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Markets End Week on Sour Note

U.S. equities finished solidly lower, posting the first weekly losses in three weeks, as angst over the continued uncertainty surrounding the impact of the coronavirus weighed on sentiment. News from the economic front didn't help matters, as Markit's business activity reports showed manufacturing output slowed and the key services sector fell into contraction territory for the first time in four years. The uneasiness pressured Treasury yields, the U.S. dollar and crude oil prices, while gold prices rallied on the flight to safety. In equity news, Deere & Company posted upbeat quarterly results and offered some positive commentary regarding its industry, while Dow member Coca-Cola warned of the negative impact of the coronavirus but maintained its full-year guidance. Markets in Europe and Asia also finished lower.

The Dow Jones Industrial Average decreased 228 points (0.8%) to 28,992, the S&P 500 Index tumbled 35 points (1.1%) to 3,338 and the Nasdaq Composite plunged 175 points (1.8%) to 9,577. In heavy volume, 1.1 billion shares were traded on the NYSE and 2.7 billion shares changed hands on the NASDAQ. WTI crude oil declined $0.50 to $53.38 per barrel and wholesale gasoline shed $0.02 to $1.76 per gallon. Elsewhere, the Bloomberg gold spot price rallied $24.29 to $1,643.85 per ounce, while the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.5% to 99.33. Markets were lower for the week, as the DJIA declined 1.4%, the S&P 500 Index lost 1.2%, and the Nasdaq Composite fell 1.6%.

Deere & Company (DE $177) reported fiscal Q1 earnings-per-share (EPS) of $1.63, above the $1.27 FactSet estimate, as equipment sales declined 5.9% year-over-year (y/y) to $6.5 billion, topping the Street's projection of $6.2 billion. The farm and construction equipment maker said Q1 performance reflected early signs of stabilization in the U.S. farm sector, but activity in the construction sector has slowed leading to lower sales and profit for its construction and forestry division. The company issued 2020 earnings guidance that was mostly in line with expectations, noting that farmer confidence, though still subdued, has improved due in part to hopes for a relaxation of trade tensions and higher agricultural exports. Shares were nicely higher.

Dow member Coca-Cola Company (KO $60) warned that the coronavirus will negatively impact unit case volume, revenues and EPS in Q1, but it still expects to achieve its previously issued full-year guidance though the virus situation continues to evolve and it expects to provide more information during its next earnings call in April. Shares were modestly higher.

Business activity reports show output slowed, existing home sales slip

The preliminary Markit U.S. Manufacturing PMI Index for February declined to 50.8 from January's unrevised 51.9 figure, below the Bloomberg consensus estimate calling for a dip to 51.5. The preliminary Markit U.S. Services PMI Index showed output for the key U.S. sector fell into contraction territory this month, dropping to 49.4 from January's 53.4 figure, where it was forecasted to remain. A reading of 50 for both indexes is the demarcation point between expansion and contraction. Markit said although only fractional, the decrease in business activity brought to an end a near four-year sequence of expansion following a contraction in service sector output and a slower rise in manufacturing production amid supplier delays following the outbreak of coronavirus.

Existing home sales declined 1.3% month-over-month (m/m) in January to an annual rate of 5.46 million units, compared to expectations of 5.44 million units and December's downwardly-revised 5.53 million rate. Sales of single-family homes and purchases of condominiums and co-ops both declined m/m but remained higher versus year ago levels. The median existing home price was up 6.8% from a year ago to $266,300, marking the 95th straight month of y/y gains. Unsold inventory came in at a 3.1-months pace at the current sales rate, up from the 3.0-months pace set the prior month. Significant declines in the West dragged down nationwide numbers, with the other three major U.S. regions reporting marginal-or no-changes last month. Sales were higher y/y in all regions. National Association of Realtors Chief Economist Lawrence Yun said, "The trend line for housing starts is increasing and showing steady improvement, which should ultimately lead to more home sales," adding that "Mortgage rates have helped with affordability, but it is supply conditions that are driving price growth."

Treasuries jumped, as the yield on the 2-year note lost 3 basis points (bps) to 1.36%, while the yields on the 10-year note and the 30-year bond were down 5 bps to 1.47% and 1.92%, respectively. Bond yields remained under pressure and gold rallied as the uncertainty regarding the economic impact of the coronavirus outbreak continued to foster a flight to safety. Schwab's Chief Fixed Income Strategist Kathy Jones provides a look at fixed income investing in her latest article, Bond Market Outlook: Coronavirus Changes the Picture, noting that with China's industrial heartland at the center of the epidemic, the ripple effects may be larger and longer-lasting than in previous outbreaks.

Europe and Asia lower on data and festering virus uncertainty

European equities finished lower, as the uncertainty regarding the impact of the coronavirus outbreak continued to hamper sentiment, while also applying pressure on global bond yields. As well, disappointing business activity reports from Australia, Japan and the U.S. countered some relatively favorable economic data in the region. Markit's preliminary Eurozone Manufacturing PMI unexpectedly improved in February, hitting a 12-month high, but remaining at a level depicting contraction, and Markit's Eurozone Services PMI showed the pace of growth accelerated more than expected for this month. Moreover, Markit's February U.K. Manufacturing PMI surprisingly improved further into a level depicting expansion, versus forecasts to fall back into contraction territory. The euro and British pound gained solid ground on the U.S. dollar, while bond yields were mostly lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Will the Coronavirus Outbreak Lead to a Market Breakdown?, that while it is impossible to predict the extent a virus can spread and have greater consequences than past epidemics, history indicates that the global economy and markets have been relatively immune to the effects of past epidemics. Jeff adds that investors may have little need to take action if their portfolios are diversified and aligned with their long-term plan.

The U.K. FTSE 100 Index and Switzerland's Swiss Market Index were down 0.4%, France's CAC-40 Index and Spain's IBEX 35 Index lost 0.5%, Germany's DAX Index declined 0.6%, and Italy's FTSE MIB Index fell 1.2%.

Stocks in Asia finished mostly to the downside with the uncertainty regarding the impact of the coronavirus outbreak, which continues to grow outside the epicenter of China, remaining a drag on conviction, while some disappointing economic data out of Australia and Japan added to the negative tone. Japan's manufacturing and services sector output both declined in February with the former remaining in contraction territory and the latter falling to a level depicting contraction. Australia's manufacturing activity improved for this month but continued to signal contraction and the nation's services sector output dropped into contraction territory. South Korea's exports rebounded in February, but its exports to China fell and the nation reported new cases of the coronavirus in the country. Japan's Nikkei 225 Index declined 0.4% and South Korea's Kospi Index fell 1.5%, while Australia's S&P/ASX 200 Index decreased 0.3%. The Hong Kong Hang Seng Index dropped 1.1%, but China's Shanghai Composite Index advanced 0.3% amid reports of business activity resuming and in the wake of the recent flood of stimulus measures that the country has deployed to combat the impact of the virus. Schwab's Jeffrey Kleintop, CFA, notes in his latest article, The Coronavirus and Emerging Markets: Ready of a Rebound?, dire predictions may have driven commodity prices to over-react to the downside; and now they may be poised to partially rebound. Markets in India were closed for a holiday.

Stocks fall as risk-off sentiment ramps up

After rallying the previous two weeks back to record highs, U.S. stocks snapped the winning streak in the holiday-shortened week. Amid a host of corporate warnings regarding the impact of the coronavirus outbreak—notably by Dow member Apple Inc. (AAPL $315)—and increased reports of the virus reaching beyond the epicenter of China, risk-off sentiment resurfaced. Defensively-natured utilities and real estate sectors outperformed this week, while all other major sectors saw noticeable red figures, led by tech stocks, which pared a recent rally, and financials that were pressured by a drop in bond yields. For a timely look at the potential impact on the markets from a tactical standpoint, check out our latest, Schwab Sector Views: Coronavirus Spreads to Equity Sectors.

Treasury yields fell to historic lows on the mid-to-long end of the curve, gold rallied sharply to a seven-year high, and the U.S. dollar continued to grind higher with the Dollar Index touching levels not seen since mid-2017. The risk aversion more than offset sharp accelerations in February regional manufacturing growth out of New York and Philadelphia, continued strong housing data, headlined by a jump in building permits, and a much stronger-than-expected rebound in Leading Indicators. Moreover, the concerns about the spreading of the coronavirus to other parts of the world took some of steam out of China's persistent flood of stimulus measures. The pressure on the equity markets intensified on the heels of Friday morning's unexpected contraction in U.S. services sector output, which helped trim a weekly gain for crude oil prices and took the Dollar Index off its multi-year highs. Earnings season continued to head down the home stretch, and of the 439 S&P 500 companies that have reported thus far, roughly 66% have exceeded revenue forecasts and about 75% have topped profit expectations, per data compiled by Bloomberg. However, Dow component Walmart Inc's (WMT $118) Q4 revenues and 2020 EPS guidance missed forecasts this week. Per Bloomberg, earnings growth for Q4 is tracking at a 1.6% pace and revenue expansion is approximately 3.6%.

Next week, along with the retail sector beginning to put the finishing touches on earnings season, the economic calendar brings a host of data, but mostly pre-virus outbreak reads such as January new home sales, the first revision to Q4 GDP, January durable goods, and January personal income and spending. However, February reads on Consumer Confidence, the University of Michigan Consumer Sentiment Index, and more regional manufacturing reports, could garner heavy attention, along with jobless claims for the week ending February 22nd.

As noted in our latest Schwab Market Perspective: Will Coronavirus Have a Lasting Impact?, the coronavirus outbreak in China unnerved investors in January, leading to a sharp (but short) U.S. stock market drop. Although stocks quickly resumed their rally toward new highs, the reaction highlighted stocks' near-term vulnerability. At the same time, divergences and weak spots have become apparent in global economic data. It's hard to say if the coronavirus will be different from past epidemics that historically have had relatively minimal long-term effects on stocks. Investors may have little need to take action in the near-term if their portfolios are diversified and aligned with their long-term plan. We continue to recommend that investors remain at their long-term strategic equity allocations—but use swings in either direction to rebalance back toward those targets, if necessary.

The international economic calendar next week could bring some data points that may garner attention with notable reports including: India—Q4 GDP and 2020 growth estimate. Japan—retail sales and industrial production. Eurozone—economic and consumer confidence reports, along with German business sentiment and Q4 GDP. U.K.—retail sales.

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