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Lackluster Start to New Year

U.S. equities closed lower, with the major indexes posting weekly losses to kick off 2022. The possibility that the Fed could accelerate down the path to monetary policy tightening remained the main catalyst of the weakness in stocks, along with persistent inflation pressures. Another mixed nonfarm payroll report added to the uncertainty, as it showed December job growth severely missed forecasts, even though the unemployment rate dropped much more than expected. In other economic news, consumer credit soared to it largest level on record. On the equity front, T-Mobile US reported stronger-than-expected Q4 subscriber additions but offered some cautious commentary, while GameStop rose amid reports it plans to launch a division to develop a market for NFTs and establish cryptocurrency partnerships. Treasuries were mixed in the wake of the employment data, and the U.S. dollar fell, while crude oil prices declined, and gold was higher. Stocks in both Europe and Asia finished mixed as the markets grappled with the Fed's minutes, data, and the omicron variant.

The Dow Jones Industrial Average shed 5 points to 36,232, the S&P 500 Index declined 19 points (0.4%) to 4,677, and the Nasdaq Composite fell 145 points (1.0%) to 14,936. In heavy volume, 4.1 billion shares of NYSE-listed stocks were traded, and 4.2 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.56 to $78.90 per barrel. Elsewhere, the gold spot price advanced $5.20 to $1,794.40 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.6% to 95.75. Markets were lower for the week, as the DJIA ticked 0.3% lower, the S&P 500 decreased 1.9%, and the Nasdaq Composite plunged 4.5%.

T-Mobile US Inc. (TMUS $110) reported preliminary Q4 postpaid net subscriber additions of 1.75 million, compared to the 1.54 million FactSet estimate. However, the company's postpaid phone churn rate came in higher than the Street had anticipated and some analysts were a bit concerned by the company's cautious commentary for 2022, which it suggested an industry slowdown. Shares finished lower.

GameStop Corp. (GME $141) rose amid reports that the gaming retailer plans to launch a division to develop a market for non-fungible tokens (NFTs) and establish cryptocurrency partnerships. The Wall Street Journal is reporting that GME is launching the division in an effort to revitalize its core videogame business and is asking game developers and publishers to list NFTs in its online marketplace to buy, sell and trade virtual videogame NFTs, which it plans to launch later this year. The company did not comment on the reports.

As noted in our 2022 Schwab Market Outlook: Ebb Tide, while overall stock market performance was strong in 2021, there has been a lot of churn beneath the surface. We look at the question of will U.S. stock indices begin to reflect more of that weakness in 2022? It's possible, especially as the world's major central banks begin to drain the liquidity that has supported financial markets since the start of the COVID-19 pandemic in March 2020. But major uncertainties remain, including the pace of inflation, how central banks will react to it, and the direction of the virus.

Find all our market commentary on our Market Insights page and follow us on Twitter at @SchwabResearch.

December job growth misses again but unemployment rate falls more than expected

Nonfarm payrolls (chart) rose by 199,000 jobs month-over-month (m/m) in December, well below the Bloomberg consensus estimate of a 450,000 rise, while November's figure was upwardly-adjusted to an increase of 249,000. Excluding government hiring and firing, private sector payrolls increased by 211,000, versus the forecasted rise of 400,000, after increasing by a positively-revised 270,000 in November. The labor force participation rate remained at November's upwardly-revised 61.9% figure, in line with forecasts. The Department of Labor said employment continued to trend up in leisure and hospitality, in professional and business services, in manufacturing, in construction, and in transportation and warehousing.

The unemployment rate fell to 3.9% from November's 4.2% rate, versus expectations of a dip to 4.1%. 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—dropped to 7.3% from the prior month's 7.7% rate. The Labor Department noted that the number of unemployed persons decreased by 483,000 to 6.3 million, with this figure down by 4.5 million over the year. In February 2020, prior to the pandemic, the unemployment rate was 3.5% and unemployed persons numbered 5.7 million. Average hourly earnings increased 0.6% m/m, north of projections calling for a match of November's positively-revised 0.4% rise. Year-over-year (y/y), wages were 4.7% higher, above forecasts of a 4.2% rise. Finally, average weekly hours remained at November's downwardly-revised 34.7, below estimates to rise to 34.8.

Consumer credit, released in the final hour of trading, showed consumer borrowing surged by $40.0 billion during November, double the $20.0 billion forecast of economists polled by Bloomberg, while October's figure was adjusted downward to an increase of $16.0 billion from the originally reported $16.9 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, increased to $20.1 billion, a 7.2% increase y/y, while revolving debt, which includes credit cards, rose by $19.8 billion, a 23.4% y/y jump.

Treasuries were mixed, as the yield on the 2-year note was down 1 basis point (bp) at 0.87%, while the yield on the 10-year note rose 4 bps to 1.77%, and the 30-year bond rate gained 3 bps to 2.13%.

The Treasury yield curve has steepened noticeably to begin the year as the markets grapple with the prospect of Fed tightening and the rapid spread of the omicron variant. The steepening was amplified by this week's hawkish minutes from the Fed's December meeting, which suggested along with accelerated tapering and multiple rate hikes this year, it may begin to reduce its balance sheet sooner than expected. For a look at the Fed's December meeting, check out Schwab's Chief Investment Strategist Liz Ann Sonders' article, Higher Ground: Fed Ups Pace of Tapering and Dots Follow Suit.

Europe lower following host of data

European equities finished mixed, with the markets digesting a host of economic data on both sides of the pond, including another mixed read on U.S. December employment. German industrial production surprisingly dipped in November, though its exports unexpectedly jumped for that month. Also, French consumer spending rose more than expected for November, while Eurozone retail sales in November surprisingly increased but the preliminary estimate of Eurozone consumer price inflation came in hotter than expected at a 5.0% y/y pace of growth for December. The markets continue to digest this week's minutes from the Fed's December meeting that showed the Central Bank may be more aggressive than initially expected in tightening monetary policy, fostering Wednesday's sharp decline in the U.S. markets. Bond yields have moved higher as the Fed is expected to ramp-up monetary policy tightening and as the Bank of England surprised the markets last month by raising its benchmark interest rate.

However, Energy and Financials continue to outperform amid expectations of higher rates and inflation and as the markets seem to be coming to grips with the fast-spreading omicron variant as signs suggest its severity may be limited compared to other variants. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his article, Omicron: Will the Virus Wave Pattern Repeat?, how we shouldn't necessarily expect this wave to unfold the same as the others. Jeff adds that the rest of the month may hold policymaker responses to what we don't yet know about omicron's effects, resulting in continued volatility. He also notes that this may be tempered by a potential delay in monetary policy tightening and a backdrop of strong global economic growth. The euro and British pound were higher versus the U.S. dollar, and bond yields in the Eurozone and the U.K. rose.

The U.K. FTSE 100 Index was up 0.5%, while Switzerland's Swiss Market Index was little changed, France's CAC-40 Index and Spain's IBEX 35 Index were down 0.4%, Germany's DAX Index decreased 0.7%, and Italy's FTSE MIB Index declined 0.1%.

Stocks in Asia finished mixed following a midweek selloff after the details of the Fed's December monetary policy meeting in the U.S. was more hawkish than expected, including a more aggressive approach to reducing its balance sheet. Meanwhile, the markets continued to grapple with the ultimate impact of the rapidly-spreading but potentially less severe omicron variant. Schwab's Jeffrey Kleintop in his latest article, Top Global Risks of 2022, touches on how future COVID waves may not resemble those of 2021, while also offering four additional risks, in no particular order: shortages turn into gluts, rate hikes slower than expected, China goes from cracking down to propping up, and geopolitical surprises. Whether or not these risks come to pass remains to be seen, Jeff adds, but a new year almost always brings new surprises. The markets likely treaded with some caution ahead of today's key December employment report, which comes as the Fed is turning more hawkish. In economic news, Japan's household spending unexpectedly fell in November, while labor cash earnings failed to rise as expected for November. Moreover, Japan reported that Tokyo consumer price inflation accelerated roughly in line with forecasts for December. After the closing bell, India released its 2022 GDP estimate of a 9.2% y/y pace of growth, but below the projection of a 9.5% rise.

Japan's Nikkei 225 Index finished little changed, with the yen holding onto yesterday's gain, China's Shanghai Composite Index dipped 0.2%, and India's S&P BSE Sensex 30 Index rose 0.2%. Australia's S&P/ASX 200 Index advanced 1.3%, and South Korea's Kospi Index gained 1.2%. The Hong Kong Hang Seng Index led the way, rallying 1.8%, continuing to bounce from Wednesday's drop amid some rebounds in the battered real estate sector and as Alibaba Group Holding Ltd. (BABA $130) recovered noticeably.

Stocks begin 2022 in the red amid potentially more aggressive Fed

U.S. stocks kicked off the new year by trimming some of the solid gains registered in 2021. The markets turned decidedly lower midweek following the release of the minutes from the Fed's December monetary policy meeting after which it announced that it will double the pace of monthly asset purchase tapering, while also suggesting that multiple rate hikes could be in the offing for 2022. The look at the details of the meeting seemed to spook the markets as they signaled that the Fed could be much more aggressive in their tightening campaign than initially expected, including a sooner-than-expected reduction of its severely bloated balance sheet. The Treasury yield curve steepened noticeably in the wake of the Fed's report, weighing on growth-related sectors, such as Information Technology and Communications Services, and pressured the interest-rate sensitive Real Estate sector. However, the markets seemed to continue to come to terms with the rapidly-spreading omicron variant as signs still suggested its impact may be less severe. Amid the ambivalence toward the variant, a third-straight weekly gain in crude oil prices, the rise in interest rates, persistent inflation pressures, and still signs of solid economic and earnings growth, cyclically-natured sectors—Energy, Financials, and Industrials—outperformed and finished the week in the green to limit the downside for the broader markets. The U.S. dollar nudged higher on the week after paring weekly gains on Friday following the mixed December nonfarm payroll report.

The economic calendar next week will remain a key point of contention for the markets as we will get a look at the December inflation picture, courtesy of the releases of the Consumer Price Index (CPI), the Producer Price Index (PPI), and the Import Price Index. Moreover, the all-important U.S. consumer will be in focus as the markets digest the December retail sales report and the preliminary January University of Michigan Consumer Sentiment Index. Other reports due out that could garner attention include initial jobless claims for the week ended January 8, the Fed's December industrial production and capacity utilization report, and the NFIB Small Business Optimism Index for last month. With the potential that the Fed could get more aggressive and uncertainty regarding how many rate hikes we will see this year, next week's Senate Banking Committee hearing on Fed Chairman Jerome Powell's nomination for a second term could have the potential to move the markets. Finally, Friday's unofficial start to Q4 earnings season is likely to be a focal point for the markets as some heavyweights in the Financials sector begin to deliver results. According to FactSet, the Q4 earnings growth rate is expected to mark the fourth-straight quarter of growth above 20.0%.

Next week's international economic calendar will also bring some reports that may garner attention with releases worth noting being: Australia—trade balance. China—CPI and PPI, lending statistics, and the trade balance. India—industrial production, CPI and PPI, and the trade balance. Japan—machine tool orders and PPI. Eurozone—investor confidence, the unemployment rate, industrial production, and the trade balance. U.K.—monthly GDP, industrial/manufacturing production, and trade balance.

As noted in our latest Schwab Market Perspective: Why 2022 May Be a Better Year, as we move into 2022 there are signs that the new year may be better than the last. The direction of COVID-19 variants remains difficult to predict, but another recent fear that has bedeviled the markets—inflation—may be about to ease. The narrowing of the performance gap under the broad stock market's surface emphasizes our strong bias toward high-quality factors such as strong earnings revisions, balance sheets, and cash flow. With sector swings and rotations still rampant, maintaining a factor-based (as opposed to sector-based) approach should allow for more stability and less violent swings in portfolios.

©2022 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.


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