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Stocks Finish Higher and Post Solid Weekly Gains

U.S. equities finished higher, adding to solid weekly advances, with the S&P 500 notching a fresh record high, as concerns regarding the new omicron variant continued to ease. The markets also sifted through the first look at the November inflation picture, which were mostly in line with estimates, but showed prices remain elevated with the headline rate hitting the highest level since 1982. In other economic news, the University of Michigan reported that preliminary December consumer sentiment improved more than expected and rose off a decade low. The markets also assessed what the data could mean regarding the Fed's response at its monetary policy meeting next week. Treasuries were mixed, and the U.S. dollar dipped, while gold and crude oil prices gained ground. In equity news, Oracle, Costco, and Broadcom all rallied following their earnings reports, while Lululemon Athletica came under pressure after issuing mixed guidance. Europe closed lower, but retained solid weekly advances, while markets in Asia also finished to the downside.

The Dow Jones Industrial Average rose 216 points (0.6%) to 35,971, the S&P 500 Index increased 45 points (1.0%) to 4,712, and the Nasdaq Composite added 113 points (0.7%) to 15,631. In moderate volume, 3.8 billion shares of NYSE-listed stocks were traded, and 4.3 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.67 to $71.61 per barrel. Elsewhere, the gold spot price increased $6.30 to $1,783.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.2% to 96.06. Markets were solidly higher on the week, as the DJIA rallied 4.0%, the S&P 500 jumped 3.8%, and the Nasdaq Composite advanced 3.6%.

Oracle Corporation (ORCL $103) reported adjusted fiscal Q2 earnings-per-share (EPS) of $1.21, above the $1.11 FactSet estimate, as revenues rose 6.0% year-over-year (y/y) to $10.4 billion, topping the Street's forecast of $10.2 billion. The company noted that its results are being driven by the 22.0% growth of its infrastructure and applications cloud businesses which are approaching $11.0 billion in annualized revenue. ORCL also increased its share repurchase program by $10.0 billion. Shares rallied over 15%.

Costco Wholesale Corporation (COST $559) reported fiscal Q1 EPS of $2.98, compared to the forecasted $2.62, with revenues growing 16.6% y/y to $50.4 billion, above the expected $49.7 billion. Q1 U.S. same-store sales rose 14.9% y/y, above the expected 13.0% increase. Shares traded nicely higher.

Lululemon Athletica Inc. (LULU $410) posted adjusted Q3 profits of $1.62 per share, exceeding the expected $1.40, as revenues grew 30.0% y/y to $1.5 billion, topping the estimated $1.4 billion. LULU issued Q4 guidance that was below forecasts, while it raised its full-year outlook. The company said it continues to navigate the ongoing, industry-wide supply chain issues, and while there are several large volume weeks ahead of it, it feels well positioned for a strong end to 2021. Shares were lower.

Broadcom Inc. (AVGO $632) announced adjusted fiscal Q4 EPS of $7.81, above the forecasted $7.74, with revenues rising 15.0% y/y to $7.4 billion, roughly in line with estimates. The semiconductor and infrastructure software solutions company said it saw a rebound in enterprise, and continued strength from cloud and service provider demand. AVGO issued Q1 guidance that was above expectations, while raising its quarterly dividend by roughly 14.0% to $4.10 and announcing a new $10.0 billion share repurchase authorization. Shares gained solid ground.

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.

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

November consumer price inflation mostly in line, December consumer sentiment improves

The Consumer Price Index (CPI) (chart) rose 0.8% month-over-month (m/m) in November, just above the Bloomberg consensus estimate of a 0.7% increase, and following October's unrevised 0.9% gain. The core rate, which strips out food and energy, increased 0.5% m/m, in line with forecasts, after October's unadjusted 0.6% rise. Y/Y, prices were 6.8% higher for the headline rate—the fastest pace since 1982—matching estimates, and following the prior month's 6.2% increase. The core rate was up 4.9% y/y, in line with projections, and following October's unrevised 4.6% increase.

The Department of Labor said there were broad increases in most components of the index, with gasoline, shelter, food, used car and truck, and new vehicle prices among the larger contributors. Prices for household furnishings, apparel, and airline fares also increased, while prices for motor vehicle insurance, recreation, and communication all declined in November.

The December preliminary University of Michigan Consumer Sentiment Index (chart) came in higher than expected at 70.4, versus estimates calling for a modest improvement to 68.0 from November's 67.4 reading, which was a ten-year low. The stronger than expected report came as both the current conditions and the expectations portions of the index unexpectedly rose. The 1-year and the 5-10 year inflation forecasts both remained at November's 4.9% and 3.0% rates, respectively.

The University of Michigan said, "Sentiment posted a small overall gain in early December (+4.5%), although it was still nearly identical to the average reading in the prior four months (70.6). The more interesting result was the large disparity between monthly gain among households with incomes in the lowest third (+23.6%) of the income distribution compared with the modest losses among households in the middle (-3.8%) and top third (-4.3%)."

Treasuries finished mixed, as the yield on the 2-year note declined 3 basis points (bps) to 0.63%, while the yield on the 10-year note was flat at 1.49%, and the 30-year bond rate ticked 1 bp higher to 1.88%.

The Treasury yield curve has flattened noticeably as of late amid the omicron variant uncertainty and as the Fed is expected to discuss speeding up its monthly asset purchase tapering campaign at next week's monetary policy meeting.

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 and Asia lower in choppy trading

European equities finished out the day lower, but were able to hold onto this week's strong gains. Investors eyed today's November consumer price inflation report out of the U.S. after showing that while the figures came mostly in line with forecasts, the headline rate hit its highest level since 1982. Most sectors were lower, led by Industrials and Information Technology, while Consumer Discretionary issues were able to eke out gains. The markets also continued to grapple with the ultimate impact of the new COVID-19 omicron variant, and 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. U.K. economic news was on the softer side, with its October industrial and manufacturing production both coming in below estimates, and the region's GDP growth slower than anticipated for October. The euro and the British pound were modestly higher versus the U.S. dollar, while bond yields in the Eurozone were mixed and rates in the U.K. were lower.

The U.K. FTSE 100 Index and Italy's FTSE MIB Index were down 0.4%, France's CAC-40 Index lost 0.2%, Germany's DAX Index dipped 0.1%, and Spain's IBEX 35 Index declined 0.5%, while Switzerland's Swiss Market Index was flat.

Stocks in Asia finished broadly lower to finish a choppy week as the markets continued to monitor the preliminary data regarding the impact of the new omicron variant, while waiting for some key November consumer price inflation data out of the U.S. The report is likely to have implications on the path of monetary policy tightening by the Fed, which uncertainty of has contributed to the recent market volatility. The markets also continued to digest central bank decisions this week in the region as central banks out of India and Australia both decided to keep its monetary policy stance unchanged. In economic news in the region, Japan's preliminary November machine tool orders report showed demand slowed but remained robust compared to a year ago. Also, China's November aggregate financing—a measure of total credit issued—came in below forecasts, while the country's new yuan loans also rose at a smaller pace than expected.

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 decreased 1.0%, with the yen trimming yesterday's gains late in the session, and China's Shanghai Composite Index dipped 0.2%. The Hong Kong Hang Seng Index dropped 1.1%, India's S&P BSE Sensex 30 Index finished little changed, Australia's S&P/ASX 200 Index decreased 0.4%, and South Korea's Kospi Index moved 0.6% lower.

Markets snapback this week, S&P 500 back withing shouting distance of record highs

After two weeks of drawdowns, the markets bounced back this week and the S&P 500 back to an arm's length of record high territory. Fed commentary was dormant during the quiet period before next week's monetary policy, which likely helped foster the rebound, but preliminary data appeared to ease concerns about the omicron variant to lead broad-based gains among all the S&P 500 sectors. Data suggested that although the spread of the variant is likely more prevalent, the impact could be less severe than the prior delta variant. The Information Technology sector led to the upside, while Consumer Discretionary underperformed but managed to post a solid gain. The Treasury yield curve steepened after some noticeable flattening as of late as the markets come to terms with last week's hawkish pivot from the Fed. Crude oil prices rebounded, while action for the U.S. dollar and gold was subdued. Other economic data painted a positive picture, notably on the employment front as jobless claims hit the lowest level in over 50 years, job openings remained robust, and the quit rate among workers declined.

The markets will head into next week that will see the economic calendar continue to develop the November inflation picture, courtesy of the releases of the Producer Price Index and Import Price Index. The all-important U.S. consumer will also be in focus, with the release of the November retail sales report. Some other reports that could garner some attention include: preliminary December Manufacturing and Services PMIs from Markit, the NFIB Small Business Optimism Index for last month, the NAHB's December homebuilder sentiment report, November housing starts and building permits data, and the Fed's industrial production and capacity utilizationstatistics for last month.

However, the headlining event on next week's U.S. docket will most likely be the monetary policy decision from the Federal Open Market Committee (FOMC). The decision will be accompanied by its statement, in which the FOMC is expected to signal a faster pace of its monthly asset purchases tapering campaign. However, some of the most market-moving potential could come in the form of the updated economic projections, which will include the outlooks for how many rate hikes are expected for 2022 by FOMC participants. Finally, the customary press conference by Fed Chairman Jerome Powell shortly after the decision and economic projections are released is poised to garner heavy scrutiny as has been the case.

The international economic calendar next week also has the chance to garner market reactions, with key monetary policy decisions out of the Eurozone, the U.K., and Japan, which will follow the policy announcement in the U.S. Moreover, a host of preliminary December Manufacturing and Services PMIs will hit the tape, with reports out of Australia, Japan, the Eurozone and the U.K. Other reports that are due out and deserve a mention include: China—retail sales, industrial production, and new home prices. Japan—the Q4 Tankan Manufacturing Sentiment Indexes, core machine orders, and trade balance. Eurozone—industrial production, the final read on consumer price inflation, and trade balance, along with German business confidence. U.K.—inflation statistics, employment change, and retail sales.

Volatility is likely to continue amid the uncertainties regarding the ultimate impact of the omicron variant and how soon and how fast the Fed will tighten monetary policy. Check out our 2022 Schwab Market Outlook: Ebb Tide, for a look at what we are watching and expecting in 2022 regarding the U.S. markets and economy, the global markets, and the path of interest rates in the bond markets.

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