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Markets Close Out Seesaw Week Lower

U.S. equities finished lower to cap off a volatile week, with growth-related issues such as Information Technology and Consumer Discretionary leading the way southward. Early gains evaporated as the markets digested a mixed November nonfarm payroll report that showed job growth severely missed but the unemployment rate fell, and the labor force participation rate rose to the highest level since March 2020. Nervousness persisted as investors grappled with the pace of Fed monetary policy tightening after Chairman Jerome Powell executed a hawkish pivot this week, while more cases of the Omicron variant have been reported in the U.S. In other economic news, November services sector growth hit a new record high, while factory orders came in well above expectations. Treasuries were higher, pressuring yields, and the U.S. dollar was little changed, while crude oil prices turned lower in the final minutes of trading and gold traded solidly to the upside. In equity news, DocuSign plunged after missing on billings revenues and issuing disappointing guidance, while Marvell Technology rallied after topping earnings forecasts and delivering an upbeat outlook. Europe finished out the week lower, as the markets digested a host of services sector data, and the U.S. labor report, while continuing to contend with the variant and the Fed's recent pivot, while markets in Asia were mixed.

The Dow Jones Industrial Average fell 60 points (0.2%) to 34,580, the S&P 500 Index declined 39 points (0.8%) to 4,538, and the Nasdaq Composite dropped 296 points (1.9%) to 15,085. In heavy volume, 5.1 billion shares of NYSE-listed stocks were traded, and 5.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.24 to $66.26 per barrel. Elsewhere, the gold spot price jumped $23.10 to $1,785.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was unchanged at 96.16. Markets were noticeably lower on the week, as the DJIA declined 0.9%, the S&P 500 decreased 1.2%, and the Nasdaq Composite dropped 2.6%.

DocuSign Inc. (DOCU $135) reported Q3 earnings-per-share (EPS) of $0.58, topping the $0.46 FactSet estimate, with revenues rising 42.0% year-over-year (y/y) to $546 million, above the Street's forecast of $533 million. However, the e-signature company's billings revenue came in south of expectations, with the company noting that after six quarters of accelerated growth, it saw customers return to more normalized buying patterns. DOCU issued Q4 and full-year guidance that was below estimates. Shares tumbled over 40%.

Marvell Technology Inc. (MRVL $84) posted adjusted Q3 EPS of $0.43, topping the projected $0.38, with revenues rising 61.0% y/y to $1.2 billion, roughly in line with forecasts. The semiconductor company said revenues grew substantially in each of its five end markets, led by data center. MRVL added that it is expecting sequential revenue growth, led by 5G, which is expected to increase 30% quarter-over-quarter, and data center which is forecasted to continue to grow in the double digits. As such, the company issued Q4 EPS and revenue guidance that was above expectations. Shares rallied over 15%.

Market volatility has surged recently as concerns about the new Omicron COVID-19 variant was exacerbated by the first confirmed cases in the U.S. Also, the jitteriness in the markets has been amplified by this week's hawkish pivot by Federal Reserve Chairman Jerome Powell, who suggested the Central Bank's tapering campaign could be expedited due to persistent inflation pressures that could be exacerbated by the variant.

The Schwab Center for Financial Research offers a look at the ramped-up choppiness in the markets in our commentary, Market Volatility: Schwab's Quick Take. We point out how from a global stock market perspective, policymaker and consumer responses will be key regarding the economic impact. We discuss how market volatility is unsettling, but historically not unusual, and if you've built an appropriately diversified portfolio that matches your time horizon and risk tolerance, it's likely the recent market drop will be a mere blip in your long-term investing plan. However, it can be hard to do nothing when markets are rough.

Schwab's Chief Investment Strategist Liz Ann Sonders also offers her 2022 U.S. Market Outlook: Under Pressure, where she discusses where we go from here given that the pandemic is not exactly behind us. She discusses the macro backdrop that includes slower growth and a move to tighter monetary policy, which tends to usher in higher intra-market correlations and greater tail risks. We recommend a bias toward quality and not trying to time the market. There are concerns for 2022, but investing should always be a disciplined process over time.

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

November job growth misses, services sector growth hits a record

Nonfarm payrolls (chart) rose by 210,000 jobs month-over-month (m/m) in November, well below the Bloomberg consensus estimate of a 550,000 rise, while October's figure was upwardly-adjusted to an increase of 546,000. Excluding government hiring and firing, private sector payrolls increased by 235,000, versus the forecasted rise of 536,000, after increasing by a favorably-revised 628,000 in October. The labor force participation rate rose to 61.8% from October's 61.6%, above the forecasted increase to 61.7%, hitting the highest level since March 2020. The prime age labor force participation rate—25-54 years old—ticked higher to 81.8% from 81.7%. The Department of Labor said notable job gains occurred in professional and business services, transportation and warehousing, construction, and manufacturing, while employment in retail trade declined over the month.

The unemployment rate fell to 4.2% from October's 4.6% rate, versus expectations of a dip to 4.5%. 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 7.8% from the prior month's 8.3% rate. The long-term unemployed—those jobless for 27 weeks or more—was little changed but is 1.1 million higher that in February 2020, accounting for 32.1% of the total unemployed in November. Permanent job losersdeclined by 205,000 but is 623,000 higher than in February 2020.

Average hourly earnings increased 0.3% m/m, south of projections calling for it to match October's 0.4% rise. Y/Y, wages were 4.8% higher, below forecasts of a 5.0% rise. Finally, average weekly hours ticked higher to 34.8 from October's unrevised 34.7, where it was expected to remain.

The November Institute for Supply Management(ISM) Services Index (chart) showed expansion in the key services sector (a reading above 50) notched another record high of 69.1, up from 66.7 in October, which was the previous record, and versus estimates of a decrease to 65.0. The stronger-than-expected report came as growth in new orders remained strong and business activity accelerated, jumping above 70, while employment growth also ramped up. Meanwhile, new export orders fell, and prices paid dipped but remained severely elevated and above the 80 mark. The ISM said, "Record growth continued for the services sector, which has expanded for all but two of the last 142 months. Demand continues to outpace supply that has been impacted by capacity constraints, shortages of labor and materials, and logistical challenges. This has also caused demand-pull inflation that is affecting overall business conditions."

The final Markit U.S. Services PMI Index for November was revised higher to 58.0 from the preliminary estimate of 57.0, where it was expected to remain. However, the index was down from October's 58.7 figure. A reading above 50 denotes expansion. Markit's release is independent and differs from the ISM report, as it has less historic value and Markit weights its index components differently, while its survey respondents include those that vary more in size, including small and medium-sized companies.

Factory orders (chart) rose 1.0% m/m in October, versus estimates calling for a match of September's upwardly-revised 0.5% increase. Durable goods orders—preliminarily reported last week—were revised favorably to a 0.4% decrease for October, and excluding transportation, orders were unadjusted at a 0.5% advance. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—were upwardly-revised at a 0.7% rise.

Treasuries were higher, as the yield on the 2-year note was down 2 basis points (bps) to 0.60%, the yield on the 10-year note declined 9 bps to 1.36%, and the 30-year bond rate was 7 bps lower at 1.69%.

The Treasury yield curve has flattened noticeably as of late, as Fed Chairman Jerome Powell suggested the Central Bank could speed up the pace of its tapering campaign to combat rising inflation pressures, while also saying that the word "transitory" in referencing inflation should be retired.

Amid the choppiness in the bond markets, Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest 2022 Fixed Income Outlook: Rough Waters how we expect another wave up in bond yields in 2022 as central banks around the world shift away from the very easy policies of the past few years. Kathy points out that with the pandemic-era policies ending, investors should be prepared for shifting tides and the risks and opportunities they present.

Europe lower following mixed U.S. labor report, Asia mixed

European equities finished lower with gains for the Energy sector being met with weakness in the growth-related sectors of Information Technology and Consumer Discretionary. However, skittishness across the globe remained regarding the new COVID-19 Omicron variant that has been detected in several countries around the world, most recently in the U.S., and has roiled the markets as of late. This new variant has added more uncertainty regarding future economic activity, the ongoing supply-chain challenges, and rising inflation pressures, as well as government and central bank responses. Moreover, the markets grappled with the mixed November U.S. labor report, which showed job growth was well below estimates, but the unemployment rate fell and the labor force participation rate increased. This week's comments from Fed Chairman Jerome Powell in the U.S. continued to garner attention after he pivoted to a more hawkish stance to combat the persistent inflation pressures by saying the Central Bank will discuss speeding up its tapering campaign despite the uncertainty toward the variant.

The markets digested a plethora of services sector reports in the region, which showed growth in output was softer than initially expected in Germany and the Eurozone for November, but accelerated m/m, while U.K. services activity slowed more than expected last month compared to the prior month. In other economic news, Eurozone retail sales rebounded in October by a smaller amount than anticipated. Bond yields in the Eurozone and in the U.K. were lower, while the euro nudged higher versus the U.S. dollar , but the British pound was lower.

The flared-up COVID variant concerns come as economic growth is expected to slow but remain above trend, as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, in his 2022 Global Outlook: Slowing But Not Slow. Jeff notes how global GDP surpassed its pre-pandemic level in 2021, and although it's expected to slow in 2022, it is still expected to grow at an above average rate. In addition, Jeff adds that fiscal policy in the U.K. and Europe is expected to support economic growth, while central banks have been slow to end their loose monetary policy, and supply and inflationary pressures may soon ease up. Amid all this, Jeff highlights four themes for investors: consider international stocks, go green and look at eco-friendly investments, look into firms that are buying back shares, and guard against potential gluts that might emerge.

The U.K. FTSE 100 Index was down 0.1%, France's CAC-40 Index shed 0.4%, Germany's DAX Index decreased 0.6%, Italy's FTSE MIB Index declined 0.3%, and Spain's IBEX 35 Index dropped 0.7%, while Switzerland's Swiss Market Index was little changed.

Stocks in Asia finished mixed to end the week following the solid rebound in the U.S. yesterday after a two-day sell-off, with the markets continuing to assess the new Omicron variant. The global markets have been volatile amid the uncertainty regarding the new variant, along with this week's hawkish comments from Fed Chairman Powell in the U.S. The variant has fostered uncertainty regarding the ultimate economic impact and government responses, adding to the uncertainty regarding ongoing supply-chain issues and the resulting inflationary pressures. Schwab's Jeffrey Kleintop offers his article, Will Shortages Lead to Gluts?, noting how the global economy may be closer to the end of supply chain problems than the beginning. He points out how markets tend to look six to twelve months into the future, and they may soon begin to consider the possibility that some shortages may start to ease, and gluts may have started to form by the second half of next year.

A host of November services sector output reports were digested, with Japan's growth being revised to a stronger-than-expected pace, along with Australia's, while China and India both reported that growth came in slower than expected.

Japan's Nikkei 225 Index increased 1.0%, with the yen continuing to pause from a recent rally, and China's Shanghai Composite Index advanced 0.9%. Australia's S&P/ASX 200 Index increased 0.2%, and South Korea's Kospi Index rose 0.8%. However, the Hong Kong Hang Seng Index dipped 0.1%, and India's S&P BSE Sensex 30 Index fell 1.3%, trimming a weekly gain ahead of next week's monetary policy decision.

Stocks see pressure as the week saw volatility ramp up

U.S. stocks fell broadly during the week that saw volatility surge as we moved to the final month of the year. Volatility was bolstered on two fronts with uncertainty regarding the ultimate impact of the new Omicron variant fostering skittishness, while Fed Chairman Jerome Powell's surprising hawkish pivot appeared to catch the markets off guard. All the major sectors finished in the red, led by the Communications Services and Consumer Discretionary sectors, while the defensively-natured Utilities sector outperformed. Energy issues also came under pressure in the wake of the recent severe drop in crude oil prices, while OPEC and its allies, known as OPEC+, surprised the markets by sticking to its plan for gradual oil production increases. Economic data remained mostly positive with Manufacturing and Services PMIs for November continuing to show solid expansion, while the post-COVID downward trend in initial jobless claims remained firmly intact despite a modest rise. The Treasury yield curve flattened noticeably after Fed Chair Powell suggested an accelerated tapering could be in the offing and that it was time to retire the "transitory" reference to inflation. The U.S. dollar nudged higher and gold continued a recent weekly losing streak, while crude oil prices slipped despite a late-week counterintuitive rebound after the OPEC+ decision.

Next week, although the economic calendar may have to yield to the focus on the Omicron variant, there are some data points that could still garner attention. The November inflation picture will begin to unfold, with the release of the Consumer Price Index (CPI), while we will get a timely read on the all-important U.S. consumer, with the preliminary December University of Michigan Consumer Sentiment Index. Jobless claims for the week ended December 4 will also likely command some attention, though the markets may get a bit of a reprieve as Fedspeak will go quiet the week ahead of the December 15 policy decision.

Next week's international economic calendar is also likely to be paid attention to, courtesy of the following releases: Australia—the Reserve Bank of Australia's monetary policy decision. China—trade balance, CPI and PPI, aggregate financing—a measure of total credit issued—and lending statistics. India—Reserve Bank of India's monetary policy decision. Japan—household spending, labor earnings statistics, and machine tool orders. Eurozone—Investor confidence, along with Germanfactory orders, trade balance, and industrial production. U.K.—monthly GDP, industrial/manufacturing production, trade balance, and the Bank of England's 12-month inflation estimate.

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