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Markets Tumble Amid Global Health Emergency

Stocks around the globe cratered today after the World Health Organization declared a health emergency, due to the spread of the coronavirus. Cases have been confirmed in over a dozen countries, including the U.S., Canada, U.K. and China, which has been the epicenter of contagion. U.S. Treasuries were higher on safe-haven flows. Although, foreign exchange markets did demonstrate a similar flight-to-safety with the U.S. dollar weaker in comparison to its major peers; although, the yen was higher. Gold was lower on the day. A bit overshadowed by coronavirus headlines, earnings reports came in generally strong today, headlined by a blowout report from Amazon that far exceeded the Street’s expectation. Caterpillar and Exxon Mobil also beat expectations; Visa’s results were in line with expectations and Chevron posted a disappointing loss.

The Dow Jones Industrial Average fell 603 points (2.1%) to 28,256, the S&P 500 was down 57 points (1.7%) to 3,227 and the NASDAQ was down 148 points (1.6%) to 9,151. In heavy volume, 1.3 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the NASDAQ. WTI oil was down $0.58 to $51.56 per barrel and wholesale gasoline was flat at $1.49 per gallon. Elsewhere, the Bloomberg gold spot price shed $1.30 to $1,587.90 per ounce. The Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.5% to 97.39. For the week, the Dow fell 2.5%, the S&P 500 was down 2.1% and the NASDAQ was down 1.8%. Inc. (AMZN $2,009) reported Q4 earnings-per-share (EPS) of $6.47, above the $4.04 FactSet estimate, as revenues rose 21.0% year-over-year (y/y) to $87.4 billion, topping the expected $86.0 billion. The company said more people joined its Prime membership this quarter than ever before and the number of items delivered to U.S. customers with its Prime free one-day and same-day delivery more than quadrupled compared to last year. The company also noted that Prime members watched double the hours of original movies and TV shows on its Prime video service this quarter compared to the last year. AMZN issued Q1 revenue guidance with a midpoint that was just shy of expectations. Shares were solidly higher.

Dow member Caterpillar Inc. (CAT $131) posted Q4 EPS of $1.97, or $2.63 ex-items, versus the Street's $2.38 projection, with revenues declining 8.4% y/y to $13.1 billion, south of the expected $13.5 billion. The company issued 2020 earnings guidance that was well below estimates, noting that it expects continued global economic uncertainty to pressure sales and cause dealers to further reduce inventories. Shares traded lower.

Dow component Exxon Mobil Corporation(XOM $62) announced Q4 profits of $1.33 per share, or $0.41 ex-items, versus the expected $0.43, as revenues declined 6.6% y/y to $67.2 billion, above the forecasted $64.6 billion. The company said its operations performed well, while short-term supply length in the downstream—refining—and chemicals businesses impacted margins and financial results. XOM's earnings out of its upstream segment—exploration and production—fell y/y, amid lower gas prices and higher growth-related expenses. Shares moved solidly lower.

Dow member Chevron Corporation (CVX $107) reported a Q4 loss of $3.51 per share, or EPS of $1.49 ex-items, compared to the expected profit of $1.47 per share, with revenues dropping 14.2% y/y to $36.4 billion, below the estimated $39.0 billion. CVX posted a sizable loss out of its U.S. upstream segment as it recorded a large impairment charge and lower crude oil and natural gas realizations weighed, partially offset by higher crude oil and natural gas production. CVX added that its U.S. downstream earnings increased y/y due to higher margins on refined product sales and lower operating expenses. Shares saw pressure on the day.

Dow component Visa Inc. (V $199) posted fiscal Q1 EPS of $1.46, in line with forecasts, as revenues rose 10.0% y/y to $6.1 billion, mostly matching expectations. The company's payments volume and processed transactions both grew compared to the prior year. V reaffirmed its 2020 EPS and revenue guidance. Shares fell.

The busiest week for Q4 earnings season is winding down, and of the 225 S&P 500 companies that have reported thus far, roughly 64% have topped revenue forecasts and about 74% have exceeded earnings forecasts, per data compiled by Bloomberg. Y/Y sales growth is running at a 1.3% rate and profit expansion is on pace for 0.3%. Read why we continue to feel that fundamentals continue to support an overweight to large caps (S&P 500) at the expense of small caps (Russell 2000) in Schwab's Chief Investment Strategist Liz Ann Sonders' article, Best of What's Around: Sticking with Large Caps. Moreover, 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 marketperform from underperform and the financial sector to outperform from marketperform, while downgrading the materials and utilities sectors to underperform from marketperform.

Dow component International Business Machines Corporation (IBM $143) announced that Chief Executive Officer (CEO) Virginia Rometty will retire and the Board has named Arvind Krishna as CEO, effective April 6, 2020. Rometty will continue as Executive Chairman and serve through the end of the year. Shares traded nicely higher.

Personal income and spending tick higher, consumer sentiment surprisingly improves

Personal income (chart) rose 0.2% month-over-month (m/m) in December, versus the Bloomberg forecast of a 0.3% rise, and compared to November's downwardly-revised 0.4% gain. Personal spending gained 0.3%, in line with forecasts, and following the prior month's unrevised 0.4% advance. The December savings rate as a percentage of disposable income was 7.6%. The PCE Deflator was up 0.3% m/m, versus expectations of a 0.2% rise and versus the prior month's downwardly-revised 0.1% gain. Compared to last year, the deflator was 1.6% higher, matching estimates and compared to November's downwardly-adjusted gain of 1.4%. Excluding food and energy, the PCE Core Index rose 0.2% m/m, above expectations to be in line with November's unadjusted 0.1% increase. The index was 1.6% higher y/y, matching estimates and versus November's negatively-adjusted 1.5% gain.

The January final University of Michigan Consumer Sentiment Index (chart) was revised to 99.8, versus expectations for it to remain at the preliminary 99.1 reading and above December's 99.3. The index posted the highest level since May 2019 as a dip for the current conditions component of the report was more than offset by an improvement in the expectations portion of the survey. The 1-year inflation forecast rose to 2.5% from December's 2.3% rate, and the 5-10 year inflation forecast increased to 2.5% from the prior month's 2.2% pace.

The Chicago PMI unexpectedly fell further into a level depicting contraction (a reading below 50), dropping to 42.9 in January from December's 48.9 level, where it was expected to remain. The was the deepest contraction since December 2015 and posted the seventh-straight month below 50 as new orders, production and employment all contracted at faster paces, along with inventories.

The Q4 Employment Cost Index rose 0.7%, in line with estimates to match Q3's unadjusted rise.

Treasuries were higher, with the yield on the 2-year note falling 9 basis points (bps) to 1.32%, the yield on the 10-year note falling 8 bps to 1.51% and the 30-year bond rate declining 6 basis points (bps) to just under 2.0%. Bond yields and the stock markets remain hampered by intensifying concerns regarding the impact of the spreading coronavirus and following this week's unchanged monetary policy decision and dovish tone from the Fed. For analysis of the current backdrop, Schwab's Liz Ann Sonders delivers her latest article, Virus: Could it be the Catalyst to Change Sentiment?, while Schwab's Chief Fixed Income Strategist Kathy Jones provides a look at the Fed's decision in her article, Fed Holds Rates Steady, Cites "Moderate" Economic Growth.

Global equities suffer along with the U.S.

Global equities finished out the week lower, with concerns about the spreading coronavirus ramping up, as the World Health Organization (WHO) declared a global health emergency and the U.K. reported its first case. Cases have been confirmed in over a dozen countries, including the U.S., Canada, U.K. and China, which has been the epicenter the breakout. The death toll is currently estimated to be above 200 people and many airlines have suspended travel to China in response to the virus.

The preliminary estimate of Eurozone Q4 GDP came in at a 1.0% y/y pace of growth, below the expected 1.1% expansion and the 1.2% growth posted in Q3. German retail sales fell much more than expected in December. In Japan, retail sales rose at a smaller rate than expected and consumer price inflation in Tokyo was a bit cooler than forecasted; however, industrial production came in stronger than projected. Mainland Chinese markets remained closed as the Lunar New Year holiday was extended, but the country reported that its official Manufacturing PMI dipped to 50.0 as expected for January, which is right at the level separating expansion and contraction. Data from India showed the world’s second most populous country increased GDP at a pace of 6.1% in 2019, which was over a percent slower growth rate than the prior year. The euro, British pound and Japanese yen traded higher versus the U.S. dollar. 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 and Germany's DAX Index were down 1.3%, France's CAC-40 Index and Switzerland's Swiss Market Index fell 1.1%, Spain's IBEX 35 Index decreased 1.2%, and Italy's FTSE MIB Index dropped 2.3%. Japan's Nikkei 225 Index rose 1.0%. Hong Kong's Hang Seng Index declined 0.5%. South Korea's Kospi Index fell 1.4%. Australia's S&P/ASX 200 Index ticked 0.1% higher. India's S&P BSE Sensex 30 Index traded 0.5% to the downside. 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 fall for second week as virus concerns continue to hamper sentiment

U.S. stocks registered a second-straight weekly loss, with the spreading of the coronavirus continuing to stymie the recent momentum that took the equity markets back to all-time highs earlier this month. The economic front painted a mixed picture with Consumer Confidence jumping and being joined by Friday's stronger-than-expected consumer sentiment report and the Fed signaling it will remain highly accommodative. However, although Q4 GDP growth was slightly north of forecasts—aided by the narrowing trade deficit—the report showed the heavily weighted personal consumption component came in much softer than anticipated and business investment continued to decline, while core durable goods orders missed and new home sales surprised to the downside. The markets digested the busiest week of earnings season, which also fostered some mixed reactions. Dow members Apple Inc. (AAPL $316), Microsoft Corporation (MSFT $170) and McDonald's Corporation (MCD $215) highlighted the robust docket this week, along with former Dow component General Electric Company (GE $13), Amazon and Tesla Inc. (TSLA $643), but weak guidance bit the shares of Dow members 3M Company (MMM $160), Pfizer Inc. (PFE $37) and Caterpillar, along with chipmaker Advanced Micro Devices Inc. (AMD $48).

The markets were defensive this week as utilities posted a solid gain and losses for consumer staples were relatively minimal, and most of the other major sectors finished solidly in the red, led by drops for cyclically-natured energy and materials issues. Consumer discretionary stocks bucked the trend, overcoming the intensified virus outbreak uneasiness, bolstered by the aforementioned consumer-centered economic and earnings data. Treasury yields extended a recent drop and the curve moved closer to a return of inversion for some key maturities and the U.S. dollar retreated a bit, pressured by a solid advance for the British pound after the Bank of England surprised some and held off on announcing a rate cut and the U.K. headed toward Friday's Brexit date. Crude oil prices extended a tumble as of late and gold continued to benefit from the safe-haven sentiment and the drop in bond yields.

Next week, volatility is likely to persist as the Iowa caucus could cause the political front to compete for market attention with a continued robust earnings calendar, the focus on the coronavirus and some key data points from the economic front. The week is poised to begin and end with a bang, as Monday will bring the ISM Manufacturing Index and Markit's Manufacturing PMI for January, and the week will conclude with Friday's January nonfarm payroll report and the Fed's semi-annual monetary policy report to Congress. Sandwiched between the two days will be the releases of factory orders, the trade balance, ISM's and Markit's services sector reports, Q4 unit labor costs and nonfarm productivity, and jobless claims.

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.

In addition to a flood of global manufacturing and services reports, next week's international economic calendar will bring some data that could cause some market reactions with reports deserving a mention including: Australia—Reserve Bank of Australia monetary policy decision, trade balance and retail sales. China—trade figures. India—Reserve Bank of India monetary policy decision. Japan—household spending and wage figures. Eurozone—retail sales, along with German factory orders, trade balance and industrial production.

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Important Disclosures

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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