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Late Rally Offers a Glimmer of Hope, After a Very Bad Week

The last time markets suffered a week this bad in 2008, esoteric terms and acronyms, like credit default swaps, CDOs, and CLOs, were littered thorough the financial press, but this week has only one culprit: the coronavirus. However, today brought the slightest sign of relief as a strong rally in the final minutes of trading eased what had been steep losses and even let the NASDAQ creep into the green. Recent volatility has led to increased expectations that the Fed will take measures to support the market and that the Fed may work in conjunction with other global central banks. The bond market has responded with record low rates on the longer end of the curve. Economic data offered upbeat reads on personal income, consumer sentiment and regional manufacturing. In equity news, VMware posted mixed quarterly results. Baidu was the latest company to warn of the outbreak's negative impact. Workday posted favorable quarterly results. Global equity indexes suffered heavy losses on the day.

The Dow Jones Industrial Average shed 357 points (1.4%) to 25,409, the S&P 500 fell 25 points (0.8%) to 2,954 and the NASDAQ added 1 point to 8,567. In heavy volume, 2.5 billion shares were traded on the NYSE and 5.3 billion shares changed hands on the NASDAQ. WTI oil was down $2.33 to $44.76 per barrel and wholesale gasoline shed $0.02 to $1.40 per gallon. Elsewhere, the Bloomberg gold spot price was down $75.80 to $1,566.70 per ounce. The Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.4% to 98.11. For the week, the Dow was down 12.4%, the S&P shed 11.5% and the NASDAQ dropped 10.5%.

VMware Inc. (VMW $121) reported Q4 earnings-per-share (EPS) of $0.76, or $2.05 ex-items, versus the 2.17 FactSet estimate, as revenues rose 11.0% year-over-year (y/y) to $3.1 billion, above the Street's projection of $3.0 billion. The enterprise software company's license revenue came in a bit short of expectations, while its services revenues were roughly in line with forecasts. The company's current-year guidance appears to be a bit noisy due to the impact of its acquisition of Pivotal and the impact of the coronavirus. Shares fell shaply.

Baidu Inc. (BIDU $120) was in focus after China's leading internet search company issued Q1 revenue guidance that was south of expectations as it noted that the coronavirus situation in China is evolving, and business visibility is very limited and its guidance is subject to substantial uncertainty. The company did post Q4 EPS and revenues that topped expectations. Shares traded higher.

As uncertainty regarding the impact of the coronavirus intensifies and a plethora of companies have issued guidance reflecting the negative impact of the outbreak, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Heartbreaker: Spreading Impact of Coronavirus, that the impact of the coronavirus is spreading; both geographically and economically. She adds that central banks will likely step in; but supply shocks are difficult to combat. Moreover, for a look at how the outbreak impacts our tactical recommendations, read the Schwab Center for Financial Research's (SCFR) Schwab Sector Views: Coronavirus Spreads to Equity Sectors. Finally, with the global stock markets being roiled and the U.S. markets registering the quickest drop into correction territory in the history of the markets, check out our SCFR's commentary, Market Correction: What Does it Mean?, for our outlook on what happens next and what can investors do now.

Workday Inc. (WDAY $170) announced a Q4 loss of $0.56 per share, or EPS of $0.50 ex-items, versus forecasts of a $0.40 per share profit, with revenues growing 23.8% y/y to $976 million, topping the expected $965 million. WDAY's subscription and services revenues exceeded forecasts. The enterprise cloud applications company for human resources and finance raised its current-year subscription revenue outlook, adding that it enters the year with considerable momentum. Shares traded higher.

Personal income and spending report mixed, consumer sentiment revised higher

Personal income (chart) rose 0.6% month-over-month (m/m) in January, versus the Bloomberg forecast of a 0.4% rise, and compared to December's downwardly-revised 0.1% gain. Personal spending gained 0.2%, below forecasts of a 0.3% increase and the prior month's upwardly-revised 0.4% advance. The January savings rate as a percentage of disposable income was 7.9%. The PCE Deflator was up 0.1% m/m, versus expectations of a 0.2% rise and versus the prior month's unrevised 0.3% gain. Compared to last year, the deflator was 1.7% higher, south of estimates of a 1.8% gain and compared to December's downwardly-adjusted rise of 1.5%. Excluding food and energy, the PCE Core Index rose 0.1% m/m, below expectations to be in line with December's unadjusted 0.2% increase. The index was 1.6% higher y/y, below estimates of a 1.7% gain and versus December's downwardly-adjusted 1.5% increase.

The February final University of Michigan Consumer Sentiment Index (chart) was revised to 101.0, versus expectations for a slight downward adjustment to 100.7 from the preliminary 100.9 reading and above January's 99.8. The index improved m/m as the current conditions and expectations components of the survey both increased. The 1-year inflation forecast dipped to 2.4% from January's 2.5% rate, and the 5-10 year inflation forecast declined to 2.3% from the prior month's 2.5% pace.

The Chicago PMI improved more than expected but remained at a level depicting contraction (a reading below 50), rising to 49.0 in February from January's 42.9 level, and versus forecasts calling for a rise to 46.0. The contraction in new orders and inventories slowed and production moved back into expansion territory, though employment moved further into contraction territory.

The advance goods trade balance showed that the January deficit narrowed more than expected, coming in at $65.5 billion, versus estimates of $68.5 billion. December's deficit was upwardly-revised to $68.7 billion.

Preliminary wholesale inventories (chart) declined 0.2% m/m for January, compared to expectations of a 0.1% increase, and versus December's negatively-revised 0.3% decline.

Treasuries continued to surge, with the yield on the 2-year note plunging 13 basis points (bps) to 0.93%, the yield on the 10-year note dropping 10 bps to 1.17%, and the 30-year bond sliding 6 bps to 1.69%. Bond yields remain in a sharp downdraft as the coronavirus concerns foster intensified flight to safety and are suggesting the markets are ramping up expectations that the Fed will be forced to react with monetary policy action. 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.

Global markets end the week with steep losses

Global equities were broadly lower again amid the continued global stock market correction that has come from the rapid spreading of the coronavirus outside the epicenter of China, with cases spiking in Italy, South Korea and Iran recently. The first case of the virus in the U.S. from an unknown origin has further exacerbated concerns, as past cases had a fairly direct link to China. The outbreak has weighed on economic and earnings forecasts and has seen China react with a flood of stimulus measures. There are some expectations for potential coordination among global central banks, including the Fed, to stabilize the markets. Global economic data has been totally overshadowed by the virus and has not had enough time to reflect the impact of the outbreak, but for the time being remains reasonably strong, highlighted today by an upbeat read on German unemployment and a slightly hotter-than-expected report on German consumer price inflation. Japan offered a stronger-than-expected read on the nation's retail sales for last month. The euro and British pound lost ground versus the U.S. dollar, while the safe-haven Japanese yen posted strong gains. Global bond yields were lower; however Italy and Greece saw another day of higher rates. 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 lost 3.2%, Germany's DAX Index fell 3.9%, France's CAC-40 Index dropped 3.4%, Spain's IBEX 35 Index declined 2.9%, Switzerland's Swiss Market Index was down 3.7%, and Italy's FTSE MIB Index decreased 3.6%. Japan's Nikkei 225 Index tumbled 3.7%. China's Shanghai Composite Index dropped 3.7% and the Hong Kong Hang Seng Index fell 2.4%. Australia's S&P/ASX 200 Index and South Korea's Kospi Index both traded 3.3% lower, while India's S&P BSE Sensex 30 Index plunged 3.6%.

As noted in our latest Schwab Market Perspective: Will Coronavirus Have a Lasting Impact?, 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, but the market’s reaction and jump in volatility amid the coronavirus outbreak highlighted stock vulnerabilities. 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.

Stocks register historic weekly drop

U.S. stocks, in concert with the global markets, plunged with the S&P 500 posting the worst week since the financial crisis and moving into correction territory—from an all-time high—in the shortest amount of time in history. Uncertainty ramped up regarding the supply and demand impact of China's aggressive containment efforts in the epicenter that included shutting down entire regions of the country and some key manufacturing hubs. The lack of clarity regarding the impact was exacerbated by spikes in new cases in South Korea and Italy, as well as the first case in the U.S. of unknown origin. Another layer of uneasiness surrounded the sparse data received thus far pertaining to testing, containment and treatment of the virus as it spreads globally, causing fears of a pandemic to ramp up. All major market sectors plunged into correction territory, potentially amplified by the growing use of systematic trading strategies, and amid frantic reassessments of pre-outbreak earnings and economic modeling by economists and analysts who grappled with the heightened uncertainty of the economic impact and the recent flood of companies issuing warnings regarding the outbreak.

The week saw expectations jump regarding a potential monetary policy reaction from the Fed and potentially some sort of global central bank coordination. Treasury yields tumbled, posting a string of record lows, and crude oil prices registered the worst weekly drop in 11 years that took WTI crude oil below $45 per barrel for first time in more than a year. Economic data was shoved to the back burner due to most figures being pre-outbreak (January) reads, such as a jump in new home sales to the highest level since mid-2007 and a much stronger-than-expected rebound in core durable goods orders. Even some relatively upbeat February reads on regional manufacturing and Friday's upward revision to consumer sentiment for this month made little-to-no impact.

Schwab's Liz Ann Sonders, notes in her article, Panic Is Not a Strategy—Nor Is Greed, that if markets are good at one thing, it's reminding investors that stock prices don't simply go up, uninterrupted, forever. She adds that markets do drop, and that's an unavoidable part of investing, but what matters is how you respond, or, more to the point, don't respond. She stresses that because if you've built a portfolio that matches your time horizon and risk tolerance when markets are calm, then a surge in turbulence may not feel so rough to you.

Next week, the economic calendar will be robust but likely will continue to be overshadowed by the outbreak focus and potential for global central bank responses, while earnings guidance could garner the most attention on the equity news front. However, we will get some February reports from the Institute for Supply Management (ISM) and Markit on manufacturing and services sector activity, jobless claims will bring a timely read on unemployment for the week ending February 29th, and the week will culminate with the nonfarm payroll report for February. The Fed's Beige Book—an anecdotal report on national business activity across Fed regions used as a tool for the next two-day monetary policy meeting set to conclude on March 18th–could also grab some attention.

Next week's international economic calendar will be dominated by February global manufacturing and services sector Purchasing Managers Indexes (PMIs), commencing with tonight's read out of China. Other reports that could garner some attention include: Australia—Reserve Bank of Australia monetary policy decision. Japan—household spending and earnings figures. Eurozone—Consumer Price Index and retail sales, along with German factory orders.

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