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Stocks Cling to Gains Amid Disappointing Retail Sales

U.S. stocks eked out gains today even after a reading on November retail sales missed expectations. Equities resiliency in the face of the report was likely due to the details emerging on the U.S.-China "phase one" trade deal. President Trump indicated that the deal includes "many structural changes and massive purchases of agricultural, energy and manufactured goods," as well as a halt on the December 15 tariffs. However, the 25% tariffs will remain on $250 billion in Chinese imports and 7.5% will be put on much of the remaining imports. The U.K. election resulted in a win for the Conservative Party. The win offers some continuity for the nation as it continues to grapple with Brexit. The results sent the British pound soaring verses both the dollar and euro. Consequently, the dollar index was lower, but the dollar did gain ground on a majority of its major peers even as U.S. Treasury yields tumbled. Earnings reports from Adobe, Broadcom, Oracle and Costco Wholesale were a mixed bag. Oil prices were higher and gold rallied amidst lower interest rates.

The Dow Jones Industrial Average (DJIA) was up 3 points to 28,015, the S&P 500 Index was up fractionally to 3,169 and the Nasdaq Composite gained 18 points (0.2%) to 8,735. 844 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil added $0.89 to $60.07 per barrel and wholesale gasoline was $0.03 higher to $1.66 per gallon. Elsewhere, the Bloomberg gold spot price increased $8.90 to $1481.20 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.2% to 97.19. Markets were up for the week, as the DJIA added 0.4%, the S&P 500 Index advanced 0.7% and the Nasdaq Composite led the way with a 0.9% gain.

Adobe Inc. (ADBE $321) reported fiscal Q4 earnings-per-share (EPS) of $1.74, or $2.29 ex-items, versus the $2.26 FactSet estimate, as revenues rose 21.4% year-over-year (y/y) to $3.0 billion, roughly in line with the Street's expectation. The company's total digital media annualized recurring revenue (ARR) topped forecasts, with its creative and document cloud segments both stronger than expected. ADBE issued fiscal 2020 EPS and revenue guidance that was mostly in line with estimates. Shares were higher.

Broadcom Inc. (AVGO $314) posted fiscal Q4 earnings of $1.97 per share, or $5.39 ex-items, versus the expected $5.39, with revenues increasing 6.0% y/y to $5.8 billion, mostly matching estimates. The company's semiconductor solutions revenues were slightly below forecasts, while its infrastructure software revenues topped forecasts. The Street appeared to give AVGO's 2020 outlook a mixed response. The company also announced a 22.6% increase to its quarterly dividend to $3.25 per share. Shares were lower.

Oracle Corporation (ORCL $55) announced fiscal Q2 profits of $0.69 per share, or $0.90 ex-items, as revenues rose 1.0% y/y to $9.6 billion, compared to the expected $9.7 billion. The company's cloud services and license support segment revenue was in line with forecasts, but its operating margin came in a bit shy of estimates. Shares traded lower.

Costco Wholesale Corporation (COST $293) reported fiscal Q1 EPS of $1.91, including a $0.17 tax benefit, versus the projected $1.71, with revenues growing 5.6% y/y to $37.0 billion, below the forecasted $37.2 billion. Shares were lower.

With the S&P 500 hitting another record high yesterday, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her 2020 Market Outlook: U.S. Stocks and Economy, the macroeconomic environment, including easier monetary policy and lending conditions, supported price-earnings (P/E) expansion in 2019, but those effects are fading. Liz Ann adds that the wide gap between stock market performance and corporate after-tax profits suggests the latter needs to accelerate. She notes that earnings are expected to accelerate in 2020, but that expectation is partly predicated on a positive outcome to the U.S.-China trade war, which remains uncertain. In addition, Liz Ann points out that due to the effects of tariffs and rising labor costs, profit margins could come under pressure in 2020.

Retail sales miss, import price inflation mixed

Advance retail sales (chart) for November rose 0.2% month-over-month (m/m), versus the Bloomberg forecast of a 0.5% increase, and October's 0.3% gain was revised to a 0.4% increase. Last month's sales ex-autos ticked 0.1% higher m/m, compared to expectations of a 0.4% gain and October's upwardly-revised 0.3% rise. Sales ex-autos and gas came in flat m/m, compared to estimates of a 0.4% gain, and October's 0.1% increase was adjusted to a 0.2% rise. The control group, a figure used to calculate GDP, was up 0.1%, below projections to match October's unadjusted 0.3% gain. Sales at health & personal, and clothing stores fell, while sales of motor vehicles, and electronics & alliances were solidly higher, but nonstore retailer sales—which includes online activity—grew 0.8% m/m and were 11.5% higher compared to the same period a year ago.

With the retail sector in focus amid the all-important holiday shopping season, the Schwab Center for Financial Research delivers our latest, Schwab Sector Views: 'Tis the Season for Consumer Discretionary … or Not?, discussing while all eyes are on estimated sales throughout December, sector performance for the month is historically not impressive.

The Import Price Index (chart) increased 0.2% m/m for November, matching projections, and following October's unrevised 0.5% decline. Compared to last year, prices dropped 1.3%, compared to forecasts of a 1.2% decline and October's unrevised 3.0% fall.

Business inventories (chart) were up 0.2% m/m in October, matching forecasts, and versus September's downwardly-adjusted 0.1% dip.

Treasuries were solidly higher on the day with the yield on the 2-year note declining 5 basis points (bps) to 1.60%, the yield on the 10-year note falling 8 bps to 1.82% and the 30-year yield dropping 6 bps to 2.26%.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her 2020 Market Outlook: Fixed Income that ten-year Treasury yields should move higher in 2020 as recession fears ease. Kathy points out the lagged impact of the Federal Reserve's interest rate cuts, signs of stabilization in the global economy and a modest uptick in inflation expectations should provide a boost to intermediate- and long-term bond yields. However, she cautions that the risk to our outlook is the ongoing threat of trade tariffs weighing on business investment.

U.K markets cheer election results; Europe mixed; Asia higher

European equities finished mixed, with the markets trimming an early advance. U.K. stocks rallied on the general election results that showed Prime Minister Boris Johnson's Conservative Party winning in decisive fashion. The election results means a "soft Brexit," is likely, allowing the U.K. to leave the EU with a deal that avoids trade disruption for the next year, and potentially reducing downside risks to the global economy. The British pound surged versus the U.S. dollar on the news. Bond yields in Europe were lower, but did not fall as much as yields in the U.S. With some uncertainties appearing to fade and heading into the New Year, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his latest article, 2020 Global Market Outlook: New Heroes Needed, noting that in 2020, global economic growth may depend on comprehensive trade deals and fiscal stimulus rather than actions by central bankers to reverse last year’s slowdown in manufacturing and business investment.

The U.K. FTSE 100 Index rallied 1.1%, Germany's DAX Index gained 0.6%, France's CAC-40 Index rose 0.5%, and Spain's IBEX 35 Index advanced 1.0%, while Switzerland's Swiss Market Index fell 0.2% and Italy's FTSE MIB Index decreased 0.3%.

Asian stocks rallied broadly. Equities in the trade sensitive region were bolstered by details emerging that the U.S. and China are closing in on a "phase one" trade deal. For a look at the potential implications of a U.S-China trade deal, Schwab's Jeffrey Kleintop, offers his commentary, Tied to Trade: What's Next for Emerging Market Stocks? The news came on the heels of this week's agreement on the U.S., Mexico and Canada trade agreement (USMCA), which appeared to be contributing to fading uncertainty on the multiple trade fronts. Japan's Nikkei 225 Index jumped 2.6%, with the yen falling decisively, and even as the nation's Q4 Tankan Large Manufacturing Index fell more than expected. However, the Tankan non-Manufacturing Index came in at a higher-than-projected level. China's Shanghai Composite Index rose 1.8% and the Hong Kong Hang Seng Index rallied 2.6%. Australia's S&P/ASX 200 Index rose 0.5%, South Korea's Kospi Index advanced 1.5% and India's S&P BSE Sensex 30 Index traded 1.1% to the upside.

Stocks continue to grind higher as uncertainties ease

Some key uncertainties eased, helping the S&P 500 Index post the ninth weekly gain out of ten. Trade cooled on multiple fronts with the long-elusive U.S., Mexico, Canada trade agreement (USMCA) getting the go ahead for a House vote, while a "phase one" U.S.-China deal finally was confirmed by the world's two largest economies. The markets found support from the monetary policy front as well, with the Fed signaling that it will likely be on hold through next year and the European Central Bank sticking to its highly accommodative monetary policy stance. Another positive catalyst came in the form of a worst-case U.K. Brexit scenario being taken off the table by the decisive victory for Prime Minister Boris Johnson. However, the weekly advance seemed be kept in check as the U.S.-China deal appeared to not deliver a deep enough rollback of existing tariffs, and global economic data remained mixed. For the week, the U.S. dollar fell, Treasury yields and gold slipped, and crude oil prices modestly extended last week OPEC-fueled rally. Most sectors were higher to close out the week, with tech stocks leading the way on the cooled trade uncertainties, along with energy, financials and consumer discretionary sectors. But real estate issues were noticeable underperformers.

With the Fed out of the way, trade uncertainty easing, and Brexit concerns soothed, next week the economic calendar will likely generate heightened attention. Housing will be in focus, as the NAHB Housing Market Index, housing starts and building permits, and existing home sales will hit the tape, while we will get final revisions to Q3 GDP and the December University of Michigan Consumer Sentiment Index. However, the bulk of the scrutiny could be given to the Fed's industrial production report, Markit's preliminary December Manufacturing and Services PMIs, jobless claims—after this week's surprising surge that may have been due to seasonal noise—the November Leading Index and November personal income and spending figures. These reports will give timely data on economic output, as we are closely watching for signs of a breakdown in the bifurcation in the economy between weak manufacturing/capex and stronger services/consumption as discussed by Schwab's Liz Ann Sonders in her article, Split Personality: U.S. Economy's Bifurcation Persists.

The international economic calendar is chock full of releases that could provide some markets catalysts, with reports worth noting being: Australia—employment change. China—industrial production, retail sales and the decision on the December 1-year loan prime rate. Japan—trade balance and the Bank of Japan's monetary policy decision. Eurozone—Markit's PMIs, trade balance, consumer price inflation and consumer confidence, along with German business sentiment. U.K.—Bank of England monetary policy decision, inflation statistics, Markit's PMIs and retail sales.

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