Stocks End Mixed, but Finish with Weekly Gains

U.S. equities finished mixed, with the Dow and S&P 500 modestly pulling back from record high territory, but the major indexes were all able to post solid weekly gains. The markets appeared unsure as to how President Joe Biden's administration and the composition of Congress will impact fiscal relief, infrastructure spending, ramped-up vaccine rollout measures and the prospect of potentially higher taxes down the road. Disappointing business activity data for January overseas pressured the markets early on, as the reports illustrated the economic impact of reinstated measures globally to combat the persistent rise in COVID-19 cases. However, the U.S. economic calendar seemed to offer hope and limit the losses, as January reads on manufacturing and services sector activity from Markit showed growth unexpectedly accelerated, while existing home sales capped of a strong 2020 after topping forecasts. On the earnings front, Dow members IBM and Intel fell sharply on their results, hampering the Information Technology sector, while CSX saw pressure despite posting relatively favorable results, and shares of Intuitive Surgical suffered after it noted the impact of the COVID-19 pandemic on its business. Treasuries ticked higher, putting slight downward pressure on yields, and the U.S. dollar gained modest ground, while gold fell and crude oil prices trimmed a recent rally. Europe finished mostly lower, and markets in Asia traded to the downside.

The Dow Jones Industrial Average lost 179 points (0.6%) to 30,997, the S&P 500 Index was down 12 points (0.3%) at 3,841, while the Nasdaq Composite rose 12 points (0.1%) to 13,543. In heavy volume, 1.0 billion shares were traded on the NYSE and 5.9 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.86 to $52.27 per barrel. Elsewhere, the Bloomberg gold spot price dropped $15.55 to $1,854.47 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.1% higher to 90.22. Markets were higher for the week, as the DJIA added 0.6%, the S&P 500 increased 1.9%, and the Nasdaq Composite jumped 4.2%.

Dow member International Business Machines Corporation (IBM $119) reported Q4 earnings-per-share (EPS) of $1.41, or $2.07 ex-items, versus the $1.81 FactSet estimate. Revenues declined 6.0% year-over-year (y/y) to $20.4 billion, south of the Street's forecast of $20.7 billion. The company noted that its total cloud and Red Hat revenues were above year ago levels, but revenue out of its global business and technology services, and systems, units were down. IBM did not provide guidance in the report, but said, "We made progress in 2020 growing our hybrid cloud platform as the foundation for our clients' digital transformations while dealing with the broader uncertainty of the macro environment." IBM added that, "The actions we are taking to focus on hybrid cloud and AI will take hold, giving us confidence we can achieve revenue growth in 2021." Shares were sharply lower.

Dow component Intel Corporation (INTC $57) posted Q4 EPS of $1.42, or $1.52 ex-items, compared to the forecasted $1.11, as revenues declined 1.0% y/y to $20.0 billion, north of the projected $17.5 billion. The chip company said, "We significantly exceeded our expectations for the quarter, capping off our fifth consecutive record year. Demand for the computing performance Intel delivers remains very strong and our focus on growth opportunities is paying off." INTC also announced that it will increase its quarterly dividend by 5.3% to $0.3475 per share, while issuing Q1 guidance that was north of expectations. Shares lost ground, giving back the late-day pop yesterday minutes before the closing bell when the company released its report early.

CSX Corporation (CSX $89) announced Q4 EPS of $0.99, or $1.04 ex-items, versus the expected $1.01, with revenues decreasing 2.0% y/y to $2.8 billion, roughly in line with forecasts. The rail company said intermodal growth was more than offset by lower fuel surcharge revenue and coal declines. CSX added that despite the lower level of economic activity and operating challenges presented by the COVID-19 pandemic, it produced a full year 2020 operating ratio—the company's operating expenses as a percentage of revenue—of 58.8%, exceeding its initial guidance of 59.0%. Shares were lower.

Intuitive Surgical Inc. (ISRG $744) reported Q4 earnings of $3.02 per share, or $3.58 ex-items, versus the forecasted $3.13, as revenues—which were preliminarily reported earlier this month—rose 4.0% y/y to $1.3 billion. Shares came under pressure after the minimally invasion care and robotic-assisted surgery company noted that procedure volumes and system placements were significantly impacted by the COVID-19 pandemic as healthcare systems around the world diverted resources to respond to COVID-19. As such, the company said due to the continued uncertainty around the scope and duration of the pandemic globally, it cannot, at this time, reliably estimate the future impact on its operations and financial results.

Q4 earnings season is heating up and for a look at our latest views on all the major market sectors, including analysis of our outperform ratings on the Financials and Health Care sectors, and our underperform outlooks for the Utilities and Consumer Staples sectors check out our Schwab Sector Views: New Era in Washington. With the political landscape cleared up but uncertainty remaining regarding the implications of the changed political front, visit our Market Insights page on www.schwab.com for our analysis of the new administration and the composition of Congress, including our WashingtonWISE podcast, Dems Take Control, but No Carte Blanche for Biden and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's article, Five Names for Investors to Know in the New Administration. Finally, be sure to follow us on Twitter @SchwabResearch.

January business activity unexpectedly accelerates, existing home sales top estimates

The preliminary Markit U.S. Manufacturing PMI Index for January improved to 59.1 from December's unrevised 57.1 figure, surprisingly moving further into expansion territory denoted by a reading above 50. The Bloomberg consensus estimate called for the index to dip to 56.5. Moreover, the preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector also unexpectedly accelerated, rising to 57.5 from December's 54.8 figure, and compared to forecasts of a slight decline to 53.4. A reading above 50 also denotes expansion.

Markit noted that private sector businesses in the U.S. indicated a strong start to 2021, as output and new orders rose further. Rates of expansion in business activity accelerated at manufacturers and service providers, with goods producers registering the sharpest upturn in output since August 2014. However, the report noted intensified inflationary pressures as supplier delays and shortages pushed input prices higher and near-term concerns over the impact of the pandemic, notably on demand for consumer-facing services, and rising costs led to the weakest employment reading since July.

One of the major economic obstacles to a return to pre-pandemic activity is the labor market and Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Scar Tissue: Weak Jobs Report Emphasizes COVID's Scars, how small business trends bear watching—notably hiring plans as well as most significant constraints on hiring.

Existing home sales ticked 0.7% higher month-over-month (m/m) in December to an annual rate of 6.76 million units, versus expectations of a decline to 6.56 million units from November's upwardly-revised 6.71 million rate. Existing home sales are up 22.2% y/y.

Of the four major regions, the Northeast and South experienced m/m sales gains, while sales in the Midwest were unchanged and fell in the West. All regions saw sharp gains y/y. Sales of single-family homes and purchases of condominiums and co-ops were both up m/m and y/y. The median existing home price was up 12.9% from a year ago to $309,800, marking the 106thstraight month of y/y gains as prices rose in every region. Unsold inventory posted an all-time low of a 1.9-months pace at the current sales rate, down from 2.3-months in November and the 3.0-months pace a year earlier. Existing home sales reflect contract closings instead of signings and account for a large majority of the home sales market.

National Association of Realtors Chief Economist Lawrence Yun said, "Home sales rose in December, and for 2020 as a whole, we saw sales perform at their highest levels since 2006, despite the pandemic," adding that "What's even better is that this momentum is likely to carry into the new year, with more buyers expected to enter the market." Yun also noted that, "Although mortgage rates are projected to increase, they will continue to hover near record lows at around 3%," and he expects economic conditions to improve with additional stimulus forthcoming and vaccine distribution already underway.

Treasuries ticked higher, as the rate on the 2-year note was little changed at 0.12%, while the yields on the 10-year note and the 30-year bond dipped 2 basis points to 1.08% and 1.85%, respectively.

Bond yields have stabilized after a recent breakout that has taken the yield on the 10-year note to levels not seen since March 2020 and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, Why Longer-Term Treasury Yields Are Rising. She notes how in many ways, it appears that the market is disconnected from the current state of the economy and politics. Kathy adds 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. She notes how in many ways, it appears that the market is disconnected from the current state of the economy and politics. Kathy adds 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.

She points out that while the consensus expectation has been for stronger growth in the second half of 2021, the election results appear to have pulled those expectations forward. Kathy also discusses that with the presidency and majority in Congress held by one party, concerns about gridlock have given way to expectations of a faster recovery, more expansive fiscal policy, and higher inflation. She concludes that the recent move up in yields may be a bit too much, too soon, but the overall direction in yields is likely to remain higher.

Europe mostly lower on disappointing data, impact of virus

European equities finished mostly lower amid continued uneasiness regarding reinstated measures to restrict activity in response to the persistent resurgence in COVID-19 cases across the globe, with the world's second largest economy of China taking action to try to combat the spread. Economic data in the region added to the skittish mood and illustrated the impact of the restrictions with Markit's Eurozone Composite PMI falling further into contraction territory for this month, as manufacturing growth slowed but services sector activity—the hardest hit by the pandemic—moved deeper into contraction territory. Moreover, aggressive measures out of the U.K. have resulted in the region's services sector output tumbling deep into contraction territory, as reported by Markit, more than offsetting continued expansion in manufacturing output, though the pace has slowed noticeably. The reports were somewhat offset by the strong business activity and housing sales reports out of the U.S. The euro was little changed versus the U.S. dollar, which has stabilized after rolling back over this week, and the British pound lost ground. Bond yields in the core Eurozone regions and the U.K. traded mostly lower.

Although we got closure on the U.S. political front this week, uncertainty is resurfacing on this side of the pond as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, in his latest article, An Investors' Guide to the 2021 Elections. Jeff points out how Joe Biden taking the Presidential oath of office on Wednesday in the U.S. marks the end of a long U.S. political contest, but a year of political challenges is just getting started overseas.

The U.K. FTSE 100 Index was down 0.3%, Germany's DAX Index decreased 0.2%, France's CAC-40 Index declined 0.6%, Italy's FTSE MIB Index dropped 1.5%, and Spain's IBEX 35 Index fell 1.0%, while Switzerland's Swiss Market Index ticked 0.2% higher.

Stocks in Asia finished broadly lower with the markets assessing the recent rally, the modest rebound in the U.S. dollar that has bolstered emerging markets, and signs economic activity slowed in January. Moreover, concerns festered about the impact of the reinstatement of some restrictions on activity across the globe aimed at combating the persistent COVID-19 virus and variants. Japan's manufacturing output for this month fell back into contraction territory and its services sector activity contracted further, while Australia's manufacturing growth accelerated but the expansion out of its services sector slowed. Japan's Nikkei 225 Index declined 0.4%, even as the yen softened slightly late in the session, and Australia's S&P/ASX 200 Index traded 0.3% lower. China's Shanghai Composite Index decreased 0.4% and the Hong Kong Hang Seng Index fell 1.6%, exacerbated by a sharp drop in shares of oil giant CNOOC Ltd. (CEO $104) after index provider MSCI announced it will remove it from some of its indexes. South Korea's Kospi Index declined 0.6% and India's S&P BSE Sensex 30 Index dropped 1.5%. 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 ride familiar leaders back to record highs

U.S. stocks finished solidly higher on the week, returning to record high territory with the Information Technology, Communications Services and Consumer Discretionary sectors taking back the bullish reins. Meanwhile, the recent participation of cyclically-sensitive sectors—Energy, Financials, Materials and Industrials—cooled amid pauses in the rally in crude oil prices and the recent sharp steepening of the Treasury yield curve. The markets appeared to cheer the closure on the political front, with Joe Biden being sworn in as the 46th President of the United States, which helped boost optimism of further fiscal relief, along with ramped-up infrastructure spending and measures to expedite the rollout of COVID-19 vaccines. However, action was a bit choppy this week as the markets grappled with the uncertainty regarding the ultimate size and scope of the fiscal relief, and the potential for higher taxes and regulations down the road. Also, skittishness lingered regarding the impact of measures taken globally to combat the persistent surges in COVID-19 cases.

Q4 earnings season continued to heat up and although results have mostly topped expectations, the Street seemed to take on the "sell the news" mentality, while severely punishing the few that missed forecasts, as the equity markets came into the season running extremely hot. Per data compiled by Bloomberg, of the 68 S&P 500 companies that have reported thus far, roughly 75% have bested revenues estimates and about 86% have topped earnings forecasts. Revenue and earnings growth rates are running positive compared to last year but at muted paces south of 1.0%, though it is still early in the season. The economic calendar was shortened by Monday's holiday and appeared to take a back seat to the political and virus focus, but showed December housing construction and sales activity remained robust and business activity growth accelerated in January, while although decelerating the pace of initial jobless claims continued to be painfully elevated. The U.S. dollar rolled back over after last week's rebound from a recent tumble to lows not seen since the Spring of 2018 and gold gained ground.

Next week's economic calendar will get back to full strength, delivering Consumer Confidence, durable goods orders, regional manufacturing reports, the first look (of three) at Q4 GDP, the Leading Index, personal income and spending, new home sales, initial jobless claims for the week ended January 23, and the University of Michigan Consumer Sentiment Index. However, an accelerating earnings season is likely to compete for market attention. The headlining release/event will likely be the midweek monetary policy decision from the Federal Open Market Committee (FOMC), which will be followed shortly by the customary press conference from Fed Chairman Jerome Powell. Powell's comments are likely to be highly scrutinized given the backdrop of optimism of a second half economic recovery in 2021, rising inflation expectations, the recent steepening of the Treasury yield curve, Fedspeak as of late suggesting mixed feelings regarding tweaking asset purchases, and the disappointing start to the rollout of vaccines.

The international economic calendar next week will also bring some key data points that could move the markets headlined by: China—industrial profits. India—2020 GDP. Japan—retail sales, Tokyo inflation figures, and industrial production. Eurozone—consumer confidence, along with German business confidence, Q4 GDP, and unemployment change. U.K.—employment change.

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

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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Stocks End Mixed, but Finish with Weekly Gains

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