Stocks Finish Rollercoaster Day on the Plus Side

U.S. equities finished higher amid a day fraught with wild swings above and below the flatline, as investors weighed a plethora of news and events. Clarity on the political front appeared to keep sentiment elevated, despite the disturbing violence at the Capitol earlier in the week. Meanwhile, the December nonfarm payroll report disappointed by posting a loss in jobs for the month, but the data likely bolstered expectations of ramped-up fiscal relief measures from the incoming administration. As well, the surging COVID-19 cases globally, including variants of the virus, remained a concern. Treasuries were mostly lower, lifting yields, and the U.S. dollar gained ground, while gold tumbled and crude oil prices added to a weekly surge. In equity news, Micron Technology posted upbeat quarterly results and guidance, Serepta Therapeutics tumbled after disappointing gene therapy trial results, and Dow member Boeing Company settled a case with the Justice Department regarding its troubled 737 MAX jet. Markets in Europe and Asia finished higher.

The Dow Jones Industrial Average rose 57 points (0.2%) to 31,098, the S&P 500 Index was up 21 points (0.6%) at 3,825, and the Nasdaq Composite increased 135 points (1.0%) to 13,202. In heavy volume, 1.0 billion shares were traded on the NYSE and 7.1 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.41 to $52.24 per barrel. Elsewhere, the Bloomberg gold spot price tumbled $65.28 to $1,848.67 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 90.05. Markets were higher for the week, as the DJIA rose 1.6%, the S&P 500 increased 1.8%, and the Nasdaq Composite advanced 2.4%.

Micron Technology Inc. (MU $77) reported fiscal Q1 earnings-per-share (EPS) of $0.71, or $0.78 ex-items, compared to the $0.68 FactSet estimate, as revenues rose 12.2% year-over-year (y/y) to $5.8 billion, above the Street's forecast of $5.7 billion. The memory chip company said its Q1 results were driven by strong end-market demand, adding that it is excited about the strengthening DRAM industry fundamentals. The company also noted that for the first time in its history, it is simultaneously leading on DRAM and NAND technologies, and it is in an excellent position to benefit from accelerating digital transformation of the global economy fueled by AI, 5G, cloud, and the intelligent edge. MU issued Q2 EPS and revenue guidance that topped estimates. Shares were lower.

Shares of Sarepta Therapeutics Inc. (SRPT $82) tumbled over 50% after the company announced disappointing results from its trial of its gene therapy as a one-time treatment for the rare Duchenne muscular dystrophy disorder.

Dow member Boeing Company (BA $210) announced that it reached a $2.5 billion agreement with the Department of Justice to settle a criminal charge that it misled regulators about safety issues that led to two fatal crashes involving its 737 MAX jet, which was grounded for nearly two years after being returned to service late last year. Shares slipped.

The markets appeared to be pleased with the clarity on the political front as the outcome of the runoff elections in Georgia gave the Democrats a slim majority in Congress, which could prove pivotal in future legislation, notably implications for tax policy, regulation, further fiscal relief, and infrastructure spending. However, this week's violence at the U.S. Capitol remained a sore spot and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses in his article, Washington Unrest: What Investors Should Know.

For more on the impact of the changed political landscape and for our outlooks on equities, bonds and the global markets for 2021, visit our Market Insights page on www.schwab.com. Finally, be sure to follow us on Twitter @SchwabResearch.

December employment declines

Nonfarm payrolls (chart) fell by 140,000 jobs month-over-month (m/m) in December, compared to the Bloomberg forecast of a 50,000 rise, and following November's upwardly-adjusted gain of 336,000. Excluding government hiring and firing, private sector payrolls dropped by 95,000, versus the forecasted rise of 25,000 after advancing by a favorably-revised 417,000 in November. The labor force participation rateremained at November's 61.5% rate, matching forecasts.

The Department of Labor said for last month job losses in leisure and hospitality and in private education were partially offset by gains in professional and business services, retail trade and construction.

The unemployment rate held at November's 6.7% rate, versus forecasts to tick higher to 6.8%. Average hourly earnings jumped 0.8% m/m, compared to projections of a 0.2% gain, and November's 0.3% increase. Y/Y, wages were 5.1% higher, north of estimates of a 4.5% increase. Average weekly hours dipped to 34.7 from November's unrevised 34.8 rate, where it was forecasted to remain.

The report noted that among the unemployed, the number of persons on temporary layoff increased by 277,000 in December, down considerably from the high of 18.0 million in April but is 2.3 million higher than pre-pandemic levels in February. The number of permanent job losers fell by 348,000 to 3.4 million in December but is up by 2.1 million since February. The number of unemployed reentrants increased by 282,000 to 2.3 million over the month, 452,000 higher than in February. Finally, the number of long-term unemployed—those jobless for 27 weeks or more—were essentially unchanged at 4.0 million but has increased by 2.8 million since February.

November wholesale inventories (chart) were revised higher to a flat m/m reading, versus expectations to be unadjusted at the preliminary estimate of a 0.1% dip and compared to October's upwardly-revised 1.3% rise. Sales nudged 0.2% higher after October's downwardly-revised 1.7% gain.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $15.3 billion during November, above the $9.0 billion forecast of economists polled by Bloomberg, while October's figure was adjusted downward to an increase of $4.5 billion from the originally reported $7.5 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $16.0 billion, a 6.1% increase year-over-year (y/y), while revolving debt, which includes credit cards, fell by $700 million, a 1.0% y/y decline.

Treasuries are mostly lower following the jobs report, as the yield on the 2-year note was little changed at 0.14%, while the yield on the 10-year note gained 5 basis points (bps) to 1.12%, and the 30-year bond rate rose 4 bps to 1.88%.

Schwab's 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 further fiscal stimulus. Meanwhile, short-term interest rates are likely to remain pinned near zero throughout the year as the Fed waits to "normalize" interest rates until inflation rises. Consequently, the yield curve should steepen as the difference between short and long-term yields expands.

Europe and Asia higher as tech continues to grind higher

European equities finished higher, with the Information Technology sector leading to the upside, despite the unexpected drop in December employment in the U.S. The markets appeared buoyed by political clarity in the U.S., along with some upbeat economic data in the region. German exports and industrial production for November both rose more than anticipated, while the Eurozone unemployment rate surprisingly declined for November. The euro was lower versus the U.S. dollar, which has stabilized after a recent drop, while the British pound gained modest ground against the greenback. Bond yields in the Eurozone and the U.K. were mixed.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, 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 rose 0.2%, Germany's DAX Index increased 0.6%, France's CAC-40 Index advanced 0.7%, Spain's IBEX 35 Index added 0.3%, while Italy's FTSE MIB Index and Switzerland's Swiss Market Index gained 0.3%.

Stocks in Asia finished mostly higher to close out the week, with the global markets finding support from the clarity on the political front of the world's largest economy of the U.S. Cyclically-sensitive sectors, notably Energy, along with Financials have received a boost, while Information Technology issues continued to find demand. This week's host of relatively strong December business activity reports have also underpinned the backdrop. However, Chinese markets lagged amid resurfaced geopolitical tensions with the U.S. that included decisions to delist some of the country's large telecom companies and reports that the U.S. is mulling blacklisting e-commerce giant Alibaba Group Holding Ltd. (BABA $227). The markets seemed to look past the impact of surging COVID-19 cases and variants of the virus, with Japan declaring a state of emergency in Tokyo and three other areas. Japan's Nikkei 225 Index gained 2.4%, with the yen holding onto yesterday's weakness and as the country's household spending unexpectedly rose in November. South Korea's Kospi Index rallied 4.0%, bolstered by a jump in shares of Hyundai Motor Co. (HYMTF $42) on reports that the company was in discussions regarding a deal with Dow member Apple Inc. (AAPL $131) to develop electric vehicles and batteries. Australia's S&P/ASX 200 Index advanced 0.7%, India's S&P BSE Sensex 30 Index rose 1.4%, and the Hong Kong Hang Seng Index moved 1.2% higher. China's Shanghai Composite Index declined 0.2%. 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 ride clarity on contentious political front to solid weekly gains

U.S. stocks finished the first week of 2021 positively, notching another round of record highs as the drawn-out contentious election concluded to provide clarity and foster some resiliency for the markets. The highly-anticipated Georgia runoff Senate elections ended with the Democrats gaining a slim majority in Congress and President-elect Joe Biden was officially declared the next President. As such, the markets piled into cyclically-sensitive sectors on expectations that further fiscal relief may be in the offing, along with ramped-up infrastructure spending. Financials also contributed noticeably amid a decisive steepening of the Treasury yield curve, while Energy issues led the way, rallying in the wake of a jump in crude oil prices on optimism of a robust recovery in the second half of 2021 and as Saudi Arabia surprised the markets by announcing oil production cuts. Stocks shrugged off an unsettling attack on the U.S. Capitol by election protestors, festering concerns about the impact of the surging cases and new variants of COVID-19, and the prospect that tax increases could be on the new administration's agenda. The U.S. dollar stabilized somewhat after hitting lows not seen since the Spring of 2018, and gold reversed an early week rally to finish lower.

The economic calendar will likely be in focus next week as the markets assess the need for further fiscal relief, headlined by some key reads on the consumer, courtesy of December retail sales and the preliminary January University of Michigan Consumer Sentiment Index. Inflation data will also be prevalent as the Consumer Price Index (CPI), the Producer Price Index (PPI) and the Import Price Index will hit the tape. Other reports due out next week that could garner some attention include, initial jobless claims for the week ended January 9, December industrial production, the Fed's Beige Book report—an anecdotal look at business activity across the nation used as a policy tool in preparation for the Central Bank's next two-day monetary policy meeting set to conclude January 27—the JOLTS job openings report for November, and the NFIB Small Business Optimism Index for last month. Finally, Fed Chairman Jerome Powell will take part in a Princeton economics webinar on Thursday.

Next week's international economic calendar will also provide some data points that could move the markets courtesy of: China—CPI and PPI, lending statistics, and trade balance. Japan—core machine orders. India—industrial production, CPI and PPI, and trade balance. Eurozone—investor confidence, industrial production and trade balance, along with German 2020 GDP. U.K.—industrial/manufacturing production, trade balance and November 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.

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 Finish Rollercoaster Day on the Plus Side

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