Stocks | December 1, 2021

Schwab Market Update

Early Gains Evaporate After U.S. Confirms First Variant Case

 

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U.S. equities relinquished early gains to finish lower after U.S. health officials confirmed the nation's first case of the Omicron variant in California. The markets have been volatile amid uncertainty regarding the ultimate impact of the new variant, and yesterday's hawkish pivot from Fed Chairman Jerome Powell. The markets paid close attention to Chairman Powell's second day of Congressional testimony after yesterday suggesting the Central Bank could speed up its asset purchase tapering campaign and saying we should retire the "transitory" reference to inflation. A busy economic day unfolded, headlined by solid November manufacturing data, and stronger-than-expected private sector employment growth from ADP ahead of Friday's key labor report. The Fed delivered a read on economic activity across the nation in afternoon action, noting modest expansion, but continued supply-chain constraints. In equity news, Dow member salesforce topped earnings estimates but issued Q4 guidance that was below forecasts, Dow component Merck & Co narrowly received FDA backing for its COVID-19 antiviral pill, and Mastercard raised its dividend and announced a new share repurchase program. Treasuries finished mixed, and the U.S. dollar ticked higher, while crude oil prices added to yesterday's tumble and gold gained modest ground. Europe finished with broad-based gains to recover somewhat from yesterday's slide, while markets in Asia were also higher.

The Dow Jones Industrial Average fell 462 points (1.3%) to 34,022, the S&P 500 Index declined 54 points (1.2%) to 4,513, and the Nasdaq Composite lost 284 points (1.8%) to 15,254. In very heavy volume, 5.3 billion shares of NYSE-listed stocks were traded, and 6.3 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.61 to $65.57 per barrel. Elsewhere, the gold spot price gained $3.70 to $1,780.20 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—inched 0.1% higher to 96.11.

Dow member salesforce (CRM $252) reported adjusted Q3 earnings-per-share (EPS) of $1.27, above the $0.92 FactSet estimate, with revenues rising 27.0% y/y to $6.9 billion, topping the Street's forecast of $6.8 billion. The company noted strong revenue growth, margin and cash flow, noting that salesforce is more relevant and strategic than ever as every company accelerates their digital transformation journey. CRM issued Q4 guidance that came in below expectations, while it also raised its full-year outlook. Analysts are citing slowing revenue growth for its MuleSoft business and how its Q4 guidance suggests a deterioration in margins from its current remaining performance obligations (CRPO). Shares fell over 10%.

Dow component Merck & Co. Inc. (MRK $74) announced that a U.S. Food & Drug Administration (FDA) advisory committee narrowly voted (13-10) in favor of Emergency Use Authorization for the company's first oral antiviral to treat mild-to-moderate COVID-19. Shares were lower.    

Mastercard Incorporated (MA $306) announced an 11.0% increase of its quarterly dividend to $0.49 per share, while also reporting a new share repurchase program, which authorizes the company to buy back up to $8.0 billion of its stock. Shares finished lower.   

The markets have seen volatility accelerate since Friday amid concerns about the new Omicron COVID-19 variant and following yesterday's hawkish pivot by Federal Reserve Chairman Jerome Powell, who suggested the Central Bank's tapering campaign could be expedited due to persistent inflation pressures that could be exacerbated by the variant.

The Schwab Center for Financial Research offers a look at Friday's drawdown in our commentary, Market Volatility: Schwab's Quick Take, discussing the new COVID variant. We point out how from a global stock market perspective, policymaker and consumer responses will be key regarding the economic impact. We discuss how market volatility is unsettling, but historically not unusual, and if you've built an appropriately diversified portfolio that matches your time horizon and risk tolerance, it's likely the recent market drop will be a mere blip in your long-term investing plan. However, it can be hard to do nothing when markets are rough.

Schwab's Chief Investment Strategist Liz Ann Sonders also offers her 2022 U.S. Market Outlook: Under Pressure, where she discusses where we go from here given that the pandemic is not exactly behind us. She discusses the macro backdrop that includes slower growth and a move to tighter monetary policy, which tends to usher in higher intra-market correlations and greater tail risks. We recommend a bias toward quality and not trying to time the market. There are concerns for 2022, but investing should always be a disciplined process over time.

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

November manufacturing output remains solid, private sector payrolls stronger than expected

The November Institute for Supply Management (ISM) Manufacturing Index (chart) showed manufacturing growth (a reading above 50) accelerated. The index rose to 61.1 from October's unrevised 60.8 level, and versus the Bloomberg consensus estimate of an increase to 61.2. The strong report came as growth in new orders, production, and employment all accelerated, while inventories dipped but remained in expansion territory and supplier delivery times shrunk but remained elevated. Inflation pressure remained palpable, but cooled, declining 3.3 points to 82.4, and continuing to come well off the 92.1 mark in June that was the highest reading since July 1979. 

The ISM said, "Manufacturing performed well for the 18th straight month, with demand and consumption registering month-over-month (m/m) growth, in spite of continuing obstacles. Meeting demand remains a challenge, due to hiring difficulties and a clear cycle of labor turnover at all tiers. Panelists' comments suggest m/m improvement on hiring, offset by backfilling required to address employee turnover. Indications that supplier delivery rates are improving were supported by the Supplier Deliveries Index softening. Transportation networks, a harbinger of future supplier delivery performance, are still performing erratically."

The final November Markit U.S. Manufacturing PMI Index was unexpectedly revised lower to 58.3 from the preliminary 59.1 level, where it was forecasted to remain, and just below October's reading of 58.4. A reading above 50 denotes expansion. Markit's report differs from the ISM's release as it polls a larger swath of companies varying in size and it weights its components differently.  

The ADP Employment Change Report showed private sector payrolls rose by 534,000 jobs in November, above forecasts calling for a 525,000 gain. October's rise of 571,000 jobs was revised to a 570,000 increase. Today's ADP data, which does not include government hiring and firing, comes ahead of Friday's broader November nonfarm payroll report, expected to show headline employment grew by 548,000 jobs and private sector jobs rose by 525,000. The unemployment rate is forecasted to dip to 4.5% and average hourly earnings are projected to rise 0.4% m/m and be up 5.0% y/y.

Construction spending (chart) rose 0.2% m/m in October, versus projections of a 0.4% gain and following September's favorably-revised 0.1% decline. Residential spending decreased 0.5% m/m, and non-residential spending rose 0.9%.

The MBA Mortgage Application Index declined 7.2% last week, following the prior week's increase of 1.8%. The drop came as a 14.8% fall for the Refinance Index more than offset a 5.1% rise for the Purchase Index. The average 30-year mortgage rate rose 7 basis points (bps) to 3.31%.

Fed Chairman Jerome Powell concluded his two-day Congressional testimony this morning in front of the House, along with Treasury Secretary Janet Yellen. Yesterday, Powell moved the markets after suggesting the Central Bank could speed up the pace of its tapering campaign to combat rising inflation pressures, while also saying that the word "transitory" in describing the inflation picture should be retired. The comments came as he warned that a recent rise in COVID-19 cases and the emergence of the Omicron variant could pose downside risks to employment and economic activity. He mentioned that greater virus concerns could reduce people's willingness to work in person which would slow progress made in the labor market. Powell also said that inflation can be largely traced to the pandemic so far, but price pressures have spread more generally in recent months, and the risk of high inflation has increased. The Q&A session is being closely followed for any color on how much will the pace of tapering be sped up and what that could mean for the timing of the first rate hike.

Rounding out the busy day, the Fed released its Beige Book—an anecdotal read on business activity across all Fed districts used as a policy tool to prep for the next monetary policy decision set to be announced on December 15. The report indicated that most Districts reported that the economy grew at a "modest to moderate pace, with consumer spending increasing slightly, but low inventories held back sales of some items, notably light vehicles. Activity in the leisure and hospitality segment picked up in most Districts as the spread of the Delta variant ebbed in many areas. Meanwhile, construction activity generally increased, but was restrained by scarce materials and labor, while manufacturing growth was solid, but materials and labor shortages limited expansion.

Treasuries were again mixed amid the flared-up global market uneasiness regarding the new COVID-19 variant and following Fed Chairman Powell's comments, as the yield on the 2-year note was up 2 bps to 0.54%, while the yield on the 10-year note was 2 bps lower at 1.42%, and the 30-year bond rate lost 1 bp to 1.77%.

Bond yields have been choppy as of late and Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest 2022 Fixed Income Outlook: Rough Waters how we expect another wave up in bond yields in 2022 as central banks around the world shift away from the very easy policies of the past few years. Kathy points out that with the pandemic-era policies ending, investors should be prepared for shifting tides and the risks and opportunities they present.

The only item on tomorrow's economic calendar is weekly initial jobless claims for the week ended November 27, forecasted to show 240,000 fist-time unemployment applications were filed.

Europe and Asia recover as markets assess variant and Fed pivot

European equities rebounded from yesterday's slide with the markets continuing to assess the new COVID-19 Omicron variant that has been detected in several countries around the world and has roiled the markets as of late. This new variant has added more uncertainty regarding future economic activity, the ongoing supply-chain challenges, and rising inflation pressures, as well as government and central bank responses. Yesterday's comments from Fed Chairman Jerome Powell in the U.S. continued to garner attention, as he appeared to pivot to a more hawkish stance to combat the persistent inflation pressures by saying the Central Bank will discuss speeding up its tapering campaign despite the uncertainty toward the variant.

The flared-up COVID variant concerns have come as economic growth is expected to slow but remain above trend, as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, in his 2022 Global Outlook: Slowing But Not Slow. Jeff notes how global GDP surpassed its pre-pandemic level in 2021, and although it's expected to slow in 2022, it is still expected to grow at an above average rate. In addition, Jeff adds that fiscal policy in the U.K. and Europe is expected to support economic growth, while central banks have been slow to end their loose monetary policy, and supply and inflationary pressures may soon ease up. Amid all this, Jeff highlights four themes for investors: consider international stocks, go green and look at eco-friendly investments, look into firms that are buying back shares, and guard against potential gluts that might emerge. On the economic front, the final reads on manufacturing output in the Eurozone and U.K. continued to show solid expansion, while German retail sales unexpectedly declined in October. Bond yields in both the U.K. and Eurozone were mostly higher, while the British pound ticked higher versus the U.S. dollar, but the euro was lower.

The U.K. FTSE 100 Index was up 1.6%, France's CAC-40 Index jumped 2.4%, Germany's DAX Index rallied 2.5%, Italy's FTSE MIB Index gained 2.2%, Spain's IBEX 35 Index advanced 1.8%, and Switzerland's Swiss Market Index traded 0.9% higher.

Stocks in Asia rebounded from a recent sell-off that has come from the new COVID-19 Omicron variant, and despite yesterday's hawkish comments from Fed Chairman Powell in the U.S. This recent pressure has been fueled by the variant fostering some renewed global travel restrictions and uncertainty regarding the ultimate economic impact and government responses. This only adds to the uncertainty regarding ongoing supply-chain issues and the resulting inflationary pressures. Schwab's Jeffrey Kleintop offers his article, Will Shortages Lead to Gluts?, noting how the global economy may be closer to the end of supply chain problems than the beginning. He points out how markets tend to look six to twelve months into the future, and they may soon begin to consider the possibility that some shortages may start to ease, and gluts may have started to form by the second half of next year.

In economic news, a private read on China's November manufacturing output showed activity unexpectedly moved into contraction territory. The report followed yesterday's official government data that showed last month's services sector activity grew more than expected and its manufacturing output nudged back into expansion territory. Moreover, Japan's final Manufacturing PMI was revised to a quicker pace of expansion than initially reported for last month. Finally, Australia's Q3 GDP fell into contraction territory quarter-over-quarter, while its y/y growth was stronger than expected. 

Japan's Nikkei 225 Index rose 0.4%, with the yen modestly paring recent gains, and China's Shanghai Composite Index also moved 0.4% higher. The Hong Kong Hang Seng Index advanced 0.8%, South Korea's Kospi Index rallied 2.1%, and India's S&P BSE Sensex 30 Index increased 1.1%. However, Australia's S&P/ASX 200 Index continued to buck the trend, declining 0.3%.

Tomorrow's international economic calendar will offer trade data from Australia, consumer confidence from Japan, as well as PPI from the Eurozone.

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