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Markets Selloff on Coronavirus Concerns

Equities fell today as concerns over the deadly coronavirus continued to escalate. A second case was confirmed in the U.S in Chicago from a patient that had recently traveled to the epicenter of the breakout in the Wuhan region of China and a potential third case in North Carolina is being investigated. The World Health Organization (WHO) has yet to declare a global health emergency. Benefiting from safe-haven flows, Treasuries, gold and the U.S. dollar rose on the day. In economic news, Markit's business activity reports for this month showed growth continued in both the manufacturing and services sectors. Dow members Intel and American Express bested the Street's expectations and offered favorable guidance. Crude oil prices were lower. International markets were higher.

The Dow Jones Industrial Average was down 170 points (0.6%) to 28,990, the S&P 500 fell 36 points (1.1%) to 3,290 and the NASDAQ was down 88 points (0.9%) to 9,315. 871 million shares were traded on the NYSE and 2.6 billion shares changed hands on the NASDAQ. WTI oil was down $1.40 to $54.19 per barrel and wholesale gasoline fell $0.04 to $1.52 per gallon. Elsewhere, the Bloomberg gold spot price added $6.60 to $1,578.20 per ounce. The Dollar Index—a comparison of the U.S. dollar to six major world currencies—added 0.2% to 97.88. For the week, the Dow fell 1.2%, the S&P 500 shed 1.2% and the NASDAQ was down 0.8%.

Dow member Intel Corporation (INTC $69) reported Q4 earnings-per-share (EPS) of $1.58, or $1.52 ex-items, versus the $1.25 FactSet estimate, as revenues rose 8.0% year-over-year (y/y) to $20.2 billion, above the Street's expectation of $19.2 billion. The chipmaker said its data-centric revenue grew at a record 15% y/y pace and its PC-centric revenue was also up compared to the prior year. INTC issued Q1 EPS and revenue guidance that was above estimates and its 2020 revenue forecast topped expectations. Separately, the company raised its quarterly dividend by 5.0% to $0.33 per share. Shares were up sharply.

Dow component American Express Company (AXP $135) posted Q4 profits of $2.03 per share, above the expected $2.01, with revenues rising 9.0% y/y to $11.4 billion, roughly in line with expectations. The company said its results reflected higher card fee income, card member spending and net interest income. AXP issued 2020 EPS and revenue guidance that had midpoints north of estimates. AXP traded nicely higher.

With Q4 earnings season shifting into high gear, of the 86 S&P 500 companies that have reported results thus far, roughly 66% have topped revenue forecasts and nearly 73% have bested profit projections, per data compiled by Bloomberg. Overall y/y revenue growth is tracking at about 3.3%, while earnings expansion compared to the prior year is modest, coming in at roughly 0.8%. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Best of What's Around: Sticking with Large Caps, given the high correlation between business confidence and corporate profits, we believe earnings estimates for this year remain a tad too lofty. Liz Ann adds that this should provide a continued healthy backdrop for large cap stocks to outperform their smaller cap brethren. She points out though that any meaningful pickup in economic growth—particularly if accompanied by higher inflation—could be the lifeline for which small caps have been clamoring.

Manufacturing growth remains and services sector output continues to grind higher

The preliminary Markit U.S. Manufacturing PMI Index for January dipped to 51.7 from December's unrevised 52.4 figure, below the Bloomberg consensus estimate calling for a slight improvement to 52.5. The preliminary Markit U.S. Services PMI Index showed growth increased more than expected this month for the key U.S. sector, rising to 53.2 from December's 52.8 figure, above forecasts of 53.0. Readings above 50 for both indexes denote expansion. Markit said although new orders posted slower paces of expansion, firms expanded their workforce numbers at a faster rate in January as employment grew for the third successive month and at the quickest pace since last July. The data analytics firm also noted that price pressures remained historically subdued and output expectations across the private sector improved at the start of 2020, with optimism reaching a seven-month high in January.

Schwab’s Liz Ann Sonders notes in her 2020 U.S. Market Outlook: Ramble On?, that economic bifurcation is expected to persist to start 2020; with trade/political uncertainty plaguing business confidence and manufacturing; but labor conditions continuing to support consumers and services.

Treasuries were higher, with the yield on the 2-year note declining 2 basis points (bps) to 1.49%, the yield on the 10-year note shedding 5 bps to 1.69% and the 30-year yield dropping 4 bps to 2.14%. 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.

Overseas markets higher

Closing before the U.S. turned decisively lower, markets in Asia and Europe were mostly higher on the day. Yesterday's announcement from the European Central Bank (ECB) that it will conduct a strategic review of its monetary policy for the first time since 2003 continued to support sentiment, as inflation and economic growth in the region have failed to meaningfully recover even with the central bank's highly-accommodative measures. Markit's Eurozone Manufacturing and Services PMIs showed the former improved but remained in contraction and the latter slipped slightly, but continued to expand for this month. Markit's German Manufacturing PMI showed the country's contraction was less severe than had been anticipated. U.K. manufacturing output also suffered a less severe contraction than was expected. In Japan, consumer price inflation accelerated in December and the country's manufacturing and services sector activity improved for this month. Services returned to expansion, but manufacturing remained in contraction territory. The euro and British pound saw some pressure versus the U.S. dollar, while the yen benefited from safe-haven flows. Global bond yields were lower.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, Will Europe Lead In 2020 As 2019 Risks Fade, how the receding risks posed by Brexit and the trade wars should provide a tailwind to Europe's economy. Jeff adds that European economic data is improving relative to economist estimates at a pace not seen in years, but notes that there is some risk that sequels to trade wars and Brexit could cause pressures to reemerge later this year with the potential to undermine the Eurozone’s improving economic momentum.

The U.K. FTSE 100 Index was up 1.0%, France's CAC-40 Index rose 0.9%, Germany's DAX Index advanced 1.4%, Italy's FTSE MIB Index gained 1.1%, Spain's IBEX 35 Index traded 0.5% higher, and Switzerland's Swiss Market Index increased 0.3%. Japan's Nikkei 225 Index ticked 0.1% higher. Hong Kong's Hang Seng Index gained 0.2% and Australia's S&P/ASX 200 Index finished little changed. India's S&P BSE Sensex 30 Index continued to recover from a recent bout of weakness, rising 0.6% to post a second-straight session in the green. Markets in mainland China and South Korea were closed for holidays.

Schwab's Jeffrey Kleintop, discusses the Top Ten Global Risks For Investors in 2020, in his article, pointing out that they are all surprises to the consensus view: return of inflation, trade tensions don’t fade, manufacturing recovery fails, Brexit ends badly, rising costs prevent earnings rebound, job cuts, geopolitical conflict, surprise election outcome, increased regulation, and ineffective monetary policy. Jeff adds that having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome are key to successful investing.

Stocks down for the week as virus outbreak overshadows data

U.S. stocks finished lower on the week with earnings season heating up and delivering some upbeat results from the technology sector, and global economic data continuing to keep recession concerns in check. However, an outbreak of the coronavirus in China that spread to the U.S. appeared to overshadow the upbeat earnings and economic data, as it put several cities in China on lockdown and threatened the key Chinese Lunar New Year celebration that starts tomorrow and is a historically active event for the consumer. The fastest pace in U.S.existing home sales since February 2018, was accompanied by a jump in U.K. business optimism, a recovery in South Korean exports, and a stronger-than-expected improvement in German investor sentiment. The U.S. dollar nudged higher but remained in the downtrend that started in early October and gold moved back to near multi-year highs. The defensively-natured utilities sector led to the upside, along with the tech sector on the aforementioned earnings results, while energy issues fell as oil prices dropped, and financials saw some pressure amid a slide in Treasury yields. Amid the recent backdrop of an apparent global economic revitalization, a rise in Treasury bond yields, a decline in the U.S. dollar and momentum that has taken stocks to record highs, we have updated our ratings for the major market sectors as discussed in the Schwab Center or Financial Research's Schwab Sector Views: New Sector Ratings for the New Year. We upgraded communications services stocks to market perform from under perform and the financial sector to outperform from market perform,

while downgrading the materials and utilities sectors to underperform from market perform.

Although the busiest week for Q4 earnings season is on next week's horizon and will likely dominate the market's attention, the economic calendar will also yield some key reports that could have a say on the moves in the markets. New home sales will get the ball rolling, followed by the preliminary December read on durable goods orders, January's Consumer Confidence Index, the first look (of three) at Q4 GDP, jobless claims, personal income and spending, the Chicago PMI, and the final January University of Michigan Consumer Sentiment Index. The headlining event will likely come in the form of the midweek monetary policy decision from the Federal Open Market Committee (FOMC). The FOMC has made it clear it will likely be on hold for some time, but scrutiny of the FOMC's statement and customary press conference by Chairman Jerome Powell could ramp up, given the eased trade tensions, signs of global stabilization, subdued inflation, and continued efforts by the Central Bank to calm the overnight lending markets, that have occurred since its last meeting in December.

As noted in our latest Schwab Market Perspective: Trends Diverge as Markets Enter 2020, the U.S. economy split sharply in 2019—manufacturing activity lagged services, corporate profits lagged stock performance—while investor sentiment surged. How long will these divergences continue in 2020? The global economy is showing signs of stabilization, but global stocks priced in much of that improvement last year. This could mean weaker global stock market performance in 2020 than in 2019, despite a better economy. Treasury bond yields are likely to move modestly higher during the first half of the year. However, market inflation expectations are low, implying the market may be unprepared for an unexpected rise in prices.

The international economic calendar will also provide some data points that could have an impact on the markets: China—Manufacturing and non-Manufacturing PMIs. Japan—retail sales and industrial production. Eurozone—economic confidence, Q4 GDP and consumer price inflation estimates, along with German business confidence and retail sales. U.K.—Bank of England monetary policy decision.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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