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Stocks End a Volatile Week Lower



U.S. stocks closed lower in the final session of a tumultuous week as the ongoing geopolitical crisis in Ukraine loomed large. A second straight month of stronger-than-expected U.S. labor data couldn’t overcome the risk sentiment brought about by the intensifying attacks from Russia on Ukraine. News that Russia has seized Europe's largest nuclear power plant in Ukraine appeared to further unnerve the already skittish markets. Meanwhile, the markets continued to brace for tightening monetary policy following this week's testimony by Fed Chairman Jerome Powell, during which he said he will propose a 25 basis-point hike at its meeting in two weeks. Treasuries extended a weekly rally that has compressed yields, and the U.S. dollar built on a recent charge. Crude oil prices saw a big jump to continue its spike and gold added to a weekly advance. In earnings news, Gap posted a smaller-than-expected loss, but missed on same-store sales, while Broadcom and Costco Wholesale topped forecasts. Asia finished lower and Europe fell broadly on the exacerbated crisis in eastern Europe.

The Dow Jones Industrial Average declined 180 points (0.5%) to 33,615, the S&P 500 Index lost 35 points (0.8%) to 4,329, and the Nasdaq Composite decreased 225 points (1.7%) to 13,313. In heavy volume, 5.7 billion shares of NYSE-listed stocks were traded, and 5.2 billion shares changed hands on the Nasdaq. WTI crude oil advanced $8.01 to $115.68 per barrel. Elsewhere, the gold spot price traded $30.70 higher to $1,966.60 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.7% at 98.49. Markets were lower on the week, as the DJIA was down 1.3%, the S&P 500 also lost 1.3%, and the Nasdaq Composite sank 2.8%.

The markets this week saw wild swings as they contended with two major catalysts: the Fed and the unfolding crisis in Ukraine. Given the heightened geopolitical turmoil, uncertainty ramped-up regarding if the Fed would have to change its plans for aggressive monetary policy tightening to combat persistent and broadening inflation pressures. Fed Chairman Jerome Powell seemed to provide some clarity, which the markets took positively, as he noted that he would propose a 25 basis point (bp) rate increase in the next meeting in two weeks, given the inflation backdrop, strong economy, and an "extremely tight" labor market.

Meanwhile, volatility took another leg up as Russia intensified its attack on Ukraine with the latest developments being a bombing of Europe's largest nuclear power plant in Ukraine, which allowed the Russian army to seize control. The U.S., European Union, and other global allies have broadly condemned Russia's invasion and swiftly responded with unprecedented sanctions aimed at crippling the country's ability to maintain financial system stability and cutting off Russia from participating in the global economy. The measures included restricting some financial institutions from using the SWIFT global payment system and freezing assets and foreign currency reserves of its central bank. The sanctions have yet to target Russia's exporting activity of energy, materials and agriculture, but self-imposed sanctions among global importers of Russian commodities have ensued to further hamstring the country's trade activity. However, given the global influence of Russia and Ukraine on energy and agriculture, already sizzling inflation concerns have shot up to a new stratosphere to unnerve the markets. As such, Treasury prices rallied this week to apply downside pressure on yields amid a flight-to-safety that also boosted the U.S. dollar and gold. Meanwhile, crude oil prices witnessed a meteoric rise to multi-year highs.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the latest financial sanctions on Russia in his article Russia-Ukraine: Hit to Russia’s Financial Systems, and what the potential implications could be in his commentary Schwab's Quick Take: Russia Invades Ukraine. Jeff 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. He also cautions that investors should seek to avoid getting caught up in dramatic events as they unfold, as it rarely leads to wise decisions.

In earnings news, Gap Inc. (GPS $14) reported a Q4 loss of $0.02 per share, smaller than the $0.13 per share shortfall called for by FactSet, with revenues rising 2.0% year-over-year (y/y) to $4.53 billion, versus the Street's forecast of $4.49 billion, but were down 3.0% compared to 2019. Q4 same-store sales grew 3.0% y/y, compared to the expected 3.7% gain. The company noted near-term disruptions from acute headwinds that muted its Q4 performance, but it said it is poised for balanced growth moving forward after two years of restructuring. GPS issued much stronger-than-expected current year EPS guidance. Shares were lower.

Broadcom Inc. (AVGO $596) posted adjusted fiscal Q1 EPS of $8.39, topping the expected $8.13, with revenues rising 16.0% y/y to $7.71 billion, exceeding the forecasted $7.61 billion. The chip company said its results were driven by strong enterprise demand, and continued investments in next generation technology by hyperscale and service providers. AVGO issued Q2 revenue guidance that bested estimates. Shares traded to the upside.

Costco Wholesale Corporation (COST $526) announced fiscal Q2 earnings of $2.92 per share, north of the expected $2.76, as revenues increased 15.9% y/y to $51.90 billion, above the forecasted $51.53 billion. The company's Q2 same-store sales grew 14.4% y/y, versus the projected 11.6% gain. Shares moved lower.

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.

February jobs report tops forecasts, Treasuries moved higher, yields fall Nonfarm payrolls (chart) rose by 678,000 jobs month-over-month (m/m) in February, above the Bloomberg consensus estimate of a 423,000 rise, while January's figure was adjusted higher to an increase of 481,000 from the initial reading of a 467,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 654,000, versus the forecasted rise of 400,000, after increasing by 448,000, revised higher from the preliminarily reported 444,000 gain in January. The labor force participation rate ticked higher to 62.3% from January's unrevised 62.2% figure, where it was expected to remain.

The unemployment rate declined to 3.8%, from 4.0%, with forecasts calling for it to dip to 3.9%. 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—rose to 7.2% from the prior month's 7.1% rate. Average hourly earnings were flat m/m, below of projections calling for a rise of 0.5%, and compared to January's downwardly-revised 0.6% rise. Compared to last year, wages were 5.1% higher, south of forecasts of a 5.8% rise. Finally, average weekly hours increased to 34.7 from January's upwardly-revised 34.6, where it was expected to remain.

Treasuries remained higher despite the employment data amid the continued volatility surrounding the Fed and the crisis in eastern Europe. The yield on the 2-year note declined 6 bps to 1.48%, the yield on the 10-year note dropped 11 bps to 1.73%, and 30-year bond rate decreased 7 bps to 2.16%.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, The Fed's Next Move: Ukraine Changes the Picture, how after months of laying the groundwork for monetary policy tightening, the Federal Reserve now faces a sudden change in the economic outlook. Kathy adds that although the folks at the Fed would like to pursue a steady path to raising short-term interest rates and reducing its balance sheet, it may not be as easy as they might have expected just a few weeks ago. We think it's likely that the Fed will move cautiously in the months ahead, with four to five rate hikes this year. We would continue to be cautious about taking on significantly more risk in this environment. Kathy also points out how markets are not only subject to rapid changes in the economic and policy outlook, but also shifting political decisions. She also cautions how liquidity conditions in markets are also subject to sudden changes, which can make it challenging to enter or exit positions at reasonable prices.

Next week as the Fed goes into its quiet period ahead of its March 16 monetary policy decision, the economic calendar will be headlined by the first glimpse at the February inflation picture, with the release of the Consumer Price Index (CPI). Pricing pressures the consumer faces are expected to continue to accelerate and hit a 7.9% y/y pace, remaining at the highest level in 40 years. Other reports that could garner market attention include the NFIB Small Business Optimism Index, the job openings and labor turnover survey(JOLTS), and the preliminary March University of Michigan Consumer Sentiment Index.

Asia and Europe fall broadly amid heightened turmoil in Ukraine

European equities saw a widespread drop, as the markets remained unnerved by the intensified attack on Ukraine by Russia. The crisis escalated, along with the uneasiness, overnight as Russia attacked Europe's largest nuclear power plant located in Ukraine, which resulted in the Russian army seizing control. Uncertainty regarding the ultimate impact of the war in eastern Europe remained palpable, as oil prices continued to spike to stoke already boiling hot inflation, and Europe being heavily reliant on Russia for its energy needs. For more on the situation and potential implications, check out Schwab's Chief Investment Strategist Liz Ann Sonders', Jeffrey Kleintop's, and Kathy Jones' latest commentary, Russia-Ukraine: Navigating Markets on Edge, where they recognize the immense human toll, while offering what we expect to see in coming days and weeks. The economic calendar continued to take a back seat to the geopolitical crisis, though French industrial and manufacturing production rose much more than expected in January, Germany's exports unexpectedly fell in January, and Eurozone retail sales grew at a much slower pace than anticipated for January. The euro and British pound traded lower versus the U.S. dollar, while bond yields in the Eurozone and the U.K. saw pressure.

The U.K. FTSE 100 Index was down 3.5%, Germany's DAX Index decreased 4.4%, France's CAC-40 Index fell 5.0%, Italy's FTSE MIB Index dropped 6.2%, Spain's IBEX 35 Index traded 3.6% lower, and Switzerland's Swiss Market Index slid 3.6%.

Stocks in Asia finished broadly lower to close out the week, with the markets remaining skittish regarding the crisis that continues to unfold in eastern Europe. Spiking oil prices have bolstered already elevated inflation concerns and resuscitated global economic worries to foster volatility and weigh on the markets. Overnight news of an attack on Europe's largest nuclear power plant in Ukraine and reports that Russia has taken control exacerbated the move and led to the widespread losses in the region. Meanwhile, the uneasy backdrop continued to be accompanied by expectations that the U.S. Fed will go ahead with the commencement of its rate hike campaign in two weeks. In economic news, India's Services PMI showed growth in the sector accelerated slightly in February. For more on the global markets, read Schwab's Jeffrey Kleintop's commentary on Why Invest Internationally.

Japan's Nikkei 225 Index traded 2.2% lower, as the yen gave back a recent drop amid ratcheted-up risk aversion, and China's Shanghai Composite Index declined 1.0%. The Hong Kong Hang Seng Index led to the downside, falling 2.5%, Australia's S&P/ASX 200 Index decreased 0.6%, and South Korea's Kospi Index traded 1.2% to the downside. India's S&P BSE Sensex 30 Index joined the broad-based decline, moving 1.4% lower, likely continuing to be bogged down by the rising inflation worries and recent advance for the U.S. dollar.

Next week's international economic calendar is robust but will likely yield to the market focus on the crisis in eastern Europe. Notable reports due out include: China—trade balance, inflation statistics, and key lending figures. India—industrial production, inflation figures, and trade balance. Japan—labor earnings statistics, machine tool orders, and wholesale price inflation. Eurozone—the European Central Bank monetary policy decision, along with German retail sales, factory orders and industrial production. U.K.—monthly GDP statistics, industrial and manufacturing production, and trade balance.

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