Schwab Market Update | January 21, 2021

Schwab Market Update

Stocks Mixed in Subdued Session

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U.S. equities finished mixed and near the flatline, as investors sifted through a slew of data and headlines. The closure of the highly contentious Presidential election process appeared to add to some of the positive sentiment, while the Information Technology sector continued to rally. The earnings front was headlined by Dow member Travelers Companies topping forecasts, while United Airlines posted a sizeable loss and Union Pacific fell despite relatively positive results. In economic news, housing construction activity jumping to close out Q4, regional manufacturing output surprisingly surged, and jobless claims decelerated unexpectedly but remained uncomfortably high. Treasuries were lower, lifting yields, and pressure on the U.S. dollar returned, while gold and crude oil prices were slightly lower. Europe finished lower in choppy action on the heels of the European Central Bank holding its highly accommodative policy stance steady, while markets in Asia finished mixed as the Bank of Japan left its monetary policy unchanged.

The Dow Jones Industrial Average lost 12 points to 31,176, the S&P 500 Index inched 1 point higher to 3,853, and the Nasdaq Composite increased 74 points (0.6%) to 13,531. In moderate volume, 890 million shares were traded on the NYSE and 7.1 billion shares changed hands on the Nasdaq. WTI crude oil nudged $0.18 lower to $53.13 per barrel. Elsewhere, the Bloomberg gold spot price ticked $0.30 lower to $1,871.54 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.4% at 90.09.

United Airlines Holdings Inc. (UAL $43) reported a Q4 loss of $6.39 per share, or a shortfall of $7.00 per share ex-items, compared to the FactSet estimate calling for a loss of $6.62 per share. Revenues fell 68.7% year-over-year (y/y) to $3.4 billion, roughly in line with the Street's forecasts. The airline's Q4 core cash burn rate was $19 million per day, an improvement from $24 million per day in Q3. UAL issued Q1 revenue guidance that was below estimates, but it did note that accelerated distribution of the COVID-19 vaccine may lead to faster improvement, but it is not including this potential in its outlook. The company added that it expects 2021 to be a transition year that is focused on preparing for a recovery. Shares finished solidly lower. 

Dow member Travelers Companies Inc. (TRV $149) posted Q4 earnings-per-share (EPS) of $5.10, or $4.91 ex-items, versus the Street's forecast of $3.18, with revenues rising 4.0% y/y to $8.4 billion, above the projected $7.3 billion. The insurance company said its results benefited from strong underlying underwriting income, driven by record net earned premiums and an underlying combined ratio which improved from the prior year quarter. Also, TRV added that it saw a strong renewal rate change in all three segments, including record renewal rate changes in its business insurance and bond and specialty insurance units. Shares were higher. 

Union Pacific Corporation (UNP $208) announced Q4 EPS of $2.05, or $2.36 ex-items, compared to the forecasted $2.25, as revenues declined 1.0% y/y to $5.1 billion, matching expectations and its estimate announced earlier this month. The company said its record Q4 results was due to its leveraging all three profitability drivers simultaneously—volume growth, productivity and pricing. UNP said while the economic outlook for 2021 remains uncertain, it will build off its solid 2020 performance to produce continued strong productivity through operational excellence. The rail company added that it expects its enhanced service product will support both solid core pricing gains while also increasing its share of the freight transportation market. Shares were lower.  

Q4 earnings season is rolling on and for a look at our latest views on all the major market sectors, including analysis of our outperform ratings on the Financials and Health Care sectors, and our underperform outlooks for the Utilities and Consumer Staples sectors check out our Schwab Sector Views: New Era in Washington.

With the political landscape cleared up but uncertainty remaining regarding the implications of the changed political front, visit our Market Insights page on www.schwab.com for our analysis of the new administration and the composition of Congress, including our WashingtonWISE podcast, Dems Take Control, but No Carte Blanche for Biden and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's article, Five Names for Investors to Know in the New Administration. Finally, be sure to follow us on Twitter @SchwabResearch.

Jobless claims slow, housing construction activity strong, regional manufacturing jumps

Weekly initial jobless claims (chart) came in at a level of 900,000 for the week ended January 16, below the Bloomberg consensus estimate of 935,000, and compared to the prior week's downwardly revised 926,000 level. The four-week moving average rose by 23,500 to 848,000, and continuing claims for the week ended January 9 fell by 127,000 to 5,054,000, south of estimates of 5,300,000. The four-week moving average of continuing claims declined by 67,000 to 5,126,250.

One of the major economic obstacles to a return to pre-pandemic activity is the labor market and Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Scar Tissue: Weak Jobs Report Emphasizes COVID's Scars, how small business trends bear watching—notably hiring plans as well as most significant constraints on hiring.

Housing starts (chart) for December rose 5.8% month-over-month (m/m) to an annual pace of 1,669,000 units—the fastest pace since late 2006—and well above forecasts of 1,560,000 units, and compared to November's upwardly revised pace of 1,578,000 units. Also, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, grew 4.5% m/m at an annual rate of 1,709,000, north of expectations of 1,608,000 units, and compared to the unrevised 1,639,000 unit pace in November. The stronger-than-expected housing construction came as housing starts and building permits for single-family structures—which make up the largest portion of activity—rose solidly to more than offset some weakness in multi-unit construction. 

The Philly Fed Manufacturing Index (chart) unexpectedly jumped further into expansion territory (a reading above zero) for January, rising to 26.5 versus estimates to tick higher to 11.8 from December's 11.1 level. Growth in new orders, shipments and employment all accelerated sharply. 

Treasuries were lower with the rate on the 2-year note little changed at 0.13%, while the yield on the 10-year note gained 1 basis point (bp) to 1.10% and the 30-year bond rate rose 2 bps to 1.86%.

Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, Why Longer-Term Treasury Yields Are Rising, how in many ways, it appears that the market is disconnected from the current state of the economy and politics. Kathy adds that in our view, the market is looking beyond current conditions and focusing on the future, where prospects suggest stronger growth and potentially higher inflation down the road. She notes that while the consensus expectation has been for stronger growth in the second half of 2021, the election results appear to have pulled those expectations forward. Kathy points out that with the presidency and majority in Congress held by one party, concerns about gridlock have given way to expectations of a faster recovery, more expansive fiscal policy, and higher inflation. She concludes that the recent move up in yields may be a bit too much, too soon, but the overall direction in yields is likely to remain higher.

Europe lower in choppy action following ECB monetary policy decision, Asia mixed

European equities finished lower in a choppy session, despite the continued rally in Information Technology issues, while Energy issues added to the downside pressure. The global markets appeared to cheer the changing leadership in the U.S. to keep the losses in check, while caution remained amid the festering threat of the resurgence in the COVID-19 virus and variants. The markets digested the unchanged highly accommodative monetary policy decision from the European Central Bank (ECB), which also left its Pandemic Purchase Program unchanged, but included a reiterated pledge that it stands ready to act if needed. The euro and British pound gained ground on the U.S. dollar, and bond yields in the core Eurozone regions and the U.K. traded higher. In other economic news, French manufacturing confidence surprisingly rose in January, but Italian industrial orders declined for November. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, An Investors' Guide to the 2021 Elections, how Joe Biden taking the Presidential oath of office yesterday in the U.S. marks the end of a long U.S. political contest, but a year of political challenges is just getting started overseas.

The U.K. FTSE 100 Index fell 0.4%, Germany's DAX Index ticked 0.1% lower, France's CAC-40 Index lost 0.7%, Italy's FTSE MIB Index and Spain's IBEX 35 Index declined 1.0%, and Switzerland's Swiss Market Index was down 0.3%.

Stocks in Asia finished mixed, with most markets finding some support from the closure on the U.S. political front as Joe Biden was sworn in as the 46th President of the world's largest economy. Meanwhile, the Bank of Japan (BoJ) left its monetary policy stance unchanged but suggested that options for further action remains on the table after projecting a rough economic patch in the near term but a solid rebound after that. The markets continued to focus on the rollout of the COVID-19 vaccine amid the persistent surge in new cases globally. Japan's Nikkei 225 Index rose 0.8%, even as the yen firmed a bit and data showed the nation's exports rose at a smaller pace than expected for December. The Hong Kong Hang Seng Index dipped 0.1% after a recent rally and China's Shanghai Composite Index advanced 1.1%. Australia's S&P/ASX 200 Index increased 0.8% and South Korea's Kospi Index gained 1.5%, on the heels of a report showing the country's exports jumped in January. India's S&P BSE Sensex 30 Index erased an early advance to record highs to decline 0.3%, with the markets reversing on news of a fire at the Serum Institute of India, a large producer of vaccines, including AstraZeneca PLC's (AZN $53) COVID-19 vaccine.

Schwab's Jeffrey Kleintop discusses the Top Five Global Investment Risks In 2021, noting that they are all surprises to the consensus view: problems with the vaccine rollout, geopolitical and trade tensions do not subside, fiscal and/or monetary policy tightens, a "zombie" economy, and interest rate/dollar shock. He reiterates 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. 

The international economic calendar will close out the week with a host of Markit manufacturing and services PMIs from across the globe, as well as CPI from Japan, and consumer confidence and retail sales from the U.K.

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