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Stocks Close Higher Even as Geopolitical Concerns Remain
U.S. stocks closed higher, further building on yesterday's sharp afternoon upside reversal and ended the week on a high note. However, despite the strong upwards move, uneasiness persisted as the markets remained wary of the knock-on effects of Russia’s incursion into Ukraine. Equities stayed in the green throughout the day as some early reports indicated that President Putin may be willing to hold high level talks with Ukraine. The geopolitical turmoil once again overshadowed another round of earnings reports and an abundance of economic data as personal income and spending topped forecasts, along with durable goods orders and consumer sentiment, though pending home sales unexpectedly fell. On the corporate front, Foot Locker and Dell Technologies saw pressure after offering disappointing guidance. Treasuries were mixed as the yield curve flattened after yesterday's wild ride, and the U.S. dollar trimmed some of yesterday's rally. Crude oil prices relinquished some of a recent rally and gold gave back its strong advance as of late. Asia finished mostly higher after the action in the U.S. yesterday, while Europe broadly rebounded, partially aided by the reports out of Russia regarding potential talks.
The Dow Jones Industrial Average advanced 835 points (2.5%) to 34,059, the S&P 500 Index added 96 points (2.2%) to 4,385, and the Nasdaq Composite increased 221 points (1.6%) to 13,695. In heavy volume, 5.1 billion shares of NYSE-listed stocks were traded, and 4.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.22 to $91.59 per barrel. Elsewhere, the gold spot price traded $38.70 lower to $1,887.60 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.6% at 96.56. Markets were mostly higher for the week, as the DJIA was down 0.1%, the S&P 500 gained 0.8%, and the Nasdaq Composite rose 1.1%.
The markets remained volatile as the attack on Ukraine by Russia entered its second day with intensified action on the Ukrainian capital of Kyiv. The Russian attack has been condemned by President Joe Biden, the West, and others across the globe. The U.S. and European Union, along with other allies have levied multiple tranches of sanctions on Russia. The sanctions targeted a wide swath of Russia's financial sector, including its first-and-second-largest institutions, Russian elites and their families, and restrictions on exports to Russia of technological goods used in its defense, maritime, and aerospace sectors. Moreover, the sanctions expanded bans on trade of new Russian government debt, including short-term securities, along with new equity of some state-owned companies and two key privately-owned entities. However, the sanctions thus far have not included a ban on Russia from using the Swift global payment system, which is considered to be a move that could have a significant impact on the country's financial stability. President Biden noted that the Swift action is always an option but at the moment parts of Europe have pushed back on that.
Russia and Ukraine are major global providers of commodities such as energy, wheat, aluminum, nickel, palladium, and platinum, which has exacerbated inflation concerns. This has bolstered uncertainty regarding if the Fed will dial back plans to aggressively tighten monetary policy this year to combat the rising pricing pressures, adding to the volatility for the markets.
This week, the markets were choppy with the Dow and S&P 500 both hitting correction territory, while the Nasdaq flirted with a bear market before Thursday's sharp afternoon upside reversal. Meanwhile, Treasury yields moved higher on the week, along with the U.S. dollar, and gold posted its fourth-straight weekly advance. Crude oil prices extended a rally, with the global benchmark Brent oil price breaching the $100 per barrel mark Thursday for the first time since 2014. The elevated geopolitical dynamics overshadowed a continued strong Q4 earnings season, which is poised to post the fourth-straight quarter of above 30.0% year-over-year (y/y) growth, and a mostly positive economic calendar, which showed manufacturing and service sector growth accelerated more than expected for this month, while jobless claims moderated more than anticipated.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, provides his latest article Schwab's Quick Take: Russia Invades Ukraine, in which he suggests a wider war involving NATO or the U.S. is highly unlikely, cyberattacks are more likely than a nuclear response by Russia, there are offsets to limit the impact of rising energy prices, and that Russia's action does not equate to China invading Taiwan. Jeff also cautions that investors should seek to avoid getting caught up in dramatic events as they unfold, as it rarely leads to wise decisions.
Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Tight Rope: History's Lessons About Rate Hike Cycles, how the Fed is set to embark on another tightening cycle, and though history serves as a partial guide, there are new tools this time around and an undetermined rate-hike playbook. She discusses how the Fed is on a mission to get off the "zero bound" for the fed funds rate, while also starting to shrink its behemoth balance sheet. Liz Ann points out how tightening of policy, and financial conditions, will continue to cause market volatility—across both the equity and bond markets, and stresses how the Fed is not operating with a pre-determined playbook, with the use of the balance sheet as a key policy tool still evolving. For now, she concludes, recession risk remains low, but keep an eye on leading economic indicators, as well as the yield curve. Peaks in the former, and inversions in the latter have been consistent recession warning signals historically. In the meantime, remain diversified and disciplined, with an over-arching focus on quality for the stock-pickers out there.
In equity news, Foot Locker Inc. (FL $29) tumbled after softer-than-expected full-year guidance. The weak outlook came as the footwear and apparel company cited changes to its vendor mix and the impact of the dried-up fiscal stimulus measures implemented last year.
Dell Technologies Inc. (DELL $51) saw pressure after the company reported that headwinds from supply chain challenges are impacting its ability to fulfill strong demand, while its Q4 earnings and margins missed the Street's expectations. Amid the volatility in the markets, you can find all our market commentary on our Market Insights page, and you can follow us on Twitter at @SchwabResearch.
Treasury yield curve flattens on Fed and geopolitics, economic data pours in
Treasuries were mixed following yesterday's wild ride that saw prices rally initially in a flight-to-safety to weigh heavily on yields after Russia's attack on Ukraine, but then cooling noticeably following responses from the West and the yield curve steepened. The yield curve flattened back out as the rate on the 2-year note gained 3 basis points (bps) to 1.57%, the yield on the 10-year note was little changed at 1.97%, while the 30-year bond rate dipped 1 bp to 2.28%.
The markets continue to grapple with the geopolitical developments and if they will have implications on the Fed's monetary policy tightening campaign, which is expected to be aggressive to combat surging inflation that may be exacerbated by the Russian attack on Ukraine. Schwab's Chief Fixed Income Strategist Kathy Jones points out in our latest Schwab Market Perspective:Slipping Gears, how the speed and magnitude of the policy shift is unlike any cycle in recent history. Central banks had set policy assuming that very weak economic growth and deflationary pressures would persist due to the pandemic, and have been caught by surprise by the rapid recovery and inflation surge. With a rapid change in the outlook, volatility has jumped. Two-year Treasury yields have surged in just the past six weeks in major developed countries. She adds that with economic growth rebounding and inflation running high, we expect the trend toward higher rates to continue.
Personal income (chart) came in flat month-over-month (m/m) in January, better than the Bloomberg consensus forecast of a 0.3% decline, and December's figure was upwardly-revised to a 0.4% gain. Personal spending rose 2.1%, north of expectations of a 1.6% rise, and compared to the prior month's downwardly-adjusted 0.8% decrease. The January savings rate as a percentage of disposable income was 6.4%, down from December's upwardly-revised 8.2% rate.
The PCE Deflator increased 0.6% m/m, in line with expectations, and following December's upwardly-adjusted 0.5% rise. Compared to last year, the deflator was 6.1% higher, above estimates of a 6.0% increase, and north of the prior month's unadjusted 5.8% gain. Excluding food and energy, the PCE Core Price Indexrose 0.5% m/m, matching expectations, and December's unrevised rise. The index was 5.2% higher y/y, in line with estimates, and above December's un-revised 4.9% rise.
January preliminary durable goods orders (chart) rose 1.6% m/m, compared to estimates of a 1.0% increase and versus December's sharp upward revision to a 1.2% gain from the previously-reported 0.7% decline. Ex-transportation, orders were up 0.7% m/m, north of forecasts calling for a 0.4% advance and compared to December's favorably-adjusted 0.9% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, were higher by 0.9%, compared to projections of a 0.3% rise, and versus the prior month's upwardly-revised 0.4% gain.
The February final University of Michigan Consumer Sentiment Index (chart) was unexpectedly revised higher to 62.8, from the preliminary 61.7 figure, where it was expected to remain. The upward revision came as the expectations component of the survey was adjusted higher to more than offset a downward revision to the current conditions portion. The overall index was well below January's 67.2 level as both current conditions and expectations deteriorated m/m. The 1-year inflation forecast remained at the prior month's 4.9% rate, while the 5-10 year inflation forecast dipped to 3.0% from the 3.1% level in January.
Pending home sales unexpectedly fell by 5.7% m/m in January, versus estimates of a 0.2% rise, and following December's favorably-revised 2.3% drop. Sales tumbled 9.1% y/y, versus forecasts of a 1.8% decrease, on the heels of December's positively-adjusted 5.8% decline. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales.
Next week, the economic calendar is poised to garner heavy market attention as the calendar turns to March. We will get looks at February business activity in the form of Manufacturing and Services Indexes from the ISM and Markit. The reports will be complemented by the Federal Reserve's Beige Book—an anecdotal look at economic conditions across the nation used by the Fed as a preparation tool for its next monetary policy meeting. The economic week will conclude with a bang, courtesy of the February nonfarm payroll report, which will be the last before the Fed's March 16 monetary policy decision. However, the highlight of the week will likely be the two days of Congressional testimony from Fed Chairman Jerome Powell, with the geopolitical tensions bolstering uncertainty regarding how aggressive the Central Bank will be regarding tightening its monetary policy. Finally, given the extreme uncertainty toward the geopolitical front President Biden's State of the Union address early next week will likely garner heavier-than-usual attention.
Asia mostly higher and Europe rebounds from yesterday's tumble
European equities rebounded broadly from yesterday's widespread drop that came on concerns about the impact of this week's attack on Ukraine by Russia. The markets continued to grapple with the implications of the attack, notably on the energy sector, which Europe relies heavily on Russia for. The markets also digested the latest wave of sanctions the U.S. and the West imposed on Russia and what the implications might be for the region. Bond yields in the Eurozone and the U.K. also recovered from yesterday's drop that came amid a flight-to-safety, and the euro and British pound trimmed Thursday's drops versus the U.S. dollar. The Russian markets chipped away at yesterday's plunge of over 30% and Ukraine markets remained closed. The markets appeared to get a boost from Russian news outlets suggesting President Putin is ready to send a delegation to Minsk for talks with Ukraine. For more on the situation and potential implications, check out Schwab's Jeffrey Kleintop's article, Geopolitical Risk Update: Russia-Ukraine,where 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. Jeff also adds how 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 economic calendar continued to take a back seat to the Russian attack, though German Q4 GDP was revised to a smaller contraction than initially reported, while French consumer price inflation came in hotter than expected for this month.
The U.K. FTSE 100 Index was up 3.9%, Germany's DAX Index rose 3.7%, France's CAC-40 Index and Italy's FTSE MIB Index gained 3.6%, Spain's IBEX 35 Index increased 3.5%, and Switzerland's Swiss Market Index traded 3.2% higher.
Stocks in Asia finished mostly higher, recovering some of yesterday's drop that came as the markets digested Russia's attack on Ukraine, which sent commodity prices higher and fostered a flight-to-safety. The markets appeared to get a boost from yesterday's sharp upside reversal in the U.S., which followed the response from the U.S. and the West with further sanctions on Russia. The moves also come as the markets assessed the implications on what the geopolitical developments could have on monetary policies, which are expected to tighten this year. Schwab's Jeffrey Kleintop discusses in his article, What Do Rising Rates Mean for Stock Investors?, the implications of rising global yields for stock prices, while also making the case of Why Invest Internationally. In economic news, Japan's Tokyo consumer price inflation accelerated more than expected for this month, while Hong Kong's export growth decelerated more than expected for last month. The flight-to-safety seemed to ease with the Japanese yen giving back some of a recent rally.
Japan's Nikkei 225 Index traded 2.0% higher, China's Shanghai Composite Index gained 0.6%, and Australia's S&P/ASX 200 Index ticked 0.1% higher. South Korea's Kospi Index advanced 2.1%, and India's S&P BSE Sensex 30 Index led to the upside, bouncing back by 2.4% after leading the markets lower yesterday.
Next week, the international economic week also has the chance to grab market attention, headlined by a host of Manufacturing and Services PMIs, notably out of China, Japan, India, Eurozone, and the U.K. Other reports due out next week that deserve a mention include: Australia—Reserve Bank of Australia monetary policy decision, retail sales, Q4 GDP, and trade balance. India—GDP estimate for 2022. Japan—retail sales and industrial production. Eurozone—consumer price inflation estimate and retail sales, along with Germantrade balance and unemployment change. ©2022 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. next steps
Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.
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