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  • Charles Schwab and Co.

Uncertainty Continues to Roil the Markets

U.S. stocks are in jeopardy of relinquishing a weekly gain as they extend yesterday's sharp downside reversal with the economic and earnings impact remaining highly uncertain regarding the spreading of the coronavirus, as cases reportedly surpass 100,000. A stronger-than-expected February Labor Report falling on deaf ears in the markets, as market conviction continues to be elusive. Treasury yields remain in a free-fall, with the yields on the 10-year note and 30-year bond notching fresh record lows, while the U.S. dollar is falling sharply. Crude oil prices are dropping noticeably to multi-year lows amid the increased economic uncertainty, and as OPEC's proposed production cut is being resisted by Russia. Gold is trimming a strong weekly surge. Costco posted better-than-expected quarterly results, Dow member JPMorgan is in focus after CEO Jamie Dimon underwent emergency heart surgery, and Starbucks said it expects Chinese same-store sales to tumble 50% in Q2. Europe saw widespread pressure.

At 12:50 p.m. ET, the Dow Jones Industrial Average is down 1.9%, the S&P 500 Index is decreasing 2.5%, and the Nasdaq Composite is declining 2.8%. WTI crude oil is dropping $3.78 to $42.12 per barrel, Brent crude oil is falling $4.01 at $45.98 per barrel, and wholesale gasoline is off $0.12 at $1.40 per gallon. The Bloomberg gold spot price is $6.81 lower at $1,665.42 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is tumbling 0.7% at 96.03.

Costco Wholesale Corporation (COST $306) reported fiscal Q2 earnings-per-share (EPS) of $2.10, above the $2.06 FactSet estimate, as revenues grew 10.5% year-over-year (y/y) to $39.1 billion, topping the Street's projection of $38.2 billion. Q2 same-store sales rose 8.9% y/y, versus the forecasted 6.4% gain. The company noted that February sales benefited from an uptick in consumer demand in the fourth week of the reporting period, attributing this to concerns over the coronavirus and estimating the positive impact on total and comparable sales to be approximately 3.0%. As such, COST said February same-store sales rose 12.1%, well above estimates of a 6.8% increase. Shares are lower.

Dow member JPMorgan Chase & Co. (JPM $107) is in focus after the company announced that Chief Executive Officer (CEO) Jamie Dimon underwent emergency heart surgery and is recovering well, noting that the company will continue to execute on all of the plans provided on its investor day last week. JPM said co-Presidents/co-Chief Operating Officers Daniel Pinto and Gordon Smith are in charge of the bank while Dimon recovers. Shares are trading to the downside.

Starbucks Corporation (SBUX $75) is lower after the company said it expects Q2 Chinese same-store sales to fall by 50% y/y due to the impact of the coronavirus outbreak, and the COVID-19 situation continues to evolve globally. SBUX said current estimates for China's Q2 same-store sales and revenue reflect its current expectation that substantially all stores in the market will be open by the end of the quarter and that traffic will improve modestly for the balance of the quarter relative to February's swift and severe slowdown. Also, the company said outside of the markets impacted, such as Japan, South Korea and Italy, it continues to experience robust business performance, including in its U.S. retail business.

Gap Inc. (GPS $13) announced that its Board has named Sonia Syngal, CEO of Old Navy, as the company's next CEO, effective March 23rd. Shares are lower.

The markets continue to be volatile amid the increasing uncertainty regarding the impact of the coronavirus and potential further responses from global central banks, which has heavily weighed on Treasury yields, with the rates on the 10-year note and 30-year bond falling to fresh record lows. Amid this backdrop, the Schwab Center for Financial Research (SCFR) updated our outlook as discussed in our latest, Schwab Sector Views: Coronavirus Changes Our Views. We note that the coronavirus outbreak has affected global supply chains, consumer demand and interest rates. In response, we're downgrading Financials and upgrading Utilities. Also, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest commentary, Q&A on COVID-19: The Economy, Markets and What Investors Should Do, noting that rather than trying to call the bottom, a more effective way to think about investing right now is to focus more on the duration rather than the decline. He adds that markets may have further to fall, but they may not stay down for the rest of the year barring a severe pandemic.

February labor report tops forecasts, trade deficit shrinks, yields continue to tumble

Nonfarm payrolls (chart) rose by 273,000 jobs month-over-month (m/m) in February, compared to the Bloomberg forecast of a 175,000 increase. The rise of 225,000 seen in January was revised to a gain of 273,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 228,000, versus the forecasted gain of 160,000, after rising by 222,000 in January, which was revised from the 206,000 increase that was initially reported. Notable job gains occurred in health care and social assistance, food services and drinking places, government, construction, professional and technical services, and financial activities. The upward revision to the prior two months was 85,000. The labor force participation rate remained at January's 63.4% rate.

The unemployment rate dipped to 3.5% from January's 3.6% rate, where it was forecasted to remain, while average hourly earnings were up 0.3% m/m, matching projections and compared to January's unrevised 0.2% gain. Y/Y, wage gains were 3.0% higher, in line with estimates. Finally, average weekly hours ticked higher to 34.4 from January's 34.3, where it was expected to remain.

The trade balance (chart) showed that the January deficit narrowed more than expected, coming in at $45.3 billion versus estimates of $46.1 billion. December's deficit was revised to a shortfall of $48.6 billion from the originally-reported $48.9 billion.

January wholesale inventories (chart) were revised lower to a 0.4% m/m decline, versus expectations to remain at the preliminary estimate of a 0.2% dip, and compared to December's unrevised 0.3% decrease. Sales were up 1.6%, following December's favorably-revised 0.2% decrease.

In the final hour of trading, the economic calendar will bring the release of consumer credit, projected to show borrowing came in at $16.5 billion for January, down from the $22.1 billion posted in December.

Treasuries continue to surge, with the yield on the 2-year note falling 10 basis points (bps) to 0.50%, the yield on the 10-year note dropping 16 bps to 0.75%, and the 30-year bond rate tumbling 25 bps to 1.29%. Bond yields are extending a recent plunge to fresh record lows as the coronavirus concerns foster a decisive flight to safety, and the U.S. dollar is also falling as the global markets grapple with the outbreak and central bank stimulus measures that included this week's surprising 50 bp rate cut from the Fed with expectations rising that the Central Bank may cut by another 50 bps at its scheduled meeting later this month. Schwab's Chief Fixed Income Strategist Kathy Jones discusses the Fed's response and the current bond yield environment in her articles, Fed Cuts Rates to Counter Coronavirus Risks and After the Fall: Why You Should Hold Bonds Even When Yields Are Low.

Amid the intensified market volatility, Chief Investment Strategist for Schwab's digital advice solutions, David A. Koenig, CFA, offer his latest commentary, Weathering Market Downturns: How Schwab Intelligent Portfolios Can Help. David notes that financial markets are volatile by nature, but a diversified portfolio aligned with your goals and risk tolerance—like one built and monitored by Schwab Intelligent Portfolios—can help smooth returns over time.

Europe broadly lower despite data as virus uncertainty reigns

European equities saw a widespread drop, with the global markets continuing to tumble as uncertainty regarding the spreading of the coronavirus—with global cases surpassing 100,000—continuing to stymie economic and earnings forecasts. The markets grappled with further responses from global central banks, with the Fed in the U.S. expected to cut rates by another 50 bps at its meeting later this month after this week's surprising cut and as the European Central Bank is set to deliver its monetary policy decision next week. Bond yields in the U.S. continued to tumble, with the 10-year Treasury yield plunging to fresh record lows. The virus uneasiness and uncertainty overshadowed today's upbeat U.S. employment report for February and a much stronger-than-expected rise in German factory orders for January. The euro and British pound rose versus the U.S. dollar, which added to a recent drop, and bond yields in the region—outside Italy and Greece—were lower. Crude oil prices fell noticeably amid the lack of market conviction, and as OPEC's proposed production cut is being resisted by Russia. Schwab's Chief Investment Strategist 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.

The U.K. FTSE 100 Index was down 3.6%, France's CAC-40 Index tumbled 4.1%, Germany's DAX Index declined 3.4%, Spain's IBEX 35 Index and Italy's FTSE MIB Index fell 3.5%, and Switzerland's Swiss Market Index traded 4.0% lower.

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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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