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Gains Accelerate Late-day, but to No Avail

U.S. equities rallied in the final hour, but lost steam in the final minutes to finish mixed, but higher on a weekly basis, as a volatile start to the year continues. The markets digested a much stronger-than-expected January nonfarm payroll report that showed job growth trounced estimates and December's figures were revised sharply to the upside, while the unemployment rate unexpectedly ticked higher, likely as a result of more people rejoining the workforce. The moves came amid a noticeable rise in Treasury yields, on the back of a drop in prices, as the markets continue to grapple with whether the Fed may have to be more aggressive than expected in its tightening campaign. The U.S. dollar ticked higher, and crude oil prices continued to rally, while gold traded modestly to the upside. Meanwhile, the earnings front seemed to offer support, headlined by e-commerce behemoth Amazon, as well as Snap and Pinterest, but Ford missed quarterly estimates. Europe finished lower following data and yesterday's monetary policy decisions from the European Central Bank and the Bank of England, while stocks in Asia were higher with markets in Hong Kong leading the charge in its return to action following an extended holiday break.

The Dow Jones Industrial Average lost 21 points (0.1%) to 35,090, while the S&P 500 Index increased 23 points (0.5%) to 4,501, and the Nasdaq Composite rallied 219 points (1.6%) to 14,098. In heavy volume, 4.6 billion shares of NYSE-listed stocks were traded, and 4.0 billion shares changed hands on the Nasdaq. WTI crude oil jumped $2.04 to $92.31 per barrel. Elsewhere, the gold spot price traded $3.70 higher to $1,807.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% to the upside at 97.26. Markets were higher for the week, as the DJIA was up 1.1%, the S&P 500 gained 1.6%, and the Nasdaq Composite jumped 2.4%.

Amazon (AMZN $3,153) reported Q4 earnings-per-share (EPS) of $27.75, including a pre-tax valuation gain of $11.8 billion from its common stock investment in Rivian Automotive (RIVN $61), which completed an initial public offering in November. The large gain included may be making comparisons to the $3.61 FactSet EPS estimate unclear. Revenues rose 9.0% year-over-year (y/y) to $137.4 billion, compared to the Street's forecast of $137.7 billion. The company said it had its biggest-ever Black Friday to Cyber Monday holiday shopping weekend, with apparel, beauty, home, and toys among the top-selling categories. AMZN pointed out that Q4 marked Prime Video's strongest viewership for live sports globally, and its Amazon Web Services (AWS) cloud-computing division announced significant customer momentum, with new commitments and migrations from customers across many major industries.

AMZN's North American sales rose 9.0% y/y to $82.4 billion, while its international sales dipped 1.0% to $37.3 billion, and its AWS sales surged 40.0% to $17.8 billion. Included in these figures, the company said its subscription services revenues grew 15.0% y/y to $8.1 billion, and for the first time AMZN disclosed its advertising sales, which grew 32.0% to $9.7 billion. Additionally, AMZN said with the continued expansion of Prime member benefits, as well as the rise in wages and transportation costs, it will increase the price of a Prime membership in the U.S., with the monthly fee going from $12.99 to $14.99, and the annual membership from $119 to $139, marking the first time it raised the price since 2018. The company issued Q1 guidance that some analysts, including JPMorgan and Jefferies called "better than feared." Shares rallied over 10%.

Ford Motor Company (F $18) posted Q4 earnings of $0.26 per share, below the expected $0.45, as revenues rose 5.0% y/y to $37.7 billion, south of the projected $41.2 billion. The automaker noted persistent supply chain disruptions. Operating earnings were stronger-than-expected in North America and South America, but missed in Europe and China. Looking ahead to 2022, F said it expects significantly higher profits in North America, along with collective profitability in the rest of the world. The company also noted that it expects continued variability in supplies of key components, a strong pricing environment—though with a dynamic relationship between vehicle volumes and pricing—and increased commodity costs, along with possible inflationary effects on a broad range of other expenses. Shares fell nearly 10%.

Snap Inc. (SNAP $39) achieved Q4 EPS of $0.01, compared to the expected loss of $0.09 per share, with revenues jumping 42.0% y/y to $1.3 billion, north of the projected $1.2 billion. This was the first profitable quarter in the video messaging app company's history as daily active users (DAUs) of 319 million were up 20.0%, registering the fifth-consecutive quarter of 20% or more growth. SNAP's DAUs also increased quarter-over-quarter and y/y in its North America, Europe, and Rest of World segments. SNAP issued Q1 revenue guidance that topped expectations. Shares surged nearly 60%.

Pinterest Inc. (PINS $27) announced adjusted Q4 EPS of $0.49, above the expected $0.45, as revenues rose 20.0% y/y to $847.0 million, topping the forecasted $827.0 million. The social networking company's monthly active users declined 6.0% y/y and missed expectations, while its average revenue per user rose y/y and came in above estimates. Looking ahead the company said it expects revenue growth for Q1 to be in the high teens and it plans to further invest in its business in 2022 as it expects expenses to grow around 40.0% y/y. PINS traded solidly higher.

As Q4 earnings season crosses the halfway marker, thus far of the 278 companies that have reported results in the S&P 500, roughly 68% have topped revenue forecasts, while approximately 77% have bested earnings expectations, per data compiled by Bloomberg. Compared to last year, revenue growth is on pace to be up nearly 16.0% and earnings expansion is on track for about 27.0%.

The markets have seen some wild swings amid diverging earnings results from some of the largest U.S. companies this season to add to the volatility seen to begin 2022. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Smoke on the Water … Fire Down Below, how the latest equity market rout has lifted the curtain for traditional indexes, exposing weakening internals that have become more broad-based in the face of several headwinds.

She also notes that the results have bucked the trends of the past six quarters—with a lower beat rate (percentage of companies beating expectations) and a lower percentage by which companies have been exceeding consensus estimates. As for Fed policy, Liz Ann adds that as has nearly always been the case historically, a shift in the monetary policy backdrop can mark significant turning points in the equity market and typically lead to more frequent bouts of volatility.

With the markets volatile, find all our market commentary on our Market Insights page and follow us on Twitter at @SchwabResearch.

January job growth trounces estimates, unemployment rate ticks higher, more join workforce

Nonfarm payrolls (chart) jumped by 467,000 jobs month-over-month (m/m) in January, well above the Bloomberg consensus estimate of a 125,000 rise, while December's figure was adjusted decisively higher to an increase of 510,000 from the initial reading of a 199,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 444,000, versus the forecasted rise of 35,000, after increasing by 503,000, revised noticeably higher from the preliminarily reported 211,000 gain in December. The labor force participation ratealso rose solidly to 62.2% from December's unrevised 61.9% figure, where it was expected to remain. The prime age labor force participation rate—ages 25-54 years—also nudged higher from 81.9% to 82.0%. The Bureau of Labor Statistics (BLS) said employment growth continued in leisure and hospitality, in professional and business services, in retail trade, and in transportation and warehousing.

The unemployment rate rose to 4.0%, with forecasts calling for it to remain at December's 3.9% rate. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—fell to 7.1% from the prior month's 7.3% rate. The BLS said those employed part time for economic reasons continued to trend down, and the long-term unemployed—those jobless for 27 weeks or more—declined to 1.7 million, down from 4.0 million a year earlier but is 570,000 higher than in February 2020. Also, the report showed the number of permanent job losers was little changed at 1.6 million but is down 1.9 million from a year earlier.

Average hourly earnings increased 0.7% m/m, north of projections calling for a rise of 0.5%, after matching December's downwardly-revised rise. Compared to last year, wages were 5.7% higher, topping forecasts of a 5.2% rise. Finally, average weekly hours dipped to 34.5 from December's unrevised 34.7, versus estimates to be unchanged.

Treasuries fell following the jobs data, as the yield on the 2-year note jumped 11 basis points (bps) to 1.30%, the yield on the 10-year note was 9 bps higher at 1.92%, while the 30-year bond rate rose 8 bps to 2.22%.

Treasury yields have moved higher this week but continue to be choppy after last week's decisive flattening of the yield curve as rates on the short end of the curve jumped while the mid-to-long end was subdued with the markets grappling with concerns that the Fed may have to aggressively tighten monetary policy beginning in March to combat persisting inflation pressures. The mid-to-long end of the curve appears to be hampered by uncertainty regarding what the implications could be on economic activity. The moves came in the wake of last week's monetary policy decision from the Fed that suggested multiple rate hikes are coming this year and after it begins to raise rates, the Central Bank intends on commencing its balance sheet reduction campaign, known as quantitative tightening.

Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, Bond Market: Waiting for Liftoff, while it's clear that the Fed is anxious to initiate a new tightening cycle, we think it's premature to forecast such a rapid pace of rate hikes without more clarity about its plans to reduce the amount of bonds the Fed holds on its balance sheet. The Fed released general principles for quantitative tightening, but hasn't spelled out a clear plan yet.

Kathy points out how allowing bonds to mature without reinvestment can have a similar impact as hiking rates in terms of the impact on the availability of funds to the banking system. She adds that the Fed has indicated it prefers using the federal funds rate as its primary tool to set policy, but given the size of its current bond holdings, it's possible that quantitative tightening will play a bigger role in the Fed's plans in this cycle than it did in the last cycle.

Europe lower following data and yesterday's monetary policy decisions, Asia higher

European equities finished lower, with most major sectors in the red, except for Energy, which continued to outperform as crude oil prices remained in rally mode. The markets continued to digest yesterday's monetary policy decisions from the European Central Bank (ECB) and the Bank of England (BoE). The ECB held its benchmark interest rate unchanged but said it will slowly reduce its asset purchases and plans to end its quantitative easing campaign in March. Meanwhile, ECB President Christine Lagarde sounded a hawkish tone regarding inflation, appearing to foster some expectations that the ECB could begin its rate hike campaign sooner than expected as she refused to rule out a rate hike in 2022. She noted that the central bank will discuss inflation more in depth in March and that inflation risks are to the upside. Moreover, the BoE hiked its benchmark interest rate by 25 bps for a second-straight meeting, while four out of the nine-member panel wanted 50 bps, which according to Bloomberg would have been unprecedented since the central bank gained independence from the government in 1997. Bond yields in the Eurozone and the U.K. extended solid gains, while the euro nudged higher and the British pound fell after both rose noticeably yesterday versus the U.S. dollar, which got a boost from today's much stronger-than-expected January labor report in the U.S.

Economic data in the region was mixed as German factory orders for December rose much more than expected, and U.K. construction output unexpectedly accelerated in January, while Eurozone retail sales fell more than expected m/m. Elsewhere, French industrial and manufacturing production both came in below expectations in December.

Geopolitical tensions between Russia and Ukraine remains in focus and Schwab's Chief Global Strategist Jeffrey Kleintop, CFA, provides his latest article, Guide to Geopolitical Risk: Russia-Ukraine, where he discusses the how markets have historically shrugged off geopolitical events involving Russia. He notes that Russia makes up a very small portion of the main global and emerging market indexes, while Ukraine has no exposure in such indexes. He discusses the most likely sanctions that may occur if the situation escalates, but he doesn't believe that diversified investors need to take action to protect their portfolios from the risks related to an invasion of Ukraine.

The U.K. FTSE 100 Index was down 0.2%, France's CAC-40 Index and Switzerland's Swiss Market Index decreased 0.8%, Germany's DAX Index and Italy's FTSE MIB Index fell 1.8%, and Spain's IBEX 35 Index declined 1.2%.

Stocks in Asia finished mostly higher despite the noticeable drop in the U.S. yesterday that snapped a four-day winning streak, with the markets bogged down by disappointing earnings results from Facebook parent Meta Platforms Inc. (FB $232). Hong Kong markets returned from an extended holiday break but mainland China markets remained closed for the lunar new year holiday. However, late-yesterday's stronger-than-expected earnings from e-commerce and cloud services giant Amazon in the U.S. appeared to ease some of the concerns and buoy the Consumer Discretionary and Tech sectors. The markets gained ground despite the looming key January labor report in the U.S. and after monetary policy decisions out of Europe yesterday that showed the European Central Bank may be heading toward a rate hike, while the Bank of England raised rates for the second-straight month, which boosted both the euro and British pound. Schwab's Jeffrey Kleintop, discusses in his article, What Do Rising Rates Mean for Stock Investors?, how recently, U.S. Treasury bond yields climbed back to their pre-pandemic levels and in Europe, German 10-year yields climbed above 0%, touching their highest level since May 2019. Jeff asks the question of what are the implications of rising global yields for stock prices? He points out that increasing yields could help lift stocks and may even signal outperformance of cyclical European stocks and value stocks.

In economic news, South Korea's consumer price inflation for January came in hotter than expected on both the headline and core rates. Moreover, the Reserve Bank of Australia offered its statement on monetary policy, upgrading its inflation outlook but noting that wages rose gradually and that it will be patient on raising interest rates. The statement followed Tuesday's monetary policy decision in which it maintained its benchmark interest rate, although it ended its bond buying program as expected.

Japan's Nikkei 225 Index rose 0.7%, with the yen continuing to trim some of its recent advance versus the U.S. dollar, Australia's S&P/ASX 200 Index advanced 0.6%, and South Korea's Kospi Index traded 1.6% to the upside.

Wild ride for stocks continues

After a dismal start to the new year in January, as the calendar turned to February, volatility came with it. The markets continued to cope with the economic and earnings implications regarding the prospect of a more aggressive Fed tightening campaign to try to tamp down persistent inflation pressures. The Fed uncertainty was exacerbated by Friday's surprisingly stronger-than-expected January labor report, which seemed to foster some calls for a 50 bps hike by the Fed instead of a 25 bps increase that it has historically opted for. Additional volatility came in the form of mixed earnings results from some of the largest U.S. companies. Facebook parent Meta Platformsplunged to thwart a four-session winning streak for the markets, while the week ended with Amazon's results that the Street cheered and helped boost the Consumer Discretionary sector and offer some reprieve for the markets.

Treasuries fell lifting yields sharply, as the rate on the 2-year note hit the highest since March 2020 and the yield on the 10-year note touched a level not seen since the end of 2019. However, the U.S. dollar fell from two-year highs it rallied to last week. Crude oil prices continued to surge to a fresh seven-year high and above $90 per barrel, and gold prices rebounded. For the week, the Energy sector continued its decisive outperformance that has carried over from 2021, and is up over 20% for this year, while Consumer Discretionary and Financials also were among the winners on the earnings results and the solid gain in Treasury yields. However, earnings hamstrung the Communications Services sector, which was the worst performer and the rise in interest rates hamstrung Real Estate issues.

Amid the rising interest rates and volatility surrounding the Fed and earnings season, check out Director and Senior Investment Strategist with the Schwab Center for Financial Research, David Kastner's, CFA, latest Schwab Sector Views: What to Expect When Rates Rise.

Next week, earnings season will further distance itself from the halfway point and the economic calendar will likely remain prominent, as the January inflation picture will begin to develop, courtesy of Thursday's release of the Consumer Price Index (CPI), expected to show another 0.5% m/m increase and an acceleration to a 7.3% y/y gain from December's 7.0% increase for the headline figure. Excluding food and gas, the core CPI is projected to rise 0.5% and be up 5.9% versus last year after the prior month's 5.5% gain. A timely read on the all-important U.S. consumer will also likely grab attention, with Friday's release of the University of Michigan's preliminary February Consumer Sentiment Index, while the NFIB Small Business Optimism Index for this month will get the ball rolling on Monday. Other reports that are due out next week that deserve a mention include initial jobless claims for the week ended February 5, and the December trade balance.

The international economic calendar will deliver some reports that could influence the markets with reports worth noting including: Australia—consumer confidence. China—Caixin PMI Services, and lending statistics. India—the Reserve Bank of India monetary policy decision and industrial production. Japan—household spending, labor earnings figures, trade balance, and machine tool orders. Eurozone—investor confidence, along with German industrial production, trade balance and wholesale price inflation. U.K.—Q4 GDP, December GDP, industrial and manufacturing production, and trade balance.

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