Markets Erase Weekly Gains in Late-Day Rout

Early gains for U.S equities evaporated midday, accelerating downward in afternoon action to finish solidly lower, following reports of increased tensions between Russia and Ukraine. The moves also came on the heels of yesterday's unexpected acceleration in the January consumer price inflation report, exacerbated by comments from St. Louis Fed President James Bullard saying the report amplified his hawkishness, as he suggested the Central Bank should raise rates by 100 basis points by July and said the Fed should consider intra-meeting action. Treasuries reversed to the upside to finish higher, pulling back some of yesterday's spike in rates, and the U.S. dollar traded to the upside, while crude oil prices were solidly higher, posting an eighth straight week of gains, and gold jumped. News on the economic front was light, showing a preliminary read on February consumer sentiment that fell to a more than decade low as expectations continued to tumble. Earnings season remained in focus, with Under Armour topping expectations, but warning of continued supply and freight cost headwinds, and Expedia Group topping earnings forecasts and offering some upbeat forward-looking commentary. Elsewhere, Zillow Group trimmed a recent plunge after the company posted better-than-feared results and offered positive commentary about its transition. Stocks in Europe and Asia traded to the downside as the markets remained focused on monetary policies and the developments on the U.S. front.

The Dow Jones Industrial Average lost 504 points (1.4%) to 34,738, the S&P 500 Index decreased 85 points (1.9%) to 4,419, and the Nasdaq Composite tumbled 394 points (2.8%) to 13,791. In very heavy volume, 5.2 billion shares of NYSE-listed stocks were traded, and 5.1 billion shares changed hands on the Nasdaq. WTI crude oil jumped $3.22 to $93.10 per barrel. Elsewhere, the gold spot price traded $26.60 higher to $1,864.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% to the upside at 96.02. Markets were lower for the week, as the DJIA was down 1.0%, the S&P 500 lost 1.8%, and the Nasdaq Composite fell 2.2%. Under Armour Inc. (UA $15) reported adjusted Q4 earnings-per-share (EPS) of $0.14, above the $0.06 FactSet estimate, as revenues rose 9.0% year-over-year (y/y) to $1.5 billion, roughly in line with the Street's expectation. UA said its saw improving brand strength and consumer demand, but noted supply chain headwinds and elevated freight costs, which were countered by pricing. The company announced that it will transition to a new fiscal year-end and will provide its initial fiscal year 2023 financial outlook in conjunction with the announcement of its transition quarter results in early May. The company said for its transition quarter ending March 31, it expects EPS of $0.02-0.03 and raised its revenue forecast. However, UA said it expects headwinds related to supply constraints associated with the ongoing COVID-19 pandemic impacts and that its gross margin is expected to be down 200 basis points (bps) due to the aforementioned supply chain challenges and the negative impact of higher freight costs, partially offset by pricing benefits. Shares fell.

Expedia Group Inc. (EXPE $192) posted adjusted Q4 EPS of $1.06, topping the expected $0.80, with revenues jumping 148.0% y/y to $2.3 billion, mostly matching expectations, but were down 17.0% compared to the same period in 2019. The travel booking company said, "While we experienced yet another significant travel disruption from Covid this quarter, we were pleased to see that the impact was less severe and of shorter duration than previous waves. Notably, the travel industry and traveling public prove more resilient with each passing wave, and we continue to expect a solid overall recovery in 2022, barring a change in the trajectory of the virus." Shares traded lower. Zillow Group Inc. (ZG $54) reported an adjusted Q4 loss of $0.41 per share, much smaller than the $0.91 per share shortfall that the Street had anticipated, with revenues surging 392% y/y to $3.9 billion, easily exceeding the expected $3.0 billion. The troubled real estate e-commerce services company, that has seen its stock fall nearly 77% from its all-time high coming into the report, forecasted a surprise profit for Q1 and delivered a revenue outlook that had a midpoint slightly above estimates. The company said, "Upon completion of the wind-down, which is expected to occur in H2 of 2022, we now expect the net impact of our iBuying operations wind-down of inventory (including inventory losses), operating costs and restructuring costs in the aggregate to be cash-flow positive." Shares were solidly higher.

As Q4 earnings season continues to roll on, of the 359 companies that have reported results in the S&P 500, 68.72% have topped revenue forecasts, while 76.82% have bested earnings expectations, per data compiled by Bloomberg. Compared to last year, revenue growth is on pace to be up nearly 16.35% and earnings expansion is on track for about 26.90%.

The markets have seen some wild swings as the markets grapple with the Fed tightening uncertainty and still solid absolute earnings growth during the quarter but some relative deterioration compared to the previous four quarters. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Smoke on the Water … Fire Down Below, how results have bucked the trends of the past six quarters—with a lower percentage by which companies have been exceeding consensus estimates. As for Fed policy, Liz Ann adds that as has nearly always been the case historically, a shift in the monetary policy backdrop can mark significant turning points in the equity market and typically lead to more frequent bouts of volatility. Liz Ann also notes how the much stronger-than-expected January nonfarm payroll report likely confirmed the Fed's full-steam ahead message for the near term in her latest commentary, Surprise, Surprise: Jobs Surged.

With the markets volatile, find all our market commentary on our Market Insights page, including answers to your frequently asked questions about the markets, and follow us on Twitter at @SchwabResearch.

Yesterday's surge in 2-year note yield remained in focus, February consumer sentiment falls

The markets continued to digest the recent rise in Treasury yields that hit a fevered pitch yesterday in the wake of an unexpected acceleration in January consumer price inflation, which hit the highest y/y pace in 40 years. Worries about a more aggressive Fed tightening campaign ensued and was exacerbated by comments from St. Louis Fed President James Bullard who said late-yesterday that he supports raising interest rates by a full percentage point by the start of July and that the Central Bank should consider hiking rates by 25 bps "right now" before the scheduled March meeting. Bond prices tumbled on his comments to increase the upside pressure on yields, notably a 26 bp jump in the rate on the 2-year note, and the shocking one-day move also exacerbated the pressure on the equity markets.

Schwab's Chief Fixed Income Strategist, Kathy Jones points out in her latest article, Bond Market: Waiting for Liftoff, that we expect turbulence to continue as Fed Chair Powell indicated that policy plans are not on a set course, with the Fed preferring to take a "nimble" approach. However, she adds that the markets have discounted a significant tightening in policy for this year, with the telltale signs of tight policy expectations already showing up in the markets. Kathy discusses how the yield curve has flattened, with short-term rates moving up sharply relative to long-term rates.

Kathy says while it's clear that the Fed is anxious to initiate a new tightening cycle, we think it's premature to forecast such a rapid pace of rate hikes without more clarity about its plans to reduce the amount of bonds the Fed holds on its balance sheet. The Fed released general principles for quantitative tightening but hasn't spelled out a clear plan yet. She notes how allowing bonds to mature without reinvestment can have a similar impact as hiking rates in terms of the impact on the availability of funds to the banking system. She adds that the Fed has indicated it prefers using the federal funds rate as its primary tool to set policy, but given the size of its current bond holdings, it's possible that quantitative tightening will play a bigger role in the Fed's plans in this cycle than it did in the last cycle.

Treasuries reversed course to finish higher, paring some of yesterday's drop and the sharp rise in yields, as the yield on the 2-year note was down 7 bps at 1.48%, the yield on the 10-year note decreased 10 bp to 1.93%, and the 30-year bond rate was 6 bps lower at 2.25%.

The February preliminary University of Michigan Consumer Sentiment Index (chart) declined more than expected to 61.7, versus the Bloomberg estimate calling for a dip to 67.0 from January's 67.2 reading. The index hit the lowest since October 2011 as both the current conditions and expectations portions of the survey fell to the weakest levels in more than a decade, with the latter continuing to outpace the former by a wide a margin. The 1-year inflation forecast rose to 5.0%—the highest since 2008—from 4.9%, and the 5-10 year inflation forecast remained at January's 3.1% rate.

Europe and Asia close out the week lower as markets remain roiled by monetary

European equities finished lower with the global markets remaining skittish regarding the prospect of tighter monetary policies on both sides of the pond. The expectations were amplified by yesterday's key January inflation report out of the U.S., which showed pricing pressures on the consumer side surprisingly accelerated m/m, along with some hawkish commentary from a Fed official who suggested the Central Bank should consider intra-meeting action. The markets have already been choppy after the Bank of England (BoE) increased rates for a second straight meeting last week, and the European Central Bank (ECB) sounded a more hawkish tone following last week's meeting, and ECB President Christine Lagarde pledged on Monday for a gradual adjustment to monetary policy. Earnings ramped up on this side of the pond to accompany another solid reporting period in the U.S. Shares of Swedish engineering firm Sweco rallied after its Q4 earnings topped forecasts, while strong results from British food and beverage ingredients company Tate & Lyle PLC (TATYY $41) lifted its shares. In economic news, U.K. preliminary Q4 GDP growth came in at 1.0% quarter-over-quarter, but was below the expected 1.1% expansion. The U.K. also reported that its industrial and manufacturing growth slowed more than expected in December, and its construction output unexpectedly rose month-over-month. The British pound rose and the euro declined versus the U.S. dollar, while bond yields in the U.K. were higher and rates in the Eurozone were mixed.

Geopolitical tensions between Russia and Ukraine remains in focus and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, provides his latest article, Guide to Geopolitical Risk: Russia-Ukraine, where he discusses how markets have historically shrugged off geopolitical events involving Russia. He notes that Russia makes up a very small portion of the main global and emerging market indexes, while Ukraine has no exposure in such indexes. He discusses the most likely sanctions that may occur if the situation escalates, but he doesn't believe that diversified investors need to take action to protect their portfolios from the risks related to an invasion of Ukraine.

The U.K. FTSE 100 Index dipped 0.2%, France's CAC-40 Index dropped 1.3%, Germany's DAX Index was down 0.4%, Italy's FTSE MIB Index decreased 0.8%, Spain's IBEX 35 Index fell 1.0%, and Switzerland's Swiss Market Index traded 0.7% lower.

Stocks in Asia finished lower to close out a choppy week that saw the markets diverge, while volume today was lighter than usual as Japanese markets were closed for a holiday. A negative tone was set yesterday as U.S. equity and bond prices fell solidly on the heels of the hotter-than-expected read on January consumer price inflation. The data amplified expectations that the Fed may need to be aggressive with its tightening campaign, which boosted bond yields especially on the short-end of the Treasury curve, exacerbated by some hawkish commentary from a Fed official. The markets were already bracing for tighter global monetary policies as the Fed is set to begin hiking rates next month, while the Bank of England has already hiked rates at its last two meetings, and the European Central Bank has hinted it may increase rates later this year. Meanwhile, the People's Bank of China has bucked the trend and moved towards looser monetary policy, while the Bank of Japan announced yesterday that it will buy its benchmark 10-year bonds for the first time since July 2018 in an attempt to keep rates from breaching its target range. Schwab's Jeffrey Kleintop, discusses in his article, What Do Rising Rates Mean for Stock Investors?, how recently, U.S. Treasury bond yields climbed back to their pre-pandemic levels and in Europe, German 10-year yields climbed above 0%, touching their highest level since May 2019. Jeff asks the question of what are the implications of rising global yields for stock prices? He points out that increasing yields could help lift stocks and may even signal outperformance of cyclical European stocks and value stocks.

In economic news, China's January new yuan loans and aggregate financing—a measure of total credit issued—both accelerated solidly at rates that were higher than expected. China's Shanghai Composite Index declined 0.7%, and the Hong Kong Hang Seng Index dipped 0.1% on the heels of a recent strong rebound. Elsewhere, South Korea's Kospi Index decreased 0.9%, Australia's S&P/ASX 200 Index dropped 1.0%, and India's S&P BSE Sensex 30 Index fell 1.3%.

Stocks register another wild ride as 2022 volatility persists

U.S. stocks came into the week seemingly still riding high on last Friday's much stronger-than-expected January nonfarm payroll report and an earnings season that was still on track to post the fourth-straight quarter of above 25.0%. However, a data point loomed on the week's horizon that would begin to develop the January inflation picture that most on the Street appeared to expect to see some signs of moderation. The report delivered on the promise of being a market-moving event as the markets sold off sharply on Thursday as consumer price inflation unexpectedly accelerated and moved further to highs not seen since 1982. This agitated already elevated market skittishness that the Fed was well behind and curve and would have to be more aggressive in tightening monetary policy through rate hikes and balance sheet reduction. This uneasiness was taken to another level when St. Louis Fed President Bullard said "I was already more hawkish but I have pulled up dramatically what I think the committee should do." Bullard said he would like to see 100 bps in the bag by July 1, and even floated the idea that the Central Bank should take action before its next scheduled gathering in March. Treasury bond prices tumbled and yields spiked, with the rate on the 10-year yield breaching 2.00% for the first time since the summer of 2019. But the real action came on the short-end of the curve, with the yield on the 2-year note jumping 26 bps to post its largest intraday swing since the global financial crisis and severely narrowing the spread compared to the 10-year.

Amid the rising interest rates and volatility surrounding the Fed and earnings season, check out Director and Senior Investment Strategist with the Schwab Center for Financial Research, David Kastner's, CFA, latest Schwab Sector Views: What to Expect When Rates Rise.

Not surprisingly, Materials and Financials were the top performers for the week amid the rising inflation figures and ensuing jump in interest rates, while the Energy sector continued its decisive year-to-date outperformance. Amid this backdrop, the underperformers for the week were also not surprising with the rising rates weighing on the growth-related heavyweight Communications Services and Information Technology sectors, rate-sensitive Utilities and Real Estate issues were also among the laggards. Crude oil prices notched an eight-week winning streak and gold prices moved higher, while the U.S. dollar trimmed last week's tumble from a two-year high.

Next week, earnings season will head toward the home stretch, and the economic calendar will also likely remain in focus, as the January inflation picture will fully develop, courtesy of the Producer Price Index (PPI) and the Import Price Index releases. Given the elevated inflation backdrop, omicron disruption, and sharp deterioration in consumer expectations, next week's January retail sales report has the potential for market scrutiny. Meanwhile, we will get some timely February manufacturing reports out New York and Philadelphia that could garner attention, along with the Fed's January industrial production and capacity utilizationreport, the release of initial jobless claims for the week ended February 12, and the January Leading Economic Index. Housing data will fill out the fully-loaded docket, with the releases of the February NAHB Housing Market Index, as well as January reads on housing starts and building permits and existing home sales. The Fed will also be in focus given the hyper-sensitivity to what tightening projection it could take, as the minutes from its January meeting will be released midweek, and some fedspeak will hit the tape, including two events featuring the aforementioned St. Louis Fed President James Bullard.

International economic reports due out next week that deserve a mention include: Australia—employment change. China—CPI and PPI, and its 1-year medium term interest rate decision. India—CPI and PPI, and trade balance. Japan—preliminary Q4 GDP, trade balance, core machine orders, and CPI. Eurozone—preliminary Q4 GDP, industrial production, and preliminary consumer confidence, along with German investor confidence. U.K.—inflation statistics, retail sales, and employment change. ©2022 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.

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