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Markets Finish out Volatile Week on a High Note

U.S. equities finished a wild week solidly higher, with all three major indexes able to claw out of negative territory on a weekly basis, as the intense volatility the has ushered in the new year continued. The gains came as sentiment remained shaky amid concerns about the implications of a potentially more aggressive Fed tightening campaign. The economic calendar was also in focus, which showed Q4 employment costs moderated from Q3's record high pace, and the PCE Price Index rose but mostly in line with forecasts. Additionally, personal income rose at slightly smaller pace than expected and spending declined in line with expectations, while January consumer sentiment was surprisingly revised lower led by dampened expectations. Q4 earnings season hit a fevered pitch, with Dow member Apple's record results a standout, along with fellow Dow component Visa, though Dow member Chevron missed earnings estimates, along with Mondelez, and Dow component Caterpillar warned about Q1 margin pressure from supply and labor constraints. Treasuries were higher, putting downside pressure on yields following yesterday's severe flattening in the curve, and the U.S. dollar was little changed, pausing after a recent surge to mid-2020 highs. Crude oil prices were slightly higher, while gold was lower. Europe finished lower as the global markets brace for monetary policy tightening and digested the recent surge in the greenback, while markets in Asia were mixed.

The Dow Jones Industrial Average jumped 565 points (1.7%) to 34,725, the S&P 500 Index increased 105 points (2.4%) to 4,432, and the Nasdaq Composite rallied 418 points (3.1%) to 13,771. In heavy volume, 5.0 billion shares of NYSE-listed stocks were traded, and 4.9 billion shares changed hands on the Nasdaq. WTI crude oil nudged $0.21 higher to $86.82 per barrel. Elsewhere, the gold spot price traded $5.80 lower to $1,789.20 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 97.26. Markets were mostly higher for the week, as the DJIA was up 1.3%, the S&P 500 gained 0.8%, and the Nasdaq Composite was unchanged.

Dow member Apple Inc. (AAPL $170) reported fiscal Q1 earnings-per-share (EPS) of $2.10, above the $1.90 FactSet estimate, as revenues grew 11.0% year-over-year (y/y) to an all-time record of $124.0 billion, north of the Street's $119.0 billion forecast. Products revenues of $104.4 billion easily topped estimates of $99.7 billion, with iPhone, Mac, and wearables leading the way, while its iPad revenues came in a bit short of forecasts. Services revenues grew 24.0% compared to last year at $19.5 billion, exceeding the forecasted $18.7 billion. The gross margin came in at 43.8%, above the Street's forecast of 41.8%, and north of the 39.8% rate a year ago. Shares were higher.

Dow component Chevron Corporation (CVX $131) reported adjusted Q4 EPS of $2.56, below expectations of $3.12, but the company saw several extraordinary non-cash items such as asset sales, losses on early retirement of debt and pension settlement costs, that affected earnings and could be making the comparison unclear. Sales and other operating revenues jumped 84.6% y/y to $45.9 billion, just above the estimated $45.3 billion. The company noted that its free cash flow rose to an all-time high, likely aided by expense management and the surge in oil prices, but cited softness in international exploration and production and weak U.S. refining results. Shares traded lower.

Dow member Caterpillar Inc. (CAT $201) announced adjusted Q4 profits of $2.69 per share, north of the projected $2.26, as revenues rose 23.0% y/y to $13.8 billion, above the expected $13.1 billion. The company noted higher end-user demand for equipment and services and the impact from changes in dealer inventories, along with favorable price realization. Q4 operating profit margin was 11.7%, down from 12.3% in the same period a year ago. However, the company did warn that Q1 margins may continue to decline due to rising production and labor costs, as well as the impact of supply chain issues. CAT finished solidly lower.

Dow component Visa Inc. (V $228) posted adjusted fiscal Q1 earnings of $1.81 per share, above the expected $1.70, with revenues rising 24.0% y/y to $7.1 billion, exceeding the forecasted $6.8 billion. The company said payments volumes were up 20.0% y/y, and processed transactions grew 21.0%. V said the strength of its network, the growth in eCommerce, better-than-expected progress in the return to cross-border travel and a continuation of the recovery all contributed to an excellent quarter. The company said looking ahead, "We do not believe the current surge in the pandemic will curtail the recovery. We see economies around the world continuing to improve and, as restrictions are lifted, cross-border travel will continue to recover." Shares rallied.

Mondelez International Inc. (MDLZ $66) reported adjusted Q4 EPS of $0.71, two cents below forecasts, as revenues grew 4.9% y/y to $7.7 billion, above the expected $7.6 billion. The snack company said its organic sales—excluding acquisitions, divestitures and foreign exchange—grew 5.4%, with volume and pricing driving the growth. MDLZ said in the context of greater-than-usual volatility, as a result of COVID-19 for 2022, it expects to perform in line with its long-term forecasts for revenues and EPS, but foreign exchange headwinds are expected to negatively impact its results. MDLZ traded to the downside.

As Q4 earnings season has kicked into high gear, thus far of the 169 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 30.0%.

The markets have seen some solid downside pressure to begin 2022 and the markets are looking to see if Q4 earnings season may be able to offer a reprieve. 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 although earnings season is still in its early innings, 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.

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

Personal income and spending mixed, Q4 employment costs cool, Fed still in focus Personal income (chart) rose 0.3% month-over-month (m/m) in December, below the Bloomberg consensus forecast calling for it to match November's upwardly-revised 0.5% gain. Personal spending declined 0.6%, in line with expectations, and compared to the prior month's downwardly-adjusted 0.4% increase. The December savings rate as a percentage of disposable income was 7.9%, up from November's upwardly-revised 7.2% rate.

The PCE Deflator increased 0.4% m/m, matching expectations, and following November's unadjusted 0.6% rise. Compared to last year, the deflator was 5.8% higher, in line with estimates and below the prior month's unadjusted 5.7% gain. Excluding food and energy, the PCE Core Price Index rose 0.5% m/m, matching expectations calling for it to match November's unrevised rise. The index was 4.9% higher y/y, slightly above estimates of 4.8% and November's unrevised 4.7% rise.

The Q4 Employment Cost Index increased 1.0% quarter-over-quarter (q/q), below estimates calling for a 1.2% rise, and south of Q3's unadjusted record high 1.3% rise. The January final University of Michigan Consumer Sentiment Index (chart) was unexpectedly revised lower to 67.2, from the preliminary 68.8 figure, where it was expected to remain. The downward revision came as both the expectations and current conditions portions of the survey were surprisingly adjusted downward. The overall index was lower versus December's 70.6 level as current conditions and expectations deteriorated m/m, with the latter dropping more than the former. The 1-year inflation forecast rose to 4.9% from December's 4.8% rate, and the 5-10 year inflation forecast also increased to 3.1% from the 2.9% level in the prior month.

Treasuries were higher, as the yield on the 2-year note declined 2 basis points (bps) to 1.17%, the yield on the 10-year note decreased 3 bps to 1.78%, while the 30-year bond rate was 1 bp lower at 2.08%.

Yesterday, the Treasury yield curve flattened noticeably with the rates on the short end of the curve jumping while the mid-to-long end fell as the markets grappled with concerns that the Fed may have to aggressively tighten monetary policy soon to combat persisting inflation pressures and what the implications could be on economic activity. The moves come in the wake of Wednesday's monetary policy decision from the Fed that suggested multiple rate hikes are coming this year, likely beginning in March, and after it begins to raise rates the Central Bank intends on commencing its balance sheet reduction campaign.

For a look at the Fed's decision, check out Schwab's Liz Ann Sonders' latest commentary, Fed's Message: Get Ready, where she discusses how the Central Bank after acknowledging higher inflation and a tighter labor market, marked the beginning of a transition to a hiking cycle. Liz Ann adds that we continue to believe the path toward monetary policy normalization will be bumpy, but that it's certainly time for the Fed to have started down that path. She highlights how Powell noted that the balance sheet is still a relatively new thing for the markets and the Fed, while pointing out that in the near term, policy decisions (and market expectations) will be dependent on the combination of economic and inflation data. Liz Ann concludes by noting how this year started off with a surge in volatility and significant bouts of weakness; with the likely near-term outlook being more of the same.

Europe lower, Asia mixed as global markets continue to adjust to monetary policy expectations

European equities finished lower, with all the major sectors seeing red, led by Information Technology, Industrials, Materials, Financials, and Energy. The global markets remain volatile as they continue a noticeable readjustment amid expectations that monetary policies, outside China, are set to accelerate down the tightening path. The markets continued to react to Wednesday's highly-anticipated monetary policy decision out of the U.S., which signaled that March is likely the liftoff date for rate hikes and after the rate hike campaign begins it will begin to reduce its balance sheet sometime this year. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest 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 to near 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, French consumer spending unexpectedly rose in December, and the nation's Q4 GDP growth came in stronger than expected, though Germany's Q4 GDP output came in softer than expected. Moreover, German import prices came in much cooler than expected for last month, and Eurozone economic confidence for January surprisingly deteriorated. The euro and the British pound ticked higher versus the U.S. dollar. The greenback has taken a breather from a surge as of late to highs not seen since mid-2020 in the wake of the Fed's decision and yesterday's stronger-than-expected Q4 GDP report. Bond yields in the Eurozone and the U.K. traded higher.

The U.K. FTSE 100 Index and Italy's FTSE MIB Index were down 1.2%, France's CAC-40 Index declined 0.8%, Germany's DAX Index dropped 1.3%, Spain's IBEX 35 Index lost 1.1%, and Switzerland's Swiss Market Index decreased 0.6%.

Stocks in Asia finished mixed to close out the volatile week that has been amplified by expectations that most major global central banks are set to tighten monetary policies in the face of persisting inflation and uncertainty regarding what impact this could have on economic growth. However, China has bucked the trend and has loosened its policies to try to stabilize the economy. The markets continued to digest Wednesday's key monetary policy decision from the Fed in the U.S., which signaled March is likely the liftoff date for the first rate hike, while it could begin to shrink it balance sheet sometime after that this year. The subsequent surge in the U.S. dollar, which got an additional boost from yesterday's much stronger-than-expected U.S. Q4 GDP growth, may have also added to the skittishness in the region. Some Information Technology issues rebounded from recent pressure on the prospect of higher interest rates, with Apple's stronger-than-expected earnings report after the U.S. closing bell yesterday seemed to aid the rebound.

In economic news out of the region, Hong Kong's December exports rose more than expected, South Korea's industrial production unexpectedly grew solidly last month, and Tokyo consumer price inflation came in cooler than expected for January. After the closing bell, Hong Kong's Q4 GDP growth came in below estimates. As noted in our latest Schwab Market Perspective: Bumps in the Road, the effects of the COVID-19 virus have continued to drive—and brake—economic growth. Stocks sank in early January as investors reacted to the fast-spreading omicron variant and the Federal Reserve’s signals around inflation, including the possibility it will begin "quantitative tightening" much faster than previously expected. However, there are signs that inflation pressures already may be peaking in the United States and Europe.

Japan's Nikkei 225 Index rebounded from yesterday's tumble, rallying 2.1%, with the yen modestly continuing to trim a recent rally versus the U.S. dollar. Elsewhere, China's Shanghai Composite Index dropped 1.0% and the Hong Kong Hang Seng Index fell 1.1%. South Korea's Kospi Index also recovered from yesterday's plunge, jumping 1.9%, Australia's S&P/ASX 200 Index snapped back from Thursday's fall, surging 2.2%, though India's S&P BSE Sensex 30 Index dipped 0.1%.

Volatile start to 2022 rolls on

U.S. stocks were able to claw back all of the losses for the week in what has been a rough start to 2022. Volatility remained palpable as the markets continued a revaluation across the board that has brought a correction—a 10% or more drop from recent highs—for the Nasdaq and had taken the S&P 500 dangerously close to that territory. The main driver continued to be the prospect of a potentially more aggressive Fed tightening campaign. The Fed's midweek monetary policy decision solidified expectations as Chairman Jerome Powell signaled that the liftoff date for rate hikes could be following its next meeting in March and shortly after the commencement of its balance sheet reduction process could begin. The prospect of aggressive Fed tightening roiled the global markets, resulting in a severe flattening of the Treasury yield curve, with rates on the short end rising—the yield on the 2-year note hit a high not seen since March 2020—and severely outpacing the modest increases seen on the mid-to-long end. Rates on the mid-to-longer end of the curve appeared to be hamstrung by concerns that the Fed's actions could put the brakes on the economy, which showed some signs of slowing already this week, courtesy of Markit's preliminary January Manufacturing and Services PMIs which showed expansion for both decelerated more than expected with the latter falling sharply to arm's length of contraction territory. Meanwhile, Q4 earnings season continued to heat up and mixed results and guidance appeared to offer little reprieve from the volatility to start the new year. With the markets remaining volatile, the Schwab Center for Financial Research offers a look at what a market correction is and what it means, including some steps all investors should consider.

The U.S. dollar rallied to mid-2020 levels, causing further uncertainty as the markets grappled with whether the greenback's strength will help cool off inflation or exacerbate overseas activity. However, losses seemed to be limited somewhat by a much stronger-than-expected preliminary read on Q4 GDP growth. Crude oil prices continued a sharp surge, posting a sixth-straight weekly gain and hitting near a seven-year high. Despite the persistent inflation pressures, gold prices were lower on the week, likely hamstrung by the rally in the U.S. dollar. Energy issues added to their decisive 2022 outperformance, and Information Technology posted a solid gain, likely bolstered by Apple's strong earnings report and muted mid-to-long term rates.

Next week is shaping up to be another eventful one with earnings season heading toward its pinnacle and the economic calendar set to deliver a plethora of key data points. Some January regional manufacturing reports will get the ball rolling, setting the stage for the ISM's Manufacturing and Services PMIs for this month. Other reports that could garner some attention include; the job openings and labor turnover survey (JOLTS), Q4 nonfarm productivity and unit labor costs, jobless claims for the week ended January 29, and December factory orders. However, the headlining event of the week could be Friday's January nonfarm payroll report, which will come as the markets remain hyper-sensitive to what lies ahead in terms of Fed action. Employment growth is expected to rise by 170,000 following the prior month's disappointing 199,000 gain, average hourly earnings are projected to continue to accelerate to a 5.2% y/y pace from December's 4.7% rise, and the unemployment rate is expected to remain at a post-pandemic low of 3.9%.

Next week's international economic calendar is also poised to deliver some key reports/events, headlined by monetary policy decisions from the European Central Bank and the Bank of England, as well as a host of January Manufacturing and Services PMIs out of Australia, China, Japan, India, the Eurozone, and the U.K. Other reports that may contend for attention include: Australia—the Reserve Bank of Australia monetary policy decision, trade balance, and retail sales. Japan—industrial production and retail sales. India—2021 GDPP estimate. Eurozone—Q4 GDP, CPI estimate, and retail sales, along with German factory orders and unemployment change.

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