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Markets Fall After Torrid Run

U.S. equities fell in the final session of the week after posting four-straight days of increases and notching solid weekly gains, as investors appeared to step back to reassess the rally, while also contemplating how the spreading coronavirus, which upended the markets last week, may impact the global economy. The moves came despite a stronger-than-expected January labor report. Treasury yields were lower, paring this week's rebound, and the U.S. dollar was slightly higher, while crude oil prices were mixed and gold gained modest ground. In equity news, Activision Blizzard's quarterly results exceeded forecasts, while Take-Two Interactive Software also bested the Street's estimates, but announced the departure of a key executive. Europe and Asia finished lower.

The Dow Jones Industrial Average tumbled 277 points (0.9%) to 29,103, the S&P 500 Index was down 18 points (0.5%) to 3,328 and the Nasdaq Composite declined 52 points (0.5%) to 9,521. In moderate volume, 858 million shares were traded on the NYSE and 2.2 billion shares changed hands on the NASDAQ. WTI crude oil lost $0.63 to $50.32 per barrel and wholesale gasoline added $0.03 to $1.53 per gallon. Elsewhere, the Bloomberg gold spot price increased $4.06 to $1,570.72 per ounce, while the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.2% to 98.69. Markets were solidly higher for the week, as the DJIA gained 3.0%, the S&P 500 Index rose 3.2% and the Nasdaq Composite jumped 4.0%.

Activision Blizzard Inc. (ATVI $62), reported Q4 adjusted earnings-per-share (EPS) of $1.23, compared to the $1.19 FactSet estimate, on revenues of $2.71 billion, north of the Street's forecast of $2.68 billion. The videogame maker said its latest Call of Duty: Modern Warfareedition's sell-through—the share of inventory actually sold—rose at a double-digit percentage rate compared to 2018's release of Call of Duty: Black Ops 4. Looking ahead, Chief Executive Officer Bobby Kotick said, “With our strong content pipeline across our franchises and momentum in mobile, esports, and advertising, we look forward to continuing to delight our players, fans and stakeholders in 2020 and beyond.” Shares were higher.

Take-Two Interactive Software Inc. (TTWO $115) posted Q4 EPS of $1.43, above the FactSet estimate of $1.33 per share. Revenues declined 25.5% y/y to $930.1 million, versus the $932.0 million forecast. The gaming software provider reported net bookings—an adjusted revenue metric—of $888.2 million, whereas analysts were looking for $920 million. As well, TTWO announced the departure of a key executive from its Rockstar Games unit that is responsible for the creation of its blockbuster Grand Theft Autogames. Shares were solidly lower.

Q4 earnings season continued to roll on and we feel that fundamentals still support an overweight to large caps (S&P 500) at the expense of small caps (Russell 2000) as discussed 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 for 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.

Labor report well above expectations

Nonfarm payrolls (chart) rose by 225,000 jobs month-over-month (m/m) in January, compared to the Bloomberg forecast of a 160,000 increase. The rise of 145,000 seen in December was revised to a gain of 147,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 206,000, versus the forecasted gain of 150,000, after rising by 142,000 in December, which was revised from the 139,000 increase that was initially reported. The job growth was led by employment gains in construction, health care, professional and business services, and leisure and hospitality, while employment declined in manufacturing. The upward revision to the prior two months was 7,000. The labor force participation rate ticked higher to 63.4% from December's 63.2% rate.

The unemployment rate inched higher to 3.6% from December's 3.5% rate, where it was forecasted to remain, while average hourly earnings were up 0.2% m/m, below projections of a 0.3% increase and compared to December's unrevised 0.1% gain. Y/Y, wage gains were 3.1% higher, versus estimates of a 3.0% increase. Finally, average weekly hours remained at 34.3, in line with estimates.

December wholesale inventories (chart) were revised lower to a 0.2% m/m decline, versus expectations to remain at the preliminary estimate of a 0.1% dip, and compared to November's upwardly-revised 0.1% gain. Sales were down 0.7%, following November's 0.9% increase.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $22.0 billion during December, more than the $15.0 billion forecast of economists polled by Bloomberg. November’s figure was adjusted downward to an increase of $11.9 billion from the originally reported $12.5 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $9.4 billion, a 3.7% increase year-over-year (y/y), while revolving debt, which includes credit cards, rose by $12.7 billion, a 14.0% y/y rise.

Treasuries were higher, as the yield on the 2-year note was down 5 basis points (bps) at 1.40%, the yield on the 10-year note lost 6 bps 1.58%, and the 30-year bond rate was 7 bps lower at 2.05%. Schwab's Chief Fixed Income Strategist Kathy Jones provides a look at fixed income investing in her article, Bonds vs. Bond Funds: Which is Right for You?

After four-straight days of gains, the U.S. equity markets took a breather, as investors reassessed the recent run that came courtesy of a host of upbeat global manufacturing and services reports, as well as positive U.S.-China trade developments, as the enthusiasm was tempered by an attentive return of focus on the possible impact of the coronavirus outbreak. For more on the issue, check out Schwab's Liz Ann Sonders' latest article, Virus: Could it be the Catalyst to Change Sentiment?

Europe and Asia lower following string of gains

European equities finished lower, with auto stocks leading the way, as investors assessed the past rally that had taken the STOXX 600 Index to new highs, while attention turned to what may be the economic ramifications of the coronavirus outbreak. Economic news in the area didn't help matters, as industrial production in both Germany and France plunged in December and were well short of expectations, while retail sales in Italy nudged higher. The euro and the British pound lost ground versus the U.S. dollar, while bond yields in the region were lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest video, 2020 Global Market Outlook, the potential for global economic growth to reaccelerate, and how it could lead international stocks to outperform for the first time in a number of years.

The U.K. FTSE 100 Index and Germany's DAX Index were down 0.5%, France's CAC-40 Index, Italy's FTSE MIB Index and Switzerland's Swiss Market Index ticked 0.1% lower, and Spain's IBEX 35 Index was flat.

Stocks in Asia were mostly lower, after posting three sessions of widespread gains, after China delayed the release of its January trade data, and amid concerns of the economic impact of the coronavirus outbreak across the region. The Chinese trade data that was scheduled for release today was highly anticipated after yesterday's announcement from the Asian nation that it will halve tariffs on hundreds of U.S. imports. However, the January report will be combined with February's trade data, according to a report citing the country's customs office. The Hong Kong Hang Seng Index fell 0.3%, with gaming stocks seeing pressure as casinos in the popular Macao destination were temporarily closed during the ramp-up in the coronavirus outbreak. Japan's Nikkei 225 Index declined 0.2% amid some strength in the yen, and as benchmark heavyweight Fast Retailing Co. Ltd. (FRCOY $53) tumbled after the clothing retailer that owns Uniqlo shut many of its stores in China as a result of the outbreak. As well, real wages in the nation fell for a third-straight month, household spending dropped well below expectations, but the Leading Index rose modestly. South Korea's Kospi Index decreased 0.7% with carmakers seeing pressure amid worries of supply disruptions due to shuttered factories in China. Elsewhere, India's S&P BSE Sensex 30 Index and Australia's S&P/ASX 200 Index both lost 0.4%. However, China's Shanghai Composite Index bucked the trend, bouncing off the lows of the day to finish 0.3% higher. Schwab's Jeffrey Kleintop, discusses the Top Ten Global Risks For Investors in 2020, pointing out that they are all surprises to the consensus view. Whether or not these particular surprises come to pass, a new year almost always brings surprises of one form or another and 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 recover solidly from a two-week decline to hit fresh record highs

U.S. stocks posted solid weekly gains, notching fresh record highs along the way, as the heightened anxiety over the spreading of the coronavirus that stymied the global markets over the past two weeks tempered. Some upbeat economic data lent a hand, while positive developments on the U.S.-China trade front added to the mix. Manufacturing and services sector output data surprised to the upside domestically and abroad, with the U.S. ISM Manufacturing Index returning to expansionary territory for the first time since July 2019, and its sister Non-manufacturing report rising from the month prior and besting forecasts. The jobs market remains strong, as Friday's stronger-than-expected labor report followed a drop in jobless claims and a robust ADP Employment Change Report. Earnings season continued in earnest, with Google parent Alphabet Inc. (GOOGL $1,427) beating expectations and Walt Disney Company's(DIS $142) results pleasing the street on a solid rise in revenues. Twitter Inc. (TWTR $39) fell short of estimates, but the social-networking company cracked the $1 billion revenue mark for the first time ever and its daily users surged.

The information technology and communication services sectors led the way, and health care registered a solid advance, while materials and industrials posted impressive gains after China's announcement that it will cut tariffs on hundreds of U.S. imports. Treasury yields recovered from a recent drop and the U.S. dollar moved higher, while crude oil prices were choppy for the week and gold moderated after last week's flight to safety.

Next week, earnings season will move into the latter stages, while the economic calendar will also be robust, with reports scheduled for release to include the NFIB Small Business Optimism Index, the JOLTS Job Openings report, business inventories and the Fed's industrial production and capacity utilization report. The first look at the January inflation landscape will come in the form of the Consumer Price Index (CPI) and the Import Price Index, and the all-important consumer will be on display with reads on retail sales and the preliminary University of Michigan Consumer Sentiment Index slated for release.

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.

Next week's international economic calendar will be busy, with reports deserving a mention to include: Australia—CPI and lending statistics; China—CPI, PPI, industrial production, retail sales, new yuan loans and fixed asset investment; Japan—trade figures, machine tool orders, PPI and the Tertiary Industry Index; Eurozone—GDP, labor figures and trade data, along with German GDP and CPI; U.K.—GDP, industrial production and trade balance.

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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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