shortened by the Christmas holiday, which will see all U.S. markets closed on Friday and trade in an abbreviated session on Thursday. However, the economic calendar could provide some data points that command attention. We will get the final read (of three) on Q3 GDP, the Conference Board will deliver its Consumer Confidence report, preliminary November durable goods orders will hit the tape, November personal income and spending data will be released, and the University of Michigan will offer up its revised look at consumer sentiment for this month. Housing data will also continue, with the releases of existing and new home sales for last month, while a timely read on jobless claims for the week ended December 19 will be pulled forward to Wednesday due to the holiday.

International reports due out during the shortened next week that deserve a mention include; Australia—retail sales. China—1 and 5-year loan prime rate decisions. Japan—retail sales. Eurozone—consumer confidence. U.K.—Q3 GDP.

As noted in our latest Schwab Market Perspective: Watching the Wheels, encouraging news about COVID-19 vaccines has boosted hope for stronger economic growth, kicking off a rotation in stocks and equity sectors as investors look to a brighter future. However, near-term volatility is possible, as we’re not yet out of the coronavirus tunnel.

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Lack of a Fiscal Deal Weighs on Sentiment

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