Schwab Market Update
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U.S. equities finished modestly lower and nearly where they began today in a choppy session, as investors await tomorrow's Fed decision. The Street sifted through a host of mixed earnings results from Dow members Johnson & Johnson, American Express, 3M and Verizon Communications, as well as GE. Progress on the COVID-19 vaccine front also remained top of mind as new cases persist and variants remain a source of uncertainty. Outside of earnings, Beyond Meat jumped after announcing a partnership with PepsiCo. In economic news, Consumer Confidence improved more than expected as expectations outweighed a dampened assessment of current conditions, home prices rose, while manufacturing activity in the Richmond area surprisingly slowed. Treasuries were little changed and the U.S. dollar was lower, while gold and crude oil prices slipped. Europe finished broadly higher, aided by positive earnings results from UBS, while markets in Asia also finished to the downside.
The Dow Jones Industrial Average lost 23 points (0.1%) to 30,937, the S&P 500 Index was down 6 points (0.2%) at 3,850, and the Nasdaq Composite shed 10 points (0.1%) to 13,626. In heavy volume, 1.0 billion shares were traded on the NYSE and 6.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.16 to $52.61 per barrel. Elsewhere, the Bloomberg gold spot price was $4.06 lower $1,851.87 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.3% to the downside to 90.16.
Dow member Johnson & Johnson (JNJ $170) reported Q4 earnings-per-share (EPS) of $0.65, or $1.86 ex-items, versus the $1.82 FactSet estimate, as revenues rose 8.3% year-over-year (y/y) to $22.5 billion, north of the Street's forecast of $21.7 billion. The company said its results reflected continued confidence in its products and medicines throughout the COVID-19 pandemic. JNJ issued full-year EPS and revenue guidance that was above expectations. The company noted, "We continue to progress our COVID-19 vaccine candidate and look forward to sharing details from our Phase 3 study soon." Shares traded higher.
Dow component American Express Company (AXP $116) posted Q4 EPS of $1.76, above the forecasted $1.31, as revenues declined 18.0% y/y to $9.4 billion, compared to the expected $9.3 billion. AXP said its provisions for credit losses was a benefit this quarter, primarily reflecting a reserve release of $674 million due to an improving macroeconomic outlook during the quarter and strong credit performance, as well as lower net write-offs. AXP noted that it remains cautious about the pace of recovery. Shares were lower.
Dow member 3M Company (MMM $176) announced Q4 profits of $2.38 per share, versus the expected $2.15, with revenues rising 5.8% y/y to $8.6 billion, north of the forecasted $8.4 billion. The company said it delivered a strong Q4 with organic growth—excluding acquisitions, divestitures and foreign exchange—across all business groups and robust cash flow. MMM's full year guidance was a bit lighter than anticipated. Shares traded higher.
Dow component Verizon Communications Inc. (VZ $57) reported Q4 EPS of $1.11, or $1.21 ex-items, versus the expected $1.17, with revenues dipping 0.2% y/y to $34.7 billion, above the projected $34.5 billion. The company said total wireless service revenue and strong results in Verizon Media were offset by lower wireless equipment revenue and ongoing declines in legacy wireline products. The company's wireless retail net subscriber additions came in well below estimates. VZ issued Q4 profit guidance that was above estimates. Shares were lower.
General Electric Company (GE $11) posted Q4 earnings of $0.27 per share, or $0.08 ex-items, versus the projected $0.09, with revenues declining 16.0% y/y to $21.9 billion, above the expected $21.8 billion. The company said, "As 2020 progressed, we significantly improved GE's profitability and cash performance despite a still-difficult macro environment. The fourth quarter marked a strong free cash flow finish to a challenging year, reflecting the results of better operations as well as strong and improving orders in Power and Renewable Energy." GE issued 2021 profit guidance that was below expectations. Shares were nicely higher.
As Q4 earnings season shifts into high gear, read 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.
In other equity news, Beyond Meat Inc. (BYND $186) jumped after announcing a snack partnership with PepsiCo Inc. (PEP $142), a joint venture known as The PLANeT Partnership "to develop, produce and market innovative snack and beverage products made from plant-based protein." PEP was modestly higher.
Also, Schwab's Chief Investment Strategist Liz Ann Sonders offers in her latest article, Bridging the Gap(s): Converging and Diverging Trends Stemming From the Crisis, a review of the year that was, while analyzing and dissecting the nature of the K-shaped recovery in both the economy and stock market.
Finally, keep up with our latest views on the markets, including the implications of the changed political front, on our Market Insights page on www.schwab.com and follow us on Twitter @SchwabResearch.
Consumer Confidence improves slightly as Fed began first meeting of 2021
The Conference Board's Consumer Confidence Index (chart) increased to 89.3 in January from December's downwardly revised 87.1 level, and versus the Bloomberg consensus estimate calling for a slight improvement to 89.0. The positive read came as a decline for the Present Situation Index portion of the survey was more than offset by a solid gain in the Expectations Index of business conditions for the next six months. On employment, the labor differential—consumers’ appraisal of jobs being "plentiful" minus being "hard to get"—moved further into negative territory, posting a reading of -3.2 following the -1.9-level posted in December.
The 20-city composite S&P CoreLogic Case-Shiller Home Price Index posted a 9.08% y/y gain in home prices in November, versus estimates of an 8.70% increase. Compared to the prior month, home prices were up 1.42% on a seasonally adjusted basis, above forecasts of a 1.00% gain.
The Richmond Fed Manufacturing Activity Index surprisingly fell but remained in expansion territory (a reading above zero) for this month. The index dropped to 14 from December's 19 reading, where it was expected to remain. Growth in new orders and shipments decelerated but employment expanded at a faster pace month-over-month.
Finally, the Federal Open Market Committee (FOMC) began its two-day monetary policy meeting today, which will conclude with tomorrow's statement and 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.
Treasuries were little changed, as the rates on the 2-year and 10-year notes were flat at 0.12% and 1.03%, respectively, while the yield on the 30-year bond ticked 1 basis point higher to 1.80%.
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.
In addition to the FOMC's monetary policy decision, tomorrow's economic calendar will offer durable goods orders for December, forecasted to have gained 1.0% month-over-month (m/m), while orders ex-transportation and nondefense capital goods orders ex-aircraft are both anticipated to post 0.5% m/m increases. MBA Mortgage Applications for the week ended January 22 are also on deck.
Europe higher as earnings season ramps up, Asia falls
European equities traded higher, with the Energy and Financials sectors regaining their footing as crude oil prices gained ground and earnings season ramped up. UBS Group AG (UBS $15) gained ground after the company easily topped earnings expectations, led by strength in the wealth manager's client asset management and investment banking units, while it also announced a $4.5 billion share repurchase program. The report preceded a flood of key earnings reports out of the U.S. However, the markets continued to monitor progress on the COVID-19 vaccine front, including yesterday's upbeat study results from Moderna Inc. (MRNA $152) regarding efficacy in fighting some of the virus variants that have surfaced. Moreover, although the U.S. political front has gained some clarity, political uncertainties are flaring up on this side of the pond, with Italy's Prime Minister Conte resigning yesterday. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, points out in his latest article, An Investors' Guide to the 2021 Elections, how Joe Biden taking the Presidential oath of office last week 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 euro and British pound traded higher versus the U.S. dollar, and bond yields in the Eurozone and the U.K. were mostly higher. In economic news, U.K. employment fell by a smaller amount than anticipated for November.
The U.K. FTSE 100 Index was up 0.2%, Germany's DAX Index gained 1.7%, France's CAC-40 Index and Spain's IBEX 35 Index rose 0.9%, Italy's FTSE MIB Index advanced 1.2%, and Switzerland's Swiss Market Index traded 0.4% higher.
Stocks in Asia finished broadly lower as the markets gear up for the ramped-up earnings season, while concerns remained regarding the spread of the COVID-19 virus and variants. Yesterday's rise in the U.S. dollar also likely fostered a pause in the rally for emerging markets. However, volume was lighter than usual as markets in Australia and India were closed for holidays. Stocks in China and Hong Kong led to the downside, with the Shanghai Composite Index declining 1.5% and the Hang Seng Index dropping 2.6%. Japan's Nikkei 225 Index traded 1.0% to the downside, with the yen firming a bit late in the day. South Korea's Kospi Index fell 2.1%, with the nation reporting a continued contraction in GDP but the y/y drop in Q4 was a bit smaller than anticipated. 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.
Tomorrow's international economic calendar will hold CPI and business confidence from Australia, the Leading Index from Japan and consumer confidence from Germany and Italy.
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