Stocks End Session Higher and Notch Weekly Gains

U.S. stocks were able to finish higher across the board and post weekly gains heading into the Presidents' Day holiday weekend, with Walt Disney Company being a drag on the Dow and keeping the blue chip index near the flatline, despite its Disney+ performance helping it post an unexpected Q4 profit. Signs of progress on COVID-19 vaccine rollouts, improving virus case trends in the country and elevated expectations of further fiscal relief continued to be the catalysts in the markets' rebound back to record highs from a retail trading frenzy disruption a couple weeks ago. An unexpected decline in preliminary February consumer sentiment added to the mix to keep the moves mostly rangebound. Treasuries fell, pushing yields higher, with the 10-year note hitting the 1.20% mark for the first time in a year, and the U.S. dollar ticked higher, while crude oil prices gained solid ground, and gold finished lower in choppy trading. Europe was mostly higher as investors digested earnings and U.K. GDP data, while markets in Asia were mostly lower in light volume with many markets remaining closed for holidays.

The Dow Jones Industrial Average rose 28 points (0.1%) to 31,458, the S&P 500 Index was up 19 points (0.5%) at 3,935, and the Nasdaq Composite increased 70 points (0.5%) to 14,095. In moderately-heavy volume, 831 million shares were traded on the NYSE and 7.3 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.23 to $59.47 per barrel. Elsewhere, the Bloomberg gold spot price lost $6.05 to $1,819.46 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—inched 0.1% higher to 90.47. Markets were up for the week as the DJIA gained 1.0%, the S&P 500 advanced 1.2%, and the Nasdaq Composite increased 1.7%.

Dow member Walt Disney Company (DIS $188) reported fiscal Q1 earnings-per-share (EPS) of $0.02, or $0.32 excluding items related to amortization of intangible assets, fair value step-up on its film and television costs, and restructuring and impairment charges. The FactSet estimate called for a $0.34 per share loss. Revenues declined 22.0% year-over-year (y/y) to $16.3 billion, north of the Street's forecast of $15.9 billion.

DIS said results in Q1 were adversely impacted by COVID-19, with the most significant impact at its Disney Parks, Experiences and Products segment where since late in Q2 2020, its parks and resorts have been closed or operating at significantly reduced capacity and its cruise ship sailings have been suspended. However, the company did post stronger-than-expected total direct-to-consumer (DTC) streaming subscribers, bolstered by continued growth of its Disney+ service. The company added that it made "incredible strides" in its DTC business, reaching more than 146 million total paid subscriptions. DIS added that it is confident that, with its robust pipeline of content and the upcoming launch of its new Star-branded international general entertainment offering, it is well-positioned to achieve even greater success going forward. Shares were lower.

Expedia Group Inc. (EXPE $147) posted a Q4 adjusted loss of $2.64 per share, compared to the Street's forecast of a $1.94 per share shortfall. Revenues tumbled 67.0% y/y to $920 million, south of the expected $1.1 billion. The travel booking company said last year was an incredibly difficult year for the travel industry, and while not as hard hit as many of its partners, it was not spared the broadly negative impacts of COVID-19. However, the company said Q4 brought signs of hope in the form of vaccine approvals, but rising cases across the globe and rolling shutdowns of various travel markets made an impact. EXPE said it is looking forward to much better outcomes for its customers and partners as the travel market rebounds. Shares finished lower.

Shares of PayPal Holdings Inc. (PYPL $298) traded higher after the financial technology company concluded its investor day on Thursday, where it announced a host of initiatives including customer engagement to drive higher payment volume and higher revenue per active user, opportunities to expand internationally, gaining traction on the adoption of crypto currencies, and the exploration of opportunities through potential acquisitions.

The stock markets have paused near record highs after rallying back from the disruption a couple weeks ago as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her latest article, Lesson Learned? Takeaways From the GameStop Saga.

Meanwhile, as the markets grapple with the frothy sentiment and stretched equity markets valuations, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Your Portfolio May Be Less Diversified Than You Think. He points out how investors with a large home bias may not be nearly as diversified across sectors as they believe and risk missing their financial goals as longer-term trends tend to shift with the start of a new global economic cycle. Jeff urges investors to consider rebalancing portfolios back toward international stocks as years of U.S. stock outperformance may have caused a drift away from longer-term asset allocation targets. He adds that fortunately, obtaining global diversification has never been easier or less expensive.

Keep up with our latest views on investing in this environment, including our discussion on the highly anticipated further fiscal relief on our podcast, Will the Markets Get What They Want From Washington?, at our Market Insights page on www.schwab.com and be sure to follow us on Twitter @SchwabResearch.

Preliminary read shows consumer sentiment unexpectedly fell to August 2020 levels

The February preliminary University of Michigan Consumer Sentiment Index (chart) surprisingly fell to 76.2 versus the Bloomberg consensus estimate of a slight increase to 80.9 from January's 79.0 reading. The index hit a six-month low as the current conditions component dipped slightly but the expectations portion of the index also fell to a six-month low. The report noted that the expectations component was dragged down by households with incomes below $75,000, which reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than anytime since 2014. The 1-year inflation forecast rose to 3.3% from January's 3.0% rate, and the 5-10 year inflation forecast remained at January's 2.7% level.

Treasuries traded lower, as the rate on the 2-year note was little changed at 0.11%, while the yield on the 10-year note rose 4 basis points (bps) to 1.20% and the 30-year bond rate gained 6 bps to 2.01%.

Expectations have called for longer-term bond yields to move higher and the U.S. dollar to maintain its recent downtrend and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her article, Why Longer-Term Treasury Yields Are Rising. She notes 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.

However, the labor market remains a sore spot and the Federal Reserve has gone to great lengths to stress that its primary focus is on one of its goals of maximum employment, so much that it is willing to let inflation—the other goal of the Fed is price stability—run a bit hot to ensure a recovery on the jobs front. For a look at the labor market's struggles and the Fed's latest monetary policy decision, check out Schwab's Liz Ann Sonders' article, Scar Tissue: Weak Jobs Report Emphasizes COVID's Scars, as well as her commentary, Steady as We Go: Fed Keeps Rates Unchanged.

Please note: All U.S. markets will be closed on Monday in observance of the Presidents' Day holiday.

Europe higher amid U.K. GDP data and global sentiment, Asia mostly lower on still-low volume

European equities finished out the week higher, with the global markets remaining buoyed by the recent rally that has been fueled by COVID-19 vaccine rollout progress and elevated expectations that the U.S. will deliver further fiscal relief to combat the impact of the virus. The markets also digested some earnings and economic data in the region, with shares of ING Groep NV (ING $10) rallying after the Dutch lender posted upbeat earnings results and announced a dividend. Moreover, the U.K. posted a 9.9% contraction in 2020 GDP, the worst recession since 1709, per Bloomberg, but its Q4 quarter-over-quarter GDP grew 1.0%, topping forecasts of a 0.5% increase. The euro was little changed versus the U.S. dollar and the British pound rose against the greenback, while bond yields in the Eurozone and the U.K. were higher.

As the global markets assess the rally in the stock markets, 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.

The U.K. FTSE 100 Index was up 0.9%, Germany's DAX Index ticked 0.1% higher, France's CAC-40 Index gained 0.6%, Italy's FTSE MIB Index increased 0.4%, Switzerland's Swiss Market Index advanced 0.3%, and Spain's IBEX 35 Index moved 0.2% to the upside.

Stocks in Asia finished mostly lower to close out the week as the global markets continued to assess the recent rally on vaccine optimism, as well as signs of improving virus cases and expectations of further stimulus measures out of the world's largest economy of the U.S. However, volume remained much lighter than usual, with markets in China, Hong Kong and South Korea closed, with the former amid a week-long holiday break for the Lunar New Year. Japan's Nikkei 225 Index dipped 0.1%, even as the yen softened a bit late in the day, returning to action following yesterday's holiday. Australia's S&P/ASX 200 Index declined 0.6% amid some weakness in Energy, Materials, Industrials and Financials after the state of Victoria announced a short-term lockdown after new cases were detected. India's S&P BSE Sensex 30 Index finished little changed as the nation reported stronger-than-expected December industrial production and cooler-than-anticipated consumer price inflation data for January just before the markets closed.

Bulls continue to find sustenance from vaccine optimism and fiscal relief expectations

U.S. stocks continued to bounce back to record high territory from the pullback two weeks ago that came courtesy of frenzied retail trading activity. Although the cohort of retail traders remained active, the markets elected to focus on the persistent bullish themes. COVID-19 case trends in the U.S. improved, while the vaccine rollouts and measures to boost the supply of vaccines also conspired to keep optimism alive regarding a robust economic recovery in the second half of 2021. Moreover, the hyper-stimulus backdrop from the monetary and fiscal policy fronts was bolstered as President Joe Biden's $1.9 trillion package seemed to remain in the offing, while Fed Chairman Jerome Powell continued to stress that the employment recovery still needs undivided attention on multiple fronts. The U.S. dollar rolled over following last week's bounce, the Treasury yield curve continued to steepen modestly, gold advanced and WTI crude oil prices extended a sharp rally to pre-pandemic levels, hitting prices not seen since the Spring of 2019.

As such, the Energy sector led the way higher for the week, followed by solid gains in Information Technology, Financials, Health Care and Industrials issues. Defensively-natured sectors—Consumer Staples and Utilities—lagged, while Consumer Discretionary stocks also underperformed as a stronger-than-expected Q4 earnings season continued to be met with ambivalence on the Street. For a look at the earnings season performance among the major markets sectors, check out our latest Schwab Sector Views: The Earnings Recession Has Ended.

Of the 372 S&P 500 companies that have reported earnings thus far, roughly 72% have topped revenue forecasts and approximately 79% have bested profit projections—with the average beat rate nearly 19%—per data compiled by Bloomberg. Also, compared to last year, Q4 sales are on track to be up almost 3.0% and earnings growth is on pace for about 6.0%. The economic calendar was a bit light but showed small business optimism surprisingly slipped last month, December job openings unexpectedly accelerated, consumer price inflation remained subdued in January, and initial jobless claims for the week ended February 6 remained painfully elevated.

Next week, although shortened by the holiday, the economic docket will bring some key reports that could move the markets. The January inflation picture will fully develop with the Producer Price Index (PPI) and Import Price Index, February regional manufacturing reports will begin to pour in, accompanied by the preliminary Manufacturing and Services PMIs for this month from Markit, and the Fed will deliver the minutes from its late-January monetary policy meeting, along with its January report on industrial production and capacity utilization. Housing will be in focus, courtesy of the NAHB's February homebuilder sentiment report, which will be followed by January releases of housing starts and building permits, and existing home sales. However, the headlining data points on the week's docket will likely be initial jobless claims for the week ended February 13, and the January retail sales report. The markets will also have to contend with a host of Fedspeak throughout the week.

Along with a plethora of February Manufacturing and Services PMIs from around the globe, next week's international economic calendar has to potential to garner attention with releases including: Australia—employment change and retail sales. India—PPI and trade balance. Japan—Q4 GDP, industrial production, trade balance and core machine orders. Eurozone—industrial production, Q4 GDP, and trade balance, along with German investor confidence. U.K.—inflation statistics and retail sales.

In our latest Schwab Market Perspective: Disconnection, we address the question of why does everything seem so disconnected? The U.S. stock market has rallied to new highs, but some of the recent "winners" were companies that aren't profitable and/or had been widely bet-against ("shorted") by hedge funds. Hope is high that economic growth will accelerate as more people are vaccinated against COVID-19, but so far economic data has been lackluster. Meanwhile, bond investors are expecting inflation despite signs that the economic recovery's momentum may be stalling.

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 Session Higher and Notch Weekly Gains

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