Stocks Mixed Amid Pause in Treasury Yield Rally
U.S. equities finished out the last session of the week mixed in choppy trading, while posting solid weekly losses amid skittishness among investors. The uneasiness came courtesy of the recent spike in Treasury yields, pressuring growth-oriented sectors that had been the leaders to record highs. Information Technology and Consumer Discretionary issues rebounded somewhat as the rapid rise in Treasury yields cooled, but conviction appeared to remain indecisive. Value and cyclically-natured sectors, notably Financials and Energy, pared recent gains amid the pause in interest rates and as crude oil prices saw pressure. Some second-tiered earnings reports garnered some attention but appeared to take a back seat to the bond market action, with Salesforce.com's earnings guidance weighing on its shares, but upbeat results from Etsy and Rocket Companies boosted their stocks. The economic calendar was robust, headlined by a jump in personal income and the savings rate for January, as well as a slight upward revision to consumer sentiment. The U.S. dollar rebounded, and gold prices plunged. Europe finished with widespread losses as the global markets reacted to yesterday's action in the U.S, and markets in Asia were sharply lower.
The Dow Jones Industrial Average lost 470 points (1.5%) to 30,932, the S&P 500 Index shed 18 points (0.5%) to 3,811, while the Nasdaq Composite was up 73 points (0.6%) at 13,192. In heavy volume, 1.7 billion shares were traded on the NYSE and 5.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $2.03 to $61.50 per barrel. Elsewhere, the Bloomberg gold spot price tumbled $40.49 to $1,730.07 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.9% to 90.91. Markets were lower for the week, as the DJIA lost 1.8%, the S&P 500 declined 2.5%, and the Nasdaq Composite decreased 4.9%.
The equity markets were mixed after yesterday's tumble that came as Treasury yields spiked, fueling a drawdown from recent record highs. The surge in rates is threatening the lofty valuations of market leaders—Consumer Discretionary, Information Technology, and Communication Services—exacerbated by the rate on the 10-year Treasury yield flirting with breaching the 1.5% dividend yield on the S&P 500.
For a look at the wild swings in the bond and equity markets, check out our latest commentary, Market Volatility: Schwab's Quick Take, by the Schwab Center for Financial Research (SCFR). Schwab's Chief Investment Strategist Liz Ann Sonders points out that the market's recent success had also led to increased speculative fervor, which is a risk. She notes that heightened optimism doesn’t necessarily indicate an imminent down move, particularly when there is no negative catalyst, but rising bond yields appeared to be just such a catalyst, as higher bond yields tend to put downward pressure on equity multiples. Liz Ann adds that richly valued growth sectors are now under the most pressure and with Q4 2020 earnings season winding down, there will be less earnings growth visibility in the near term, so this pressure may continue.
Meanwhile, equity investors continue to re-evaluate their expectations for economic growth and Federal Reserve policy, along with the potential for another round of fiscal stimulus and the effectiveness of the COVID-19 vaccine rollout.
The SCFR provides the takeaway for long-term investors, including making sure your portfolio, and each account, is consistent with your goals, risk tolerance, and preferences. If you're uncomfortable with market volatility and have short-term goals, make sure you don't have too much invested in risk assets, and that you have a plan to meet cash-flow needs. Revisit your goals and objectives. If you don’t have a plan, or if it hasn't been updated in a while, now would be good time to develop one. Don't try to time the market. It rarely works, and it's especially difficult to try to time the market around unexpected geopolitical events, like COVID-19.
In earnings news, Salesforce.com Inc. (CRM $217) reported adjusted Q4 earnings-per-share (EPS) of $1.04, above the $0.75 FactSet estimate, as revenues grew 20.0% year-over-year (y/y) to $5.8 billion, exceeding the Street's expectation of $5.7 billion, led by its subscription and support revenues. The company noted that mark-to-market accounting of its strategic investments benefitted its adjusted EPS by $0.22 per share. CRM issued Q1 earnings guidance that was above estimates, while raising its revenue outlooks for the current quarter and the year. However, the company's current year EPS guidance came in below expectations. Shares were lower.
Etsy Inc. (ETSY $220) reported Q4 EPS of $1.08, well above the Street's expectation of $0.59, as revenues jumped 128.7% y/y to $617 million, topping the estimated $516 million. The operator of two-sided marketplaces said, "2020 was an inflection point in history for e-commerce and for Etsy, with millions of buyers choosing us for their everyday needs." ETSY issued Q1 guidance that was noticeably north of expectations. Shares rallied.
Rocket Companies Inc. (RKT $22) announced Q4 earnings of $1.14 per share, well north of the anticipated $0.88, as revenues surged 144.0% y/y to $4.7 billion, exceeding estimates of $4.0 billion. The tech-driven real estate, mortgage and eCommerce company said its record-breaking Q4 and full year 2020 results demonstrate the sheer power of the technology platform it has built and refined for more than two decades as more consumers shift their preferences toward an increasingly digital experience. RKT also announced a special dividend of $1.11 per share. RKT finished sharply higher.
Treasury yields cool after yesterday's spike, personal income and spending data upbeat
Treasuries rose following yesterday sharp drop that fueled a surge in yields to unnerve the markets, as the rate on the 2-year note was down 5 basis points (bps) to 0.12%, the yield on the 10-year note declined 9 bps to 1.43%, and the 30-year bond rate fell 15 bps to 2.13%.
Schwab's Chief Fixed Income Strategist Kathy Jones noted that the latest rise in rates was likely due to a number of issues, including a historically weak 7-year Treasury note auction, an already rising trend in yields due to the improving growth outlook, and large mortgage-backed securities investors likely selling Treasury holdings to hedge their risk. She adds that yields may continue to move higher despite Thursday's sharp rise and lower-rated bonds could be at risk if financial conditions tighten because of higher yields. Kathy adds that higher borrowing costs pose a risk for highly leveraged corporations whose profits may still be recovering from the pandemic-induced slowdown.
For Kathy's views on how investors can navigate this environment, check out her 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?
Personal income (chart) surged 10.0% month-over-month (m/m) in January, versus the Bloomberg forecast of 9.5% gain, following December's unrevised 0.6% rise. Personal spending grew 2.4%, just shy of estimates of a 2.5% increase and compared to the prior month's downwardly adjusted 0.4% dip. The January savings rate as a percentage of disposable income was 20.5%. The Commerce Department did note that the estimate for January personal income and outlays was impacted by the continued federal response to the spread of COVID-19 and the full economic effects of the pandemic cannot be quantified in the data because the impacts cannot be separately identified.
The PCE Deflator rose 0.3% m/m, matching expectations and compared to December's unadjusted 0.4% gain. Compared to last year, the deflator was 1.5% higher, above estimates of a 1.4% rise and December's unadjusted 1.3% gain. Excluding food and energy, the PCE Core Index grew 0.3% m/m, north of expectations of a 0.1% increase and matching December's unrevised increase. The index was 1.5% higher y/y, versus estimates to match December's downwardly adjusted 1.4% gain.
The February final University of Michigan Consumer Sentiment Index (chart) was revised slightly higher than expected to 76.8, versus expectations of a tick higher to 76.5 from the preliminary reading of 76.2. The upward revision came as the current conditions portion of the survey was unadjusted, while the expectations component was revised modestly to the upside. However, the overall index was lower versus January's 79.0 level, and both components were down m/m. The 1-year inflation forecast rose to 3.3% from January's 3.0% rate, and the 5-10 year inflation forecast remained at the prior month's 2.7% forecast.
The Chicago PMI decelerated more than expected but remained comfortably north of the level depicting expansion (a reading above 50). The index declined to 59.5 in February from January's 63.8—which was the highest since the Summer of 2018—versus estimates calling for a decline to 61.0. The slower than expected expansion for the index came as both new orders and production grew at slower paces, but the contraction in employment decelerated. Inflation pressures at the wholesale level remained as prices paid continued to accelerate.
The advance goods trade balance showed that the January deficit unexpectedly widened, coming in at $83.7 billion, versus estimates calling for it to dip to $83.0 billion from December's upwardly adjusted shortfall of $83.2 billion.
Preliminary wholesale inventories gained 1.3% month-over-month (m/m) for January, compared to expectations of a 0.4% gain, and versus December's upwardly revised 0.5% rise.
Europe and Asia lower in the wake of the U.S. selloff yesterday on uneasiness toward rise in rates
European equities saw widespread losses, with the international markets reacting to the selloff that ensued yesterday in the U.S. that was fueled by the recent spike in bond yields. Energy and Financials gave back some of the recent market-leading gains amid the unnerved sentiment, while the euro and British pound lost ground as the U.S. dollar rebounded. Bond yields in the Eurozone, which have also seen solid advances as of late, were lower. However, U.K. rates were little changed.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, has noted for some time that an interest rate/currency shock is one of the Top Five Global Investment Risks In 2021. Jeff discusses the action seen in the global markets yesterday, noting that international stocks outperformed Thursday due to a higher weight to financial stocks, which tend to benefit from higher rates. He adds that international markets tend to be more cyclical in nature and are likely to outperform as global economies recover and inflation rises. International stocks have not experienced the same degree of speculation that U.S. stocks have, and have a lower overall valuation than U.S. stocks. A higher dividend yield and less exposure to aggressive growth names relative to U.S. stocks also helped.
Amid this backdrop, 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 dropped 2.5%, Germany's DAX Index declined 0.7%, France's CAC-40 Index fell 1.4%, Italy's FTSE MIB Index was down 0.9%, Spain's IBEX 35 Index dropped 1.1%, and Switzerland's Swiss Market Index decreased 1.3%.
Stocks in Asia fell broadly as sentiment was rattled yesterday by the recent rise in global bond yields, exacerbated by the spike in rates out of the world's largest economy of the U.S. Growth sectors in the equity markets that have led a rally saw the heaviest pressure, easily overshadowing lingering optimism of a robust global economic recovery, bolstered by the progress of COVID-19 vaccine rollouts. Japan's Nikkei 225 Index tumbled 4.0% to lead the way, with the yen a bit choppy, while India's S&P BSE Sensex 30 Index dropped 3.8%. China's Shanghai Composite Index declined 2.1% and the Hong Kong Hang Seng Index fell 3.6%. South Korea's Kospi Index traded 2.8% to the downside and Australia's S&P/ASX 200 Index decreased 2.4%. In economic news in the region, Japan's retail sales declined by a smaller amount than expected in January, while Hong Kong exports surged much more than expected for last month.
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 pullback from record high territory as rate spike spooks growth conviction
U.S. stocks saw a noticeable downturn from record high territory this week as the upward momentum in Treasury yields hit another gear to cause conviction in growth-related sectors to be tested. The velocity of the increase in rates this week appeared to foster the bulk of the skittishness as rates had been creeping higher amid expectations of a robust second-half 2021 economic recovery and increased inflation expectations. The spike seemed to be amplified by concerns among some market participants that the Fed may be getting complacent as Federal Reserve Chairman Jerome Powell conducted his semi-annual monetary policy on Capitol Hill. Powell downplayed the threat of near-term inflation and suggested the recent move in longer-term rates was a sign of optimism in the markets regarding the economic recovery, while continuing to stress that fixing the still painful employment picture remains top priority. Economic data also continued to paint a positive picture, which may have added to the increase in rates, with last week's jump in retail sales being followed by another dose of strong housing data, in the form of new home sales, and larger-than-expected improvements in the Leading Index and durable goods orders. Moreover, initial jobless claims—albeit likely skewed by last week's severe weather—slowed more than expected and growth in regional manufacturing activity continued to accelerate.
As such, the high-flying market leaders of Information Technology and Consumer Discretionary sectors led most of the major market sectors lower. However, losses for the week were stemmed by the continued climb in the Energy sector as crude oil prices extended a rally and amid the economic recovery optimism, while the jump in yields buoyed the interest-rate sensitive Financials sector. Some apparent flight-to-safety helped the U.S. dollar rebound into positive territory toward the end of the week, but gold fell into the red on Friday.
Next week, the economic calendar will likely garner heavy attention given the recent action in the bond markets. The February ISM Manufacturing and Non-Manufacturing Indexes, along with Markit's Manufacturing and Services PMIs will get the ball rolling, along with the Fed's Beige Book—an anecdotal read on the nation's business activity that policymakers use to prepare for the next monetary policy meeting set to conclude on March 17. Rising inflation expectations have contributed to the rise in yields, so the prices components of all these reports are likely to command attention. However, the second half of the week has the potential to garner the heaviest scrutiny, with Fed Chairman Jerome Powell delivering remarks on the U.S. economy on Thursday in a virtual event hosted by the Wall Street Journal. Finally, the week will culminate with Friday's February nonfarm payroll report, giving a look at the employment front, which the Fed has gone to great lengths to signal it has no plans to tweak its policy until a full recovery is ensured.
The international economic calendar will also likely deliver some key data points/events that could move the markets notably: Australia—the Reserve Bank of Australia monetary policy decision. China—Manufacturing and Services PMIs. Eurozone—retail sales, CPI estimate and Markit's Eurozone Composite PMI, along with German factory orders and retail sales.
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