Markets Finish Mixed, but Snap Weekly Winning Streak

U.S. equities pared early losses to finish mixed, but snapped a weekly winning streak, as Congress passed a stopgap spending bill to avert a shutdown of the federal government. However, dampened expectations of a U.S fiscal deal and a Brexit trade deal between the U.K. and European Union kept sentiment lower, overshadowing any lingering vaccine optimism. On the equity front, Dow member Walt Disney provided upbeat subscriber guidance, the FDA said it is trying for a quick Emergency Use Authorization of Pfizer's and BioNTech's vaccine, while quarterly results from Oracle, Lululemon Athletica, Costco Wholesale and Broadcom received mixed reactions. In economic news, December consumer sentiment unexpectedly improved, but wholesale price inflation remained subdued. Treasury yields traded lower amid a rise in bond prices, and the U.S. dollar gained modest ground after a recent tumble amid weakness in European currencies. Gold was higher and crude oil prices ticked lower after yesterday's solid gains. Europe finished lower amid a pullback in Financials and Energy stocks, while markets in Asia were mixed.

The Dow Jones Industrial Average rose 47 points (0.2%) to 30,046, while the S&P 500 Index lost 5 points (0.1%) at 3,663, and the Nasdaq Composite declined 28 points (0.2%) to 12,378. In heavy volume, 909 million shares were traded on the NYSE and 4.2 billion shares changed hands on the Nasdaq. WTI crude oil was $0.21 lower at $46.57 per barrel and wholesale gasoline shed $0.01 to $1.31 per gallon. Elsewhere, the Bloomberg gold spot price gained $2.43 to $1,839.00 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 lower for the week, as the DJIA was down 0.6 %, the S&P 500 declined 1.0%, and the Nasdaq Composite decreased 0.7%.

The U.S. Food and Drug Administration (FDA) said that it is aiming for a quick Emergency Use Authorization (EAU) of Pfizer Inc's (PFE $41) and BioNTech SE's (BNTX $127) COVID-19 vaccine that gained the backing by an FDA advisory panel late yesterday. The FDA added that it has notified the U.S. Centers for Disease Control (CDC) and Operation Warp Speed, so they can execute their plans for timely vaccine distribution. Shares of both companies slipped.

Dow member Walt Disney Company (DIS $176) announced at a presentation to investors that its Disney+ streaming service has seen its subscribers jump to more than 86.8 million in a little over a year, and that it sees the possibility of this figure to reach 230 million to 260 million through fiscal 2024. Additionally, DIS announced that its monthly Disney+ service rate will increase by $1 to $8 per month. Shares rallied over 10%.

Oracle Corporation (ORCL $61) reported fiscal Q2 earnings-per-share (EPS) of $0.80, or $1.06 ex-items, versus the $1.00 FactSet estimate, as revenues rose 2.0% year-over-year (y/y) to $9.8 billion, roughly in line with expectations. The company noted strong revenue growth out of its Fusion and NetSuite Cloud ERP applications businesses that contributed to increased operating earnings and it expects this trend to continue. ORCL issued Q3 guidance that was above expectations. Shares gained ground.

Costco Wholesale Corporation (COST $375) posted fiscal Q1 EPS of $2.62, above the Street's forecast of $2.05, on previously-reported revenues of $42.4 billion, which rose 16.9% y/y. Sales growth was in the double-digits across all regions in the world compared to last year, and E-commerce sales jumped 86.2%. Shares were higher.

Lululemon Athletica Inc. (LULU $344) announced Q3 earnings of $1.10 per share, or $1.16 ex-items, versus the expected $0.88, with revenues rising 22.0% y/y to $1.1 billion, just above the projected $1.0 billion. The company said its Q3 results demonstrate strength across channels and markets, both in North America and around the world. LULU added that its product innovations, investments in the e-commerce business, and strategic acquisition of MIRROR position it well to serve its guests as their needs evolve across both physical and digital experiences. Shares traded lower, with the company announcing that it will not provide detailed financial guidance for the full year due to the impact that COVID-19 is having across the globe.

Broadcom Inc. (AVGO $406) reported Q4 EPS of $2.93, or $6.35 ex-items, versus the expected $6.25, as revenues grew 12.0% y/y to $6.5 billion, north of the estimated $6.4 billion. The company said its Q4 results were driven by continued demand for networking from cloud and for broadband from service providers, as well as the significant ramp in wireless, even as enterprise demand remained soft. AVGO issued Q1 guidance that was just above the Street's projections and announced a 10.8% increase of its quarterly dividend to $3.60 per share. Shares were lower.

Schwab's Chief Investment Strategist Liz Ann Sonders offers her 2021 U.S. Market Outlook: Better Days?, noting how stocks are closing out 2020 having crossed the COVID chasm; but the economy has more rough terrain to traverse. She adds that vaccines represent the light at the end of the tunnel; but we will enter 2021 still in the tunnel. Liz Ann concludes that the outlook for 2021 looks sunnier; but frothy sentiment near-term remains a risk.

Meanwhile, the potential for further fiscal relief, of which hopes have been resuscitated to contribute to the recent push to all-time highs for the equity markets, remains elusive as has been the case for several months. Moreover, in early January, Georgia will hold runoff Senate elections 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.

December consumer sentiment surprisingly jumps, wholesale price inflation subdued

The December preliminary University of Michigan Consumer Sentiment Index(chart) unexpectedly rose to 81.4 versus the Bloomberg expectation of a dip to 76.0 from November's 76.9 reading. The surprising improvement for the index came as both the current conditions and the expectations portions of the index rose. The 1-year inflation forecast declined to 2.3% from November's 2.8% rate, and the 5-10 year inflation forecast remained at November's 2.5% level.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in November ticked 0.1% higher month-over-month (m/m), matching the Bloomberg forecast and below October's unrevised 0.3% increase. The core rate, which excludes food and energy, also gained 0.1% m/m, in line with estimates and October's unadjusted rise. Y/Y, the headline rate was 0.8% higher, compared to projections of a 0.7% gain and the prior month's unadjusted 0.5% increase. The core PPI increased 1.4% y/y last month, below estimates of a 1.5% increase, and compared to October's unrevised 1.1% rise.

Treasuries were higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, all decreased 2 basis points (bps) to 0.12%, 0.89% and 1.62%, respectively.

Bond yields have drifted higher and Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest 2021 Fixed Income Outlook: Calmer Waters, due to the likelihood of vaccines for the coronavirus becoming widely available by mid-year and the possibility of more fiscal relief for the economy coming, 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. Kathy adds that the prospect of rising interest rates tends to make bond investors wary, as higher rates mean lower bond prices, all else being equal. However, she points out how we view higher bond yields as an opportunity because when bond yields move up, it offers the chance for investors to capture more income from interest payments without necessarily taking more risk. Kathy discusses how structuring a portfolio to benefit from rising yields is the opportunity we see in 2021.

Europe sees pressure as recent leadership rests, Asia mixed

European equities finished mostly lower, as the global markets reassessed the recent rally that has been fueled by COVID-19 vaccine optimism and fostered a rotation into cyclically-natured sectors. Energy and Financials sectors, which have led the recent run gave back some of their gains, as the markets eyed whether a U.S. fiscal relief deal and an agreement on a Brexit trade deal between the U.K. and European Union will get done as time runs out on 2020 without breakthroughs on either front. The moves came after yesterday's monetary policy decision from the European Central Bank (ECB), which decided to boost and extend its emergency purchase program, but ECB President Christine Lagarde noted that the increased emergency program "need not be used in full" if favorable financing conditions can be maintained. In economic news, the U.K. tweaked its 12-month inflation outlook lower and Italian industrial production in October rose more than expected. The euro dipped versus the U.S. dollar after yesterday's gain, while dampened Brexit deal hopes appeared to weigh on the British pound. Bond yields in the Eurozone and the U.K. traded lower.

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 could start being administered globally this week, and the planned rollout is good news that 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 France's CAC-40 were down 0.8%, Germany's DAX Index fell 1.4%, Italy's FTSE MIB Index lost 1.0%, Spain's IBEX 35 Index dropped 1.5%, and Switzerland's Swiss Market Index was little changed.

Stocks in Asia finished mixed as the global market choppiness continued amid the backdrop of lingering COVID-19 vaccine optimism, near-term potential headwinds regarding the resurgence of virus cases, and as agreements on U.S. fiscal relief and a U.K. Brexit trade deal remain uncertain. Japan's Nikkei 225 Index declined 0.4%, with the yen firming up a bit late in the session, while South Korea's Kospi Index advanced 0.9% on the heels of some upbeat export data for the first part of December. The Hong Kong Hang Seng Index increased 0.4%, but Australia's S&P/ASX 200 Index decreased 0.6%. India's S&P BSE Sensex 30 Index grew 0.3%. Vaccine optimism and a coinciding drop in the U.S. dollar has benefitted the outlook for international stocks, notably emerging markets, 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.

Stocks retreat from record highs, snapping weekly winning streak

After posting back-to-back weekly gains, U.S. stocks pulled back somewhat on the week as the markets grappled with a host of data and developments while reassessing the recent run to record highs. COVID-19 vaccine optimism remained as the U.K. began administering the first doses, while the U.S. progressed toward a rollout in the world's largest economy. However, continued failures dampened optimism of agreements on U.S. fiscal relief and a U.K. Brexit trade deal. Moreover, the U.S. employment picture remained uneasy, exacerbated by the near-term impact of the resurgence in new virus cases, with last Friday's disappointing nonfarm payroll report being followed by this week's acceleration in already elevated weekly initial jobless claims. The Energy sector was the only group to post gains, as crude oil prices extended a weekly winning streak to six, while some of the air was let out of the Information Technology, Financials, Consumer Discretionary and Materials sectors. The Treasury yield curve flattened as bond prices rallied, the U.S Dollar Index stabilized after a recent tumble, and gold modestly added to last week's advance.

Next week, the markets will likely continue to be closely tied to vaccine, U.S. fiscal and U.K. Brexit headlines, while the economic calendar will deliver some key reports that could garner attention. We will begin to get December regional manufacturing reports, Markit will release its preliminary December Manufacturing and Services PMIs, the Fed will deliver its industrial production report, and November retail sales data will hit the tape. Moreover, housing data will be prevalent, courtesy of the NAHB Housing Market Index for this month, and November housing starts and building permits, while jobless claims for the week ended December 12 and the November Leading Index could also command some focus. However, the headlining event next week will likely be Wednesday's Federal Open Market Committee (FOMC) monetary policy decision. The FOMC is not expected to make changes to policy, but the markets will likely pay close attention to any guidance on how/if/when it may tweak its asset purchase program amid the threat of near-term disruptions due to rising cases and the recent moves in the Treasury markets, as well as after the European Central Bank boosted its emergency purchase program this week.

Along with a host of global preliminary December Manufacturing and Services PMI reports, next week's international economic calendar will also yield some data points that could move the markets. Notable reports due out include; Australia—employment change. China—retail sales and industrial production. India—industrial production, CPI and PPI, and trade balance. Japan—Q4 Tankan Large Manufacturing Index, trade balance, industrial production, and the Bank of Japan monetary policy decision. Eurozone—industrial production, trade balance and CPI, along with German business confidence. U.K.—employment change, inflation statistics, retail sales and the Bank of England's monetary policy decision.

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.

Important Disclosures

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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Markets Finish Mixed, but Snap Weekly Winning Streak

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