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Markets Lower to Close Out Volatile Week

U.S. equities finished lower, posting solid losses on a weekly basis along the way, amid a week rife of volatility. Uncertainty regarding the ultimate impact of the omicron variant continued to plague sentiment, while investors began the process of coming to grips with the Fed and Bank of England starting to back away from the easy monetary policies of the past two years. On the equity front, FedEx gained ground following its earnings results, but Darden Restaurants slipped despite topping Q2 expectations and General Motors fell after announcing the CEO of its autonomous driving unit, Cruise, has left the company. Treasuries were mixed and the U.S. dollar traded to the upside amid a dormant economic calendar, while gold was little changed after yesterday's rally and crude oil prices came under pressure. Europe finished mostly lower to close out the week, while markets in Asia were mixed following the Bank of Japan's monetary policy decision.

The Dow Jones Industrial Average tumbled 532 points (1.5%) to 35,365, the S&P 500 Index declined 48 points (1.0%) to 4,621, and the Nasdaq Composite nudged 11 points (0.1%) lower to 15,170. In very heavy volume as a result of "quadruple witching"—the coinciding expiration of stock options, index options, stock futures and index futures—7.5 billion shares of NYSE-listed stocks were traded, and 7.2 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.43 to $70.72 per barrel. Elsewhere, the gold spot price shed $0.40 to $1,797.20 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.6% to 96.62. Markets were solidly lower on the week, as the DJIA lost 1.7%, the S&P 500 decreased 1.9%, and the Nasdaq Composite plunged 3.0%.

FedEx Corporation (FDX $250) reported adjusted fiscal Q2 earnings-per-share (EPS) of $4.83, above the $4.28 FactSet estimate, as revenues grew 14.1% year-over-year (y/y) to $23.5 billion, north of the Street's forecast of $22.4 billion. The company said its Q2 results were driven by strong revenue growth and effective management of its cost and expected labor availability challenges. FDX said its operating income improved due to higher revenue per shipment at all transportation segments, despite the negative effect of labor market challenges that have contributed to global supply chain disruptions. The company noted that a challenging labor market affected the availability and cost of labor resulting in network inefficiencies, higher purchased transportation costs, and higher wage rates, which increased costs, primarily at FedEx Ground. FDX raised its full-year revenue guidance, while lowering its EPS outlook. Additionally, the company announced a new $5.0 billion share repurchase program. Shares traded solidly higher.

Darden Restaurants Inc. (DRI $140) reported fiscal Q2 EPS of $1.48, north of the expected $1.43, as revenues increased 37.0% y/y to $2.3 billion, above the forecasted $2.2 billion. Q2 same-store sales grew 34.4% y/y, above the projected 32.6% increase. DRI raised its inflation outlook and noted that it is accelerating a commitment to increase the minimum hourly earnings for restaurant team members. The parent of Olive Garden raised the low end of its full-year earnings outlook, which came in below forecasts, while increasing its revenue guidance. Separately, the company announced that Chairman and Chief Executive Officer (CEO) Eugene Lee, Jr. will retire as CEO effective May 29, 2022. DRI announced that its board unanimously elected current President and Chief Operating Officer Ricardo Cardenas as CEO and a member of the board, effective May 30, 2022. Shares finished lower.

General Motors Company (GM $55) announced that Dan Ammann, CEO of GM's majority-owned autonomous driving unit, Cruise, has left the company. GM said Cruise President and Chief Technical Officer, Kyle Vogt will serve as interim CEO. The company also said it will accelerate the strategy it detailed in its recent investor day, in which Cruise will play an integral role in building GM's autonomous vehicle (AV) platform as it aggressively pursues addressable AV markets beyond rideshare and delivery. Shares fell.

Schwab's Chief Investment Strategist Liz Ann Sonders 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.

Liz Ann Sonders also offers her latest article, Moving in Stereo: Churn and Rotations Causing Swings in Sentiment, where she acknowledges that 2021 has been a strong year for stocks, but with a lot of churn and sector volatility under the surface. She recommends using these short-term swings to your advantage via diversification and volatility-based rebalancing by trimming into strength and adding into weakness.

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

Treasury yields mixed as economic calendar quiet following a busy week

Treasuries were mixed with the economic calendar void of any major releases today, as the yield on the 2-year note rose 2 basis points (bps) to 0.63%, while the yield on the 10-year note was down 1 bp at 1.41%, and the 30-year bond rate decreased 4 bps to 1.82%.

The Treasury yield curve has been choppy amid the omicron variant uncertainty, and as the Fed announced that it will speed up its tapering of monthly asset purchases and could raise rates three times in 2022, as discussed by Schwab's Liz Ann Sonders in her commentary, Higher Ground: Fed Ups Pace of Tapering and Dots Follow Suit.

The pace of monetary policy tightening by the Fed is key to watch regarding the impact on the Treasury yield curve as discussed by Schwab's Chief Fixed Income Strategist, Kathy Jones in her latest article, Have Bond Yields Already Peaked for This Cycle?

Europe mostly lower, Asia mixed to close out the week

European equities finished mostly lower, as uncertainty regarding the spreading omicron variant persisted and foster some restrictive government responses, while the markets also digested data in the region and this week's monetary policy decisions. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest 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. Following Wednesday's Fed decision to speed up the pace of tapering its monthly asset purchases, the European Central Bank held its monetary policy mostly steady, but the Bank of England surprisingly raised it benchmark interest rate. Finally, overnight the Bank of Japan announced that it will cut back its corporate bond holdings and increase support for small businesses. In economic news in the region, U.K. retail sales for November came in stronger than expected, German business sentiment for December fell more than expected, and Eurozone consumer price inflation was unrevised at nearly a 5.0% y/y pace for November. The euro and British pound fell versus the U.S. dollar, and bond yields in the Eurozone were lower, though rates in the U.K. were nearly flat.

The U.K. FTSE 100 Index ticked 0.1% higher, while France's CAC-40 Index fell 1.1%, Germany's DAX Index declined 0.7%, Italy's FTSE MIB Index and Switzerland's Swiss Market Index decreased 0.6%, and Spain's IBEX 35 Index traded 0.8% lower.

Stocks in Asia finished mixed as the markets remained choppy amid the continued grappling with uncertainty regarding the impact of the new omicron variant, while digesting yesterday's host of key monetary policy decisions. Following Wednesday's decision out of the U.S. to accelerate the reduction of asset purchases, the European Central Bank mostly held its policy stance steady, though the Bank of England unexpectedly hiked rates. Following all that, the Bank of Japan held its policy stance steady, but said it will gradually lower its holdings of corporate bonds and commercial paper, while extending loan support for small businesses.

Schwab's Jeffrey Kleintop offers his 2022 Global Outlook: Slowing But Not Slow, noting 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.

Japan's Nikkei 225 Index fell 1.8%, with the yen modestly extending yesterday's advance, while China's Shanghai Composite Index declined 1.2%. The Hong Kong Hang Seng Index decreased 1.2%, and India's S&P BSE Sensex 30 Index dropped 1.5%, but Australia's S&P/ASX 200 Index ticked 0.1% higher, and South Korea's Kospi Index advanced 0.4%.

Stocks post weekly drop as variant and monetary policy preserve volatility

U.S. stocks gave back some of last week's rally as uncertainty regarding the ultimate impact of the omicron variant festered, while digesting moves by some central banks to accelerate down the path to tighter policy. The Fed headlined the week by announcing that it will speed up the pace of its tapering of monthly asset purchases, while policymakers projected the possibility of three rate hikes in 2022. The markets had a defensive tilt, with the Health Care, Consumer Staples, Real Estate, and Utilities sectors posting gains only to be more than offset by noticeable weakness in Energy, Consumer Discretionary, Information Technology, and Industrials issues. The Treasury yield curve flattened and the U.S. dollar gained some ground. Crude oil prices fell on the week, while gold traded higher after some solid gains in the final sessions of the week.

Next week will be shortened by the observance of the Christmas holiday, but the economic calendar will bring some data points that could garner market attention. The Leading Index will get the ball rolling, and will be followed by the final read on Q3 GDP, existing home sales, personal income and spending, initial jobless claims for the week ended December 18, durable goods orders, new home sales, and the final University of Michigan Consumer Sentiment Index. The markets will get a bit of a reprieve from commentary out of the Fed as no policymakers are scheduled to speak until after the new year.

Next week's international economic calendar will also provide some reports that could move the markets with releases worth noting including: Australia—minutes from the Reserve Bank of Australia's monetary policy meeting. China—1-year and 5-year loan prime rate decisions. Japan—department store sales and national consumer price inflation statistics. Eurozone—consumer confidence. U.K.—final read on Q3 GDP.

As noted in our latest Schwab Market Perspective: Why 2022 May Be a Better Year, as 2021 draws to a close, 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. Treasury bond markets are sending a message that the Federal Reserve may not have as much scope to raise short-term rates as its forecasts suggest, and Congress has reached a deal that postpones the debt ceiling issue until 2023. 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.

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