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Stocks Mixed Amid Lackluster Economic Data, Fed Uncertainty

U.S. equities finished mixed, with the Financials sector leading the laggards, despite a sharp rise in Treasury yields, in the wake of mixed results from Dow member JPMorgan Chase, Citigroup, and Wells Fargo & Company. Concerns that the Fed may need to move more aggressively down the monetary policy tightening path to combat still surging inflation pressures added to the negative sentiment. Meanwhile, investors were given a dose of disappointing economic data, headlined by a sharp drop in December retail sales, a larger-than-expected deterioration in January consumer sentiment, and a dip in industrial production. The U.S. dollar gained ground, along with crude oil prices, while gold traded modestly to the downside. Europe finished lower despite a plethora of upbeat U.K. economic data, while markets in Asia also posted losses.

The Dow Jones Industrial Average fell 202 points (0.6%) to 35,912, while the S&P 500 Index nudged 4 points (0.1%) higher to 4,663, and the Nasdaq Composite gained 87 points (0.6%) to 14,894. In heavy volume, 4.3 billion shares of NYSE-listed stocks were traded, and 4.3 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.70 to $83.82 per barrel. Elsewhere, the gold spot price lost $4.60 to $1,816.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—advanced 0.4% to 95.16. Markets were lower for a second-straight week, as the DJIA was down 0.9%, the S&P 500 decreased 0.3%, and the Nasdaq Composite also declined 0.3%.

Dow member JPMorgan Chase & Co. (JPM $158) reported Q4 earnings-per-share (EPS) of $3.33, including a loan loss reserve release of $1.8 billion, compared to the FactSet estimate of $3.01. Excluding the loan loss reserve release, EPS would have been $2.86. Revenues dipped 0.3% year-over-year (y/y) and were down 1.3% versus Q3 to $29.3 billion, below the Street's forecast of $29.8 billion.

The company said global investment banking fees were up 37.0%, driven by both the corporate & investment bank and commercial banking, due to unprecedented M&A activity, an active acquisition financing market and strong performance in IPOs. JPM said markets revenues were down 11.0%, due to lower fixed income trading revenues, compared to a record Q4 last year, but up 7.0% versus the 2019 quarter, driven by a strong performance in equities. Asset & wealth management delivered robust results, and its consumer & community banking results grew, and net interest income was up driven by balance sheet growth, partially offset by lower net interest income in its CIB unit, and it forecasted net interest income and expenses for 2022 that came in below expectations. Shares fell.

Citigroup Inc. (C $67) posted Q4 EPS of $1.46, above the expected $1.39, including the impact of divestitures of its consumer banking unit in Asia. Excluding the divestiture, EPS would have been $1.99. Revenues rose 1.0% y/y to $17.0 billion, north of the expected $16.9 billion. The company said revenues increased primarily driven by strong growth in investment banking and higher revenues in its corporate and other units, partially offset by lower revenues across regions in global consumer banking. The company's trading revenues trailed estimates, due to a challenging environment and tough comparisons to 2020 from its fixed income trading unit, while it noted that it is still not seeing loan growth play out. Shares finished lower.

Wells Fargo & Company (WFC $58) achieved Q4 profits of $1.38 per share, including a $0.18 per share gain on sales of assets, a $0.17 per share boost from loan loss reserves, and a $0.05 per share negative impact from impairment of assets. Revenues grew 12.8% y/y to $20.9 billion, north of the expected $18.8 billion. WFC said it saw strong deposit growth and while loan growth demand was weak early in the year, loans grew 5.0% in the second half of the year with growth in both its consumer and commercial portfolios. The company also issued guidance for net interest income for this year that the Street appears to be cheering, and it noted that it expects lending to pick up this year. WFC also said it expects expenses to decrease in 2022. Shares traded higher.

As noted in our 2022 Schwab Market Outlook: Ebb Tide, while overall stock market performance was strong in 2021, there has been a lot of churn beneath the surface. We look at the question of will U.S. stock indices begin to reflect more of that weakness in 2022? It's possible, especially as the world's major central banks begin to drain the liquidity that has supported financial markets since the start of the COVID-19 pandemic in March 2020. But major uncertainties remain, including the pace of inflation, how central banks will react to it, and the direction of the virus.

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

Retail sales falls much more than expected, January consumer sentiment declines

Advance retail sales (chart) for December fell by 1.9% month-over-month (m/m), versus the Bloomberg consensus forecast of a 0.1% dip, and compared to November's downwardly-adjusted 0.2% rise. Last month's sales ex-autos dropped 2.3% m/m, compared to expectations of a 0.1% gain and as November's figure was revised lower to a 0.1% increase. Sales ex-autos and gaswere down 2.5% m/m, versus estimates of a 0.2% decline, while November's reading was adjusted down to a 0.1% gain. The control group, a figure used to calculate GDP, fell 3.1% m/m, versus projections of a flat reading, and following November's downwardly-revised 0.5% decline.

Sales declines were broad-based, with the major contributors to the drop being at non-store retailers—which includes online activity—and department stores, while sales at home furnishings, electronics and appliances, clothing, and sporting goods stores also posted noticeable decreases.

The January preliminary University of Michigan Consumer Sentiment Index (chart) declined more than expected to 68.8, versus estimates calling for a dip to 70.0 from December's 70.6 reading. The index hit the lowest since November as both the current conditions and the expectations components of the survey fell more than anticipated. The 1-year inflation forecast unexpectedly ticked higher to 4.9% from 4.8%, and the 5-10 year inflation forecast also rose to 3.1% from December's 2.9% rate.

The University of Michigan said, "While the Delta and Omicron variants certainly contributed to this downward shift, the decline was also due to an escalating inflation rate. Three-quarters of consumers in early January ranked inflation, compared with unemployment, as the more serious problem facing the nation."

The Federal Reserve's report on industrial production(chart) showed a 0.1% m/m dip in December, versus estimates of a 0.2% rise, and compared to November's upwardly-revised 0.7% gain. The Fed said losses for manufacturing and utilities output were mostly offset by a gain for mining production. Capacity utilizationnudged lower to 76.5%, versus forecasts from the prior month's downwardly-adjusted 76.6% rate.

The Import Price Index (chart)decreased 0.2% m/m for December, versus estimates of a 0.2% gain, and compared to November's unrevised 0.7% increase. Versus last year, prices were up by 10.4%, compared to forecasts of a 10.8% increase and November's unrevised 11.7% rise.

Business inventories (chart) rose 1.3% m/m in November, in line with forecasts and October's upwardly-revised increase. Business inventories have increased for sixteen-straight months.

Treasuries were lower, as the yield on the 2-year note increased 7 basis points (bps) to 0.96%, while the yields on the 10-year note and the 30-year bond rose 8 bps to 1.78% and 2.13%, respectively.

The bond markets have been volatile as the markets grapple with the prospect of Fed tightening and the rapid spread of the omicron variant, while last week's hawkish minutes from the Fed's December meeting, suggested along with accelerated tapering and multiple rate hikes this year, it may begin to reduce its balance sheet sooner than expected.

Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, The Fed's Policy Tightening Plan: A One-Two Punch, how beginning quantitative tightening soon after rate hikes is a big departure from the Federal Reserve's past policy.

Europe and lower as headwinds continue to be eyed

European equities finished the week lower, with losses being held in check by the continued outperformance in the Energy sector, while Information Technology, Materials and Industrials issues moved solidly to the downside. The markets continued to grapple with increased expectations of tighter global monetary policies, following recent comments from the Fed and continued surging inflation pressures in the U.S. The markets also digested the severe miss in U.S. retail sales for December. Uncertainty regarding the ultimate impact of the rapidly-spreading omicron variant appears to be also adding to the drained conviction. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his 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. In economic news, U.K. manufacturing/industrial production, as well as services sector output and monthly GDP growth all for November came in stronger than projected. Also, the Eurozone November trade balance unexpectedly swung to a deficit. The euro and British pound were lower versus the U.S. dollar, and bond yields in the Eurozone and the U.K. were mostly higher.

The U.K. FTSE 100 Index was down 0.3%, France's CAC-40 Index and Switzerland's Swiss Market Index decreased 0.8%, Germany's DAX Index fell 0.9%, Spain's IBEX 35 Index lost 0.1%, and Italy's FTSE MIB Index dropped 1.1%.

Stocks in Asia finished lower to close out the week, as the markets continued to contend with hotter-than-expected inflation, notably in the U.S., which has bolstered the prospect of tighter global monetary policies and has weighed on growth-related sectors, such as Information Technology. Moreover, the markets continued to grapple with uncertainty regarding the rapidly-spreading omicron variant. Schwab's Jeffrey Kleintop in his latest article, Top Global Risks of 2022, touches on how future COVID waves may not resemble those of 2021, while also offering four additional risks, in no particular order: shortages turn into gluts, rate hikes slower than expected, China goes from cracking down to propping up, and geopolitical surprises. Whether or not these risks come to pass remains to be seen, Jeff adds, but a new year almost always brings new surprises. In economic news, China's December exports grew more than expected, and the Bank of Korea raised its benchmark interest rate.

Japan's Nikkei 225 Index fell 1.3%, with the yen extending a recent advance versus the U.S. dollar. Elsewhere, China's Shanghai Composite Index declined 1.0%, the Hong Kong Hang Seng Index dipped 0.2%, and South Korea's Kospi Index dropped 1.4%. Australia's S&P/ASX 200 Index decreased 1.1%, and India's S&P BSE Sensex 30 Index finished little changed.

Shaky start to 2022 continues

U.S. stocks posted a second-straight weekly loss with the markets continuing to grapple with the prospect of more aggressive monetary policy tightening by the Fed as inflation pressures continued to surge, with consumer price inflation hitting the highest year-over-year pace in forty years. Friday's plethora of softer-than-expected economic data and a lackluster start to Q4 earnings season for some of the heavyweights in the Financials sector also helped cap off the weekly drawdown, while the rapidly-spreading omicron variant added to the lack of conviction. Most major S&P 500 sectors were down for the week, led by Real Estate, Consumer Discretionary and Utilities, while the Energy sector continued to run, racking up a sizeable gain. The Treasury yield curve flattened again, with the short end continuing a recent jump, and the U.S. dollar saw some pressure. Crude oil prices added to a recent rally and gold nudged higher.

Next week will be shortened as all U.S. markets will be closed on Monday in observance of Martin Luther King Jr., Day. However, next week earnings season will ramp up to take some of the market focus, and the economic calendar will be heavily-weighted toward the housing sector, with the releases of the NAHB Housing Market Index, building permits and housing starts, existing home sales, and MBA mortgage applications. Other reports on the docket that could garner some attention include the January regional manufacturing reports out of New York and Philadelphia, along with initial jobless claims for the week ended January 15.

Next week's international economic calendar will also bring some reports that the markets may pay attention to including: Australia—employment change. China—industrial production, Q4 GDP, retail sales, and 1-year and 5-year loan prime rate decisions. Japan—Bank of Japan monetary policy decision, core machine orders, trade balance, and National consumer price inflation statistics. Eurozone—consumer price inflation figures, construction output, and consumer confidence, along with German investor confidence. U.K.—inflation statistics, employment change, and retail sales.

As noted in our latest Schwab Market Perspective: Bumps in the Road, the effects of the COVID-19 virus have continued to drive—and brake—economic growth. Stocks sank in early January as investors reacted to the fast-spreading omicron variant and the Federal Reserve’s signals around inflation, including the possibility it will begin “quantitative tightening” much faster than previously expected. However, there are signs that inflation pressures already may be peaking in the United States and Europe.

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