Stocks Lose Steam in Final Minutes
U.S. equities finished a choppy session mixed and very near the flatline, with the Dow the only major index able to notch a weekly gain, while posting fresh records along the way. The moves came amid a host of global February business activity reports, headlined by strong reads on manufacturing output and bolstered by the fastest pace of U.S. services sector growth since March 2015. Moreover, Treasury Secretary Janet Yellen continued assertion to "go big" on fiscal relief added to the positive vibe, and progress on the COVID-19 vaccine front persisted after Dow member Pfizer offered upbeat results regarding a single dose of its two-shot vaccine. However, concerns of rising inflation and the uptick in Treasury yields as of late appeared to keep investors somewhat on the fence. Earnings season remained in focus, with Deere & Company trouncing estimates and delivering strong guidance, while Applied Materials also posted upbeat results. Treasuries were lower, extending the rise in yields, and the U.S. dollar resumed a recent downtrend, while gold was higher and crude oil prices fell. Europe finished mostly higher and markets in Asia were mixed.
The Dow Jones Industrial Average rose nearly 1 point to 31,494, the S&P 500 Index was down 7 points (0.2%) at 3,907, and the Nasdaq Composite increased 9 points (0.1%) to 13,874. In heavy volume, 1.1 billion shares were traded on the NYSE and 6.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.27 to $59.26 per barrel. Elsewhere, the Bloomberg gold spot price gained $5.91 to $1,781.58 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.3% to 90.36. Markets were mixed for the week, as the DJIA gained 0.1%, while the S&P 500 declined 0.7%, and the Nasdaq Composite decreased 1.6%.
Deere & Company (DE $330) reported fiscal Q1 earnings-per-share (EPS) of $3.87, compared to the $2.16 FactSet estimate, with equipment revenues growing 23.3% year-over-year (y/y) to $8.1 billion, easily exceeding the Street's forecast of $7.2 billion. The company noted that its worldwide net sales were up 19.0%, as results were aided by outstanding performance across its business lineup and improving conditions in the farm and construction sectors. In addition, DE said its smart industrial operating strategy is making a significant impact on the company's results. The company raised its full-year profit outlook, noting that improved conditions in agricultural and construction sectors are setting the stage for a year of strong performance. Shares rallied.
Applied Materials Inc. (AMAT $119) posted fiscal Q1 EPS of $1.22, or profits of $1.39 per share excluding certain items associated with acquisition, COVID-19 and severance costs, compared to the Street's forecast calling for the semiconductor equipment company to post EPS of $1.28. Revenues rose 24.0% y/y to $5.2 billion, topping the expected $5.0 billion. The company said it saw a continued acceleration of demand in its semiconductor business as major macro and industry trends fuel increasing consumption of silicon across a wide range of markets and applications. AMAT issued Q2 earnings and revenue guidance that was well north of estimates. Shares gained noticeable ground.
For a look at the earnings season performance among the major market sectors check out our latest Schwab Sector Views: The Earnings Recession Has Ended.
In other equity news, Uber Technologies Inc. (UBER $58) is in focus after the U.K. Supreme Court unanimously ruled that the ride-hailing company's drivers are "workers," and as such, are entitled to rights that are afforded to employees like minimum wage and other benefits. Per Bloomberg, UBER said the ruling only applies to the handful of drivers that filed the initial case, but it will start a nationwide consultation to seek the views of all active drivers to help it shape the future of flexible work. Shares finished lower in choppy trading.
February business activity remains strong, existing home sales unexpectedly rise
The preliminary Markit U.S. Manufacturing PMI Index for February dipped to 58.5 from January's unrevised 59.2 figure, remaining comfortably in expansion territory denoted by a reading above 50. The Bloomberg consensus estimate called for the index to dip to 58.8. The preliminary Markit U.S. Services PMI Index showed growth (above 50) for the key U.S. sector surprisingly accelerated, rising to 58.9 from January's 58.3 figure, and compared to forecasts of a slight decline to 58.0.
Markit noted that businesses in the U.S. reported the strongest monthly expansion in output for almost six years, led by services sector firms often reporting higher activity as virus-related restrictions were partially eased and inflows of new business picked up, notably among domestic customers. Markit also said while manufacturing output growth moderated it remained among the highest seen over the past decade, thanks to a further marked increase in new orders and exports.
Existing home sales rose 0.6% month-over-month (m/m) in January to an annual rate of 6.69 million units, versus expectations of a decline to 6.60 million units from December's downwardly revised 6.65 million rate. Existing home sales were up 23.7% y/y.
Compared to last month, the National Association of Realtors (NAR) said buying activity varied in the major regions, but y/y, all four areas recorded double-digit gains in January. Sales of single-family homes and purchases of condominiums and co-ops were both up m/m and y/y. The median existing home price was up 14.1% from a year ago to $303,900, marking the 107th straight month of y/y gains as prices rose in every region. Unsold inventory remained at an all-time low of a 1.9-months pace at the current sales rate, and down sharply from the 3.1-months pace a year earlier. Existing home sales reflect contract closings instead of signings and account for a large majority of the home sales market.
NAR Chief Economist Lawrence Yun said, "Home sales continue to ascend in the first month of the year, as buyers quickly snatched up virtually every new listing coming on the market," adding that, "Sales easily could have been even 20% higher if there had been more inventory and more choices." Yun also pointed out that home sales continue to help prop up the economy and with additional stimulus likely to pass and several vaccines now available, "the housing outlook looks solid for this year."
Treasuries were lower as choppiness for the week continued, as the rate on the 2-year note was little changed at 0.11%, while the yields on the 10-year note and the 30-year bond increased 6 basis points (bps) to 1.34% and 2.14%, respectively.
The Treasury yield curve has steepened noticeably as of late, amid increasing expectations of a strong economic rebound and higher inflation, while we believe the rate on the 10-year note could reach 1.60% this year. We have a tame inflation outlook for the near term, with an expected uptick in the coming months as we lap a drop in prices that came amid the height of the pandemic, but longer term, the case for a move up in inflation grows stronger.
For more on our views about bond rates and inflation, check out Schwab's Chief Fixed Income Strategist Kathy Jones' article, Why Longer-Term Treasury Yields Are Rising, and her commentary, along with Senior Fixed Income Research Analyst Christina Shaffer, Inflation Expectations Are Up. Should Investors Worry?
Europe mostly higher as markets digest a plethora of data, with manufacturing a standout
European equities finished out the week mostly higher, with Financials seeing gains as bond yields in the region extended a recent rise, while the global markets remained supported by the extreme monetary and fiscal policy measures taken to ensure an economic recovery. The markets also digested a host of February manufacturing and services reports, which showed growth remained strong in the former out of the Eurozone, led by a surge in German output and an acceleration in U.K. growth. However, services sector activity in the Eurozone and U.K. continued to struggle, with both measures depicting contraction, illustrated by a separate report showing U.K. retail sales fell much more than expected for January. The euro and British pound traded higher versus the U.S. dollar, which appeared to resume a slide.
The move up in interest rates, notably in the U.S.—amplified by signs of rising inflation pressures this week—has caused some skittishness regarding the implications of the moves on the equity markets which are seeing elevated valuations. Interest rate or currency shocks are one of the Top Five Global Investment Risks In 2021 that Schwab's Global Investment Strategist Jeffrey Kleintop, CFA, notes, while reiterating how having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome are keys to successful investing. Also, with the markets grappling with the frothy sentiment and stretched equity market valuations, Schwab's Jeffrey Kleintop offers his article, Your Portfolio May Be Less Diversified Than You Think. He points out how investors with a large home bias may not be nearly as diversified across sectors as they believe and risk missing their financial goals as longer-term trends tend to shift with the start of a new global economic cycle. Jeff urges investors to consider rebalancing portfolios back toward international stocks as years of U.S. stock outperformance may have caused a drift away from longer-term asset allocation targets. He adds that fortunately, obtaining global diversification has never been easier or less expensive.
The U.K. FTSE 100 Index was up 0.1%, France's CAC-40 Index and Germany's DAX Index rose 0.8%, Italy's FTSE MIB Index gained 0.9%, Spain's IBEX 35 Index advanced 1.2%, while Switzerland's Swiss Market Index ticked 0.1% lower.
Stocks in Asia finished mixed with the global markets remaining focused on the recent increase in interest rates, notably in the world's largest economy of the U.S., and the implications on equity growth sectors such as Technology. However, the global markets remained buoyed by the positive backdrop of highly accommodative fiscal and monetary policies. The region kicked off a busy day of February business activity reports across the globe, with Japan's manufacturing output modestly moving back into expansion territory and Australian growth persisting, while both nations' services sector activity continued to lag, with the former's read remaining in contraction territory. In other economic news, Japan's January consumer price inflation continued to decline but stripping out fresh food and energy, prices ticked higher, and Australia's retail sales rose at a smaller amount than expected for last month.
Japan's Nikkei 225 Index decreased 0.7%, with the yen gaining some ground late in the session, while Australia's S&P/ASX 200 Index fell 1.3%, exacerbated by weakness in the Energy sector as oil prices pulled back from a recent rally. South Korea's Kospi Index gained 0.7%, though India's S&P BSE Sensex 30 Index fell 0.9%. China's Shanghai Composite Index advanced 0.6% as the markets continue to get back into the groove following the week-long Lunar New Year holiday and the Hong Kong Hang Seng Index ticked 0.2% higher. Schwab's Jeffrey Kleintop notes in his latest article, Year of the Ox: Bullish for China? China's growth for 2021 appears strong, but February holds key developments that could impact this outlook. He points out that key developments include stock delistings, trade, and COVID-19. Jeff concludes with a look at how China's stock market is the best performing in the world so far this year and the country's economic growth is driving the world's recovery, so these developments can have far reaching impacts.
Stocks mixed near record highs as inflation shows and rates continue to climb
U.S. stocks finished the shortened week mixed, with the S&P 500 and Nasdaq seeing red figures, while the blue-chip Dow continued to post fresh record highs. The bullish backdrop that has driven stocks to record highs faded somewhat as Treasury yields continued to spike, bolstered by a surge in December retail sales and as much hotter-than-expected reads on wholesale and import prices fanned the flames of inflation expectations. The Dow shrugged off an earnings miss and tepid outlook from Walmart Inc. (WMT $139) as Q4 earnings season rolled on with profit and sales beat rates continuing to trend above historical averages and the S&P 500 heading toward y/y revenue and earnings growth. Housing data continued to be robust, with building permits unexpectedly jumping ahead of Friday's surprising rise in existing home sales, but the sore sport for the economic recovery—the labor market—festered as weekly initial jobless claims accelerated from already painfully elevated levels. As such, the minutes from the Federal Reserve's late-January monetary policy meeting showed that the Central Bank remains solely focused on ensuring its policy does not derail the recovery.
Financials and Energy issues outperformed on the decisive steepening of the Treasury yield curve and continued rally in crude oil prices—amplified by the severe cold weather in the U.S.—while the high-flying Information Technology sector fell on the interest rate uneasiness. Defensively-natured sectors—Health Care, Utilities, Real Estate and Consumer Staples—also weighed on the markets.
Next week, as the earnings picture fully develops with retailers beginning to put on the finishing touches, the economic calendar will likely continue to garner attention. The consumer will be in focus, courtesy of January personal income and spending figures and more-timely February reads on Consumer Confidenceand the revised University of Michigan Consumer Sentiment Index. February regional manufacturing reports will continue to pour in, and housing will also remain on display with new and pending home salesreports. The preliminary report on durable goods orders—goods meant to last three years or more—initial jobless claims for the week ended February 20, and the first revision (of two) on Q4 GDP will round out the docket. However, the event that likely has the biggest potential to move the markets will be the two-day semi-annual monetary policy report to Congress by Fed Chairman Jerome Powell starting on Tuesday.
Next week's international economic calendar will also deliver some data points that could move the markets including: China—1-year and 5-year loan prime rate decisions. Japan—industrial production and retail sales. Eurozone—CPI and economic confidence, along with German business confidence and Q4 GDP. U.K.—employment statistics.
As noted in our latest Schwab Market Perspective: Disconnection, the U.S. stock market has rallied to new highs, but some of the recent "winners" were companies that aren't profitable and/or had been widely bet-against ("shorted") by hedge funds. Hope is high that economic growth will accelerate as more people are vaccinated against COVID-19, but so far economic data has been lackluster. Meanwhile, international equities have performed well so far in 2021, despite the virus-driven economic slowdown. This may be because economic data continues to surprise on the upside and earnings estimates have continued to climb.
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