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Bulls Take a Breather to Finish Another Strong Week

U.S. stocks declined on the day but posted another solid weekly advance, which was the seventh out of eight. However, volume was light following yesterday's Thanksgiving break and as today's session was shortened. Lingering optimism of a U.S.-China "phase one" trade deal, which was a main catalyst for this week's rally, was challenged somewhat by the U.S. signing legislation in support of Hong Kong protestors. Also, the markets tried to gauge the health of the all-important U.S. consumer as "Black Friday" unofficially kicks off the key holiday shopping season. Treasury yields were mixed and gold was higher, while the U.S. dollar turned lower and crude oil prices fell, with the economic calendar dormant and equity news light. Asia finished lower and European equities dipped on the flared up trade tensions and following a host of divergent global economic data.

The Dow Jones Industrial Average (DJIA) declined 113 points (0.4%) to 28,051, the S&P 500 Index decreased 13 points (0.4%) to 3,141 and the Nasdaq Composite slid 40 points (0.5%) to 8,665. In light volume, 496 million shares were traded on the NYSE and 1.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $2.52 to $55.59 per barrel and wholesale gasoline shed $0.08 to $1.60 per gallon. Elsewhere, the Bloomberg gold spot price was $9.03 higher at $1,464.63 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—dipped 0.1% to 98.25. Markets got back into the green for the week, as the DJIA rose 0.6%, the S&P 500 Index advanced 1.0%, and the Nasdaq Composite gained 1.7%.

The retail sector was in focus on "Black Friday," a key day on which deep discounts are made by a host of retailers to entice shoppers and unofficially kick of the holiday shopping season. The markets looked to gauge the health of the all-important U.S. consumer that has buoyed the economy and kept recession concerns muted despite noise from the slowing global manufacturing sector. Per the National Retail Federation (NRF), an estimated 165.3 million people are likely to shop Thanksgiving Day through "Cyber Monday," an online version of "Black Friday," where the NRF projects 68.7 million will take advantage of online bargains. NRF President and CEO Matthew Shay said, "Even as people are starting to purchase gifts earlier in the season, consumers still enjoy finding good Thanksgiving deals and passing time shopping with family and friends over the long holiday weekend."

For a look at the consumer discretionary sector heading into the holiday shopping season, check out the Schwab Center for Financial Research's latest Schwab Sector Views: Macro View is Obscure, but the Earnings Landscape is Clearer. We maintain a marketperform rating on the sector, noting how fundamentally, the state of the American consumer remains healthy—unemployment is near historical lows, wages have risen modestly, consumer confidence remains relatively high and interest rates have fallen this year, which makes borrowing cheaper. However, the business cycle—which traditionally rotates through early/mid/late stages, then recession, before starting the cycle over again—appears to be in the late stages. Historically, this has been a relatively weak point in the business cycle for the Consumer Discretionary sector, which tends to outperform in the early stage.

Treasury yields mixed and economic calendar dormant in a half day for the markets

Treasuries finished mixed as the economic calendar was void of any major releases today, with the yield on the 2-year note declining 2 basis points (bps) to 1.60%, though the yields on the 10-year note and the 30-year bond ticked 1 bp higher to 1.77% and 2.20%, respectively. The Treasury yield curve has flattened a bit as of late following some steepening earlier this month and Schwab's Chief Fixed Income Strategist Kathy Jones offers her commentary, The Bond Investors' Dilemma, and her latest video, Investing in Bonds with a Flat to Inverted Yield Curve.

Please note: the U.S. markets closed early today in the wake of the Thanksgiving holiday.

However, the stock markets have rallied to post a string of all-time highs and registered the seventh weekly gain in eight, as optimism of a "phase one" U.S.-China trade deal lingered, bolstered by China saying it will raise penalties on violations of intellectual property rights, which is a key component of a comprehensive trade agreement with the U.S. Also, heated up M&A activity this week supported conviction, along with some bright spots in the heavy dose of economic data, as the trade deficit surprisingly narrowed, Q3 GDP growth was unexpectedly revised higher, jobless claims fell, and durable goods orders came in much stronger than expected, highlighted by a solid gain in the report's business spending component. Earnings reports painted a mixed picture, with the Street cheering results from Best Buy Co. Inc. (BBY $81) and Dick's Sporting Goods Inc. (DKS $46), while punishing a cautious outlook from Deere & Company (DE $168) and an earnings miss by Dollar Tree Inc. (DLTR $91). Treasury yields and the U.S. dollar were little changed on the week, though gold dipped and crude oil prices fell amid some rumblings that OPEC may be balking at further production cuts. Consumer discretionary stocks led the week's advance as the aforementioned earnings reports set the stage for the upcoming key holiday shopping season and technology stocks also outperformed on the lingering trade optimism. However, the energy sector was the lone group to see red figures amid the drop in oil prices.

Next week, when the markets return to full strength, the economic calendar will remain in high gear, with key reports that could garner attention being: ISM and Markit November manufacturing and non-manufacturing reports, jobless claims, factory orders and the preliminary December University of Michigan's Consumer Sentiment Index. However, with the health of the consumer keeping recession concerns in check, Friday's November nonfarm payroll report has the potential to be the biggest driver of market direction for the week, which will come days before the Fed's final monetary policy decision of the year on December 11th. Headline job growth month-over-month (m/m) is projected at 190,000, following October's 128,000 gain, and private sector employment is forecasted to rise by 180,000 jobs. The unemployment rate is expected to remain at a near 50-year low of 3.6%, while average hourly earnings are estimated to increase 0.3% m/m, after the prior month's 0.2% gain, and remain up 3.0% year-over-year.

As noted in our latest Schwab Market Perspective: Slowing Down While Speeding Up, while volatility has remained subdued and U.S. stocks are at all-time highs, a near-term concern is that investor sentiment may be getting a bit too frothy. The potential signing of a "phase one" U.S.-China trade deal and rollback of some tariffs has contributed substantially to the rally; yet the proposals made have yet to be corroborated by anything in writing. Further, absent a trade deal that covers the major structural issues surrounding intellectual property (IP) theft, technology transfers, and supply chains, we find it difficult to envision a resurgence in corporate animal spirits and business investment—stabilization is more likely. Conversely, a positive shift in global growth may be in its infancy stages, as a more widespread adoption of fiscal stimulus may bode well for economies that have leaned too much on easier monetary policy. With many developments still at stake, we maintain our neutral stance on U.S. equities (with a bias toward large caps at the expense of small caps) and both developed and emerging market equities; and encourage investors to use volatility to rebalance and stay near their strategic asset allocations.

Europe mostly lower on trade and data

European equities finished mostly lower, with the U.S. markets dipping in a return from a holiday break, while the euro and British pound reversed slightly higher versus the U.S. dollar. Trade tensions flared up amid uncertainty regarding whether the U.S. signing of bills in support of Hong Kong protestors will derail progress on negotiations of a "phase one" U.S.-China trade deal. Optimism of an agreement between the world's two largest economies has driven the global equity markets higher recently, notably the string of all-time highs in the U.S. The economic calendar was relatively busy, with German retail sales surprisingly falling in October but the nation's unemployment change for November unexpectedly declined. Moreover, Eurozone core consumer price inflation for this month rose at a slightly faster pace than expected, and the region's unemployment rate dipped for last month. Bond yields in the region moved higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers a look at the global markets as 2019 nears the finish line in his latest article, Does The Return Of QE Mean Big Gains For Stocks in 2020?. Jeff notes that as we head into 2020, investors should be cautious in assuming that the return of central bank balance sheet growth means stocks will follow along.

The U.K. FTSE 100 Index was down 0.9%, Germany's DAX Index, France's CAC-40 Index and Spain's IBEX 35 Index dipped 0.1%, Italy's FTSE MIB Index declined 0.4%, and Switzerland's Swiss Market Index decreased 0.3%.

Asia lower following data and as trade tensions flare-up

Stocks in Asia finished lower, with the markets digesting some soft economic data out of Japan and as U.S.-China trade tensions appear to be flaring up. Following a larger-than-expected drop in Japanese October retail sales reported late-Wednesday, the nation reported that its industrial production for last month dropped 1.7% m/m, much larger than the 0.3% dip that was anticipated. U.S.-China trade tensions are resurfacing as the markets are eyeing a response from China regarding the U.S. signing of legislation in support of the protestors in Hong Kong. Schwab's Jeffrey Kleintop, discusses in his commentary, Tied to Trade: What's Next for Emerging Market Stocks?, how a wide range of outcomes from -10% to +40% may lie ahead of emerging market stocks depending on the timing and details of a trade deal. The Hong Kong Hang Seng Index dropped 2.0% to lead the downside move, and China's Shanghai Composite Index decreased 0.6%. Japan's Nikkei 225 Index declined 0.5% following the data and as the yen briefly gained some ground late in the session. South Korea's Kospi Index dropped 1.5%, while the Bank of Korea kept its benchmark interest rate unchanged. Australia's S&P/ASX 200 Index traded 0.3% lower and India's S&P BSE Sensex 30 Index moved 0.8% to the downside.

International economic data over the weekend and next week will be heavy and could be a catalyst for the global markets with key releases including: Australia—the Reserve Bank of Australia's monetary policy decision and Q3 GDP. China—official and unofficial Manufacturing and non-Manufacturing PMIs. Japan—Q3 capital spending, labor earnings figures and household spending. Eurozone—Markit's Eurozone Composite PMI, Q3 GDP and retail sales, along with German factory orders and industrial production. U.K.—Markit U.K. Composite PMI and retail sales.

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