Stocks Make Solid Gains in a Holiday-Shortened Week

U.S. stocks finished higher as the S&P 500 registered a fresh record closing level in the last session of a volatile, holiday-shortened week. Investors tried to shake off omicron concerns as some studies suggested it may be less severe than its brethren, and following additional COVID-19 treatments which were granted U.S. Food and Drug Administration (FDA) emergency use authorization. Despite the ongoing concerns around omicron, inflation, and interest rates, some upbeat economic reports boosted stocks, as jobless claims remain near pre-pandemic lows, durable goods orders came in well above forecasts, consumer sentiment was revised higher, and new home sales hit a seven-month high. Treasuries were lower, lifting yields, and the U.S. dollar ticked lower, while crude oil and gold traded to the upside. In light equity news, Quidel Corp. agreed to purchase Ortho Clinical Diagnostics for $6 billion, and Merck's molnupiravir pill received FDA's emergency use authorization for treatment of mild-to-moderate coronavirus disease in adults. Asia and Europe finished broadly higher on the back of gains out of the U.S. yesterday, and as omicron concerns receded.

The Dow Jones Industrial Average increased 197 points (0.6%) to 35,951, the S&P 500 Index rose 29 points (0.6%) to 4,726, and the Nasdaq Composite gained 131 points (0.9%) to 15,653. In lighter volume, 2.9 billion shares of NYSE-listed stocks were traded, and 3.9 billion shares changed hands on the Nasdaq. WTI crude oil moved $1.03 higher to $73.79 per barrel. Elsewhere, the gold spot price gained $7.70 to $1,809.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticker 0.1% lower at 96.00. Markets were solidly higher on the week, as the DJIA gained 1.7%, the S&P 500 increased 2.3%, and the Nasdaq Composite rallied 3.2%.

In light equity news, Quidel Corp. (QDEL $137) agreed to acquire Ortho Clinical Diagnostics Holdings(OCDX $21) for $24.68 per share in a combination of cash and newly issued shares in a transaction with an enterprise value of $6 billion. Quidel Chief Executive Officer Douglas Bryant said, "The combination with Ortho will help solidify Quidel as a leader in the diagnostics industry. We expect the combined company will emerge as a global player with top-tier R&D capabilities, a more diverse product pipeline, and broader geographic footprint." Shares of OCDX traded higher, while QDEL fell over 17%.

Merck and Co. Inc (MRK $76) received an FDA emergency use authorization for its molnupiravir pill for the treatment of mild-to-moderate coronavirus disease in adults who are at high risk for progression to severe COVID-19. The news comes on the heels of the FDA’s emergency use authorization issued to Pfizer’s (PFE $59) Paxlovid pill yesterday, which, unlike Merck’s, was authorized for adults and pediatric patients. Molnupiravir will also be limited to situations where other authorized treatments are not available or are not clinically appropriate, the FDA said. Shares finished lower.

Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, Moving in Stereo: Churn and Rotations Causing Swings in Sentiment, where she acknowledges that 2021 has been a strong year for stocks, but with a lot of churn and sector volatility under the surface. She recommends using these short-term swings to your advantage via diversification and volatility-based rebalancing by trimming into strength and adding into weakness.

Find all our market commentary on our Market Insightspage and follow us on Twitter at @SchwabResearch.

Busy economic calendar offers upbeat data

Weekly initial jobless claims (chart) came in at a level of 205,000 for the week ended December 18, in line with the Bloomberg consensus estimate and the prior week's downwardly-revised level. The four-week moving average rose by 2,750 to 206,250, and continuing claims for the week ended December 11 dropped by 8,000 to 1,859,000, matching estimates. The four-week moving average of continuing claims fell by 49,000 to 1,919,750.

Personal income (chart) rose 0.4% month-over-month (m/m) in November, matching forecasts and following October's unrevised 0.5% gain. Personal spending rose 0.6%, also meeting expectations, and compared to the prior month's upwardly-adjusted 1.4% increase. The November savings rate as a percentage of disposable income was 6.9%.

The PCE Deflator rose 0.6% m/m, in line with expectations, but below October's upwardly-adjusted 0.7% gain. Compared to last year, the deflator was 5.7% higher, matching estimates and north of the prior month's upwardly-adjusted 5.1% increase. Excluding food and energy, the PCE Core Price Index rose 0.5% m/m, eclipsing expectations of a 0.4% advance, and compared to October's 0.5% rise. The index was 4.7% higher y/y, above estimates of 4.5%, and higher than October's upwardly-revised 4.2% rise.

November preliminary durable goods orders (chart) rose 2.5% month-over-month (m/m), well above estimates of a 1.8% gain and compared to October's upwardly-revised 0.1% rise from an initial 0.4% decline. Ex-transportation, orders were up 0.8% m/m, ahead of forecasts calling for a 0.5% advance and compared to October's downwardly-adjusted 0.3% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, decreased 0.1%, compared to projections of a 0.6% rise, and versus the prior month's upwardly-revised 0.9% increase.

The December final University of Michigan Consumer Sentiment Index (chart) was revised to a higher level than expected, at 70.6, compared to expectations for it to be unadjusted at the preliminary reading of 70.4. The upward revision came as the expectations component of the survey was revised higher, more than offsetting a slight decline in the current conditions portion. The overall index was higher versus November's 67.4 level. The 1-year inflation forecast fell to 4.8% from November's 4.9% rate, and the 5-10 year inflation forecast ticked lower to 2.9% from the 3.0% level in the prior month.

New home sales (chart) rose 12.4% m/m in November to an annual rate of 744,000 units, a seven-month high, but below forecasts calling for a rate of 770,000 units, and compared to October's negatively-revised 662,000-unit level. The median home price jumped 18.8% y/y to a record $416,900. New home inventory rose to 6.5 months from October's level of a 6.3-months supply at the current sales pace. Sales rose in all regions m/m, except in the Midwest, with a sharp gain seen in the West region. New home sales are based on contract signings, offering a timelier read on housing activity compared to the larger contributor of existing home sales, which are based on closings.

Treasuries were lower, as the yield on the 2-year note was up 3 basis points (bps) at 0.69%, the yield on the 10-year note increased 4 bps to 1.49%, and the 30-year bond rate was 5 bps higher at 1.91%.

The Treasury yield curve has been choppy amid the omicron variant uncertainty, and as the Fed announced that it will double to pace of tapering its monthly asset purchases and could raise rates three times in 2022, as discussed by Schwab's Liz Ann Sonders in her commentary, Higher Ground: Fed Ups Pace of Tapering and Dots Follow Suit.

The pace of monetary policy tightening by the Fed is key to watch regarding the impact on the Treasury yield curve as discussed by Schwab's Chief Fixed Income Strategist, Kathy Jones in her latest article, Have Bond Yields Already Peaked for This Cycle?

Please note: the bond markets traded in an abbreviated session today, and all U.S. markets will be closed tomorrow in observance of the Christmas holiday.

Europe and Asia finished broadly higher, as omicron concerns softened

European equities finished the day broadly higher, as all sectors registered gains and with Industrials issues leading the way. Worries regarding the spreading omicron appeared to be tempering following a study out of South Africa—where the variant first appeared—suggesting that the strain of the virus is less severe than its delta counterpart. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his article, Omicron: Will the Virus Wave Pattern Repeat?, how we shouldn't necessarily expect this wave to unfold the same as the others. Jeff adds that the rest of the month may hold policymaker responses to what we don't yet know about omicron's effects, resulting in continued volatility. He also notes that this may be tempered by a potential delay in monetary policy tightening and a backdrop of strong global economic growth. In economic news in the region, Q3 GDP out of Spain was upwardly adjusted on both a quarterly and yearly basis, while consumer confidence in Italy came in ahead of forecasts, but business sentiment fell short. The euro traded lower versus the U.S. dollar, while the British pound was higher. Bond yields in both the Eurozone and the U.K. moved to the upside.

The U.K. FTSE 100 Index was up 0.4%, France's CAC-40 Index gained 0.8%, Germany's DAX Index was 1.0% higher, Spain's IBEX 35 Index rallied 1.2%, Italy's FTSE MIB Index increased 0.7%, and Switzerland's Swiss Market Index finished 0.6% to the upside.

Stocks in Asia finished higher in thin trading, as concerns surrounding the omicron appear to be easing with studies showing the variant to be less severe than its predecessors. Meanwhile, the positive sentiment surrounding the upbeat consumer confidence report out of the U.S. yesterday added to the mood. Energy shares led the way amid a leg up in crude oil prices. Schwab's Jeffrey Kleintop offers his latest article, Top Global Risks of 2022, noting how the biggest risks in a typical year are often hiding in plain sight. Jeff lists these top five global risks for 2022, in no particular order: shortages turn into gluts, rate hikes slower than expected, China goes from cracking down to propping up, COVID waves may not resemble those of 2021, and geopolitical surprises. Whether or not these risks come to pass remains to be seen, but a new year almost always brings new surprises. Economic news in the region was light, with private sector credit in Australia increasing more than forecasts.

Japan's Nikkei 225 Index rose 2.1%, with the yen mostly unchanged on the day, China's Shanghai Composite Index increased 0.6%, the Hong Kong Hang Seng Index was up 0.4%, India's S&P BSE Sensex 30 Index gained 0.7%, Australia's S&P/ASX 200 Index traded 0.3% higher, and South Korea's Kospi Index moved 0.5% to the upside.

Volatile holiday-shortened week ends positively

After beginning the week adding to last week's downdraft, U.S. stocks were able to snap the three-day losing streak and head into the holiday on a positive note. Uncertainty surrounding the ultimate impact of the omicron variant persisted, but fears appear to temper a bit following upbeat news from Pfizer Inc. (PFE $59) that the company’s Paxlovid pill was given an emergency use authorization by the FDA for treatment of mild-to-moderate COVID-19 disease in high-risk adults and pediatric patients. Meanwhile, a study out of South Africa suggested that the omicron variant was less severe than initially thought. All sectors finished with gains for the week, with the growth-oriented Consumer Discretionary and Information Technology sectors leading the way, and Energy issues contributed amid a rebound in crude oil prices. The Treasury yield curve steepened a bit during the week after flattening the prior week in the wake of the Fed's announcement that it will speed up the pace of its tapering of monthly asset purchases, while policymakers projected the possibility of three rate hikes in 2022. The U.S. dollar lost modest ground and gold finished slightly higher in choppy trading.

The economic calendar for the last week of 2021 will be light but bring some data points that could garner market attention. Regional manufacturing reads are on tap, as well as wholesale inventories, pending home sales and weekly initial jobless claims for the week ended December 25.

Next week's international economic calendar will also provide some reports that could move the markets with releases worth noting including: Australia—lending statistics. China—manufacturing and non-manufacturing PMIs. Japan—labor data. U.K.—housing prices.

As noted in our latest Schwab Market Perspective: Why 2022 May Be a Better Year, as 2021 draws to a close, there are signs that the new year may be better than the last. The direction of COVID-19 variants remains difficult to predict, but another recent fear that has bedeviled the markets—inflation—may be about to ease. The narrowing of the performance gap under the broad stock market's surface emphasizes our strong bias toward high-quality factors such as strong earnings revisions, balance sheets, and cash flow. With sector swings and rotations still rampant, maintaining a factor-based (as opposed to sector-based) approach should allow for more stability and less violent swings in portfolios.

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Stocks Make Solid Gains in a Holiday-Shortened Week

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