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Market Update

Schwab clients get the latest in-depth U.S. market news as well as analysis and commentary from respected sources, both proprietary and third party.


Posted: 1/18/2019 4:15 PM EST

Stocks Rallying to Close out Another Weekly Gain

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U.S. stocks continued to rally, posting a fourth-straight weekly gain ahead of a long holiday weekend. Trade optimism added more fuel to the fire amid multiple reports of progress being made regarding U.S.-China talks, joining a relatively upbeat start to earnings season, another gain in industrial production and eased Fed concerns. Stocks shrugged off the prolonged government shutdown, along with mixed results from Dow member American Express and Netflix and a drop in consumer sentiment. Treasury yields, the U.S. dollar and crude oil prices moved higher, while gold dropped.

The Dow Jones Industrial Average (DJIA) rallied 336 points (1.4%) to 24,706, the S&P 500 Index jumped 35 points (1.3%) to 2,671, and the Nasdaq Composite rose 73 points (1.0%) to 7,157. In moderately heavy volume, 1.0 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil advanced $1.68 to $54.04 per barrel and wholesale gasoline was $0.02 higher at $1.45 per gallon. Elsewhere, the Bloomberg gold spot price fell $11.09 to $1,280.96 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.3% to 96.39. Markets were nicely higher for the week, as the DJIA rose 3.0%, the S&P 500 Index grew 2.9%, and the Nasdaq Composite advanced 2.7%.

Netflix, Inc. (NFLX $339) reported Q4 earnings-per-share (EPS) of $0.30, versus the $0.24 FactSet estimate. Revenues rose 27.4% year-over-year (y/y) to $4.2 billion, roughly in line with estimates. Q4 domestic streaming subscriptions increased, but the number, along with the company's Q1 domestic subscription guidance, fell short of estimates. However, its Q4 international subscribers and outlook for Q1 both topped forecasts. The company's Q1 EPS and revenue guidance came in below the Street's expectations. Shares came under pressure.

Dow component American Express Co. (AXP $100) posted a Q4 gain of $2.32 per share, including a tax benefit of $0.58, which may have impacted comparability to the forecast of $1.80. Revenues rose 7.9% y/y to $10.5 billion, below the estimated $10.6 billion. Non-interest revenue was below expectations, as stronger-than-expected net card fees was met with softer-than-anticipated other fees and commissions. Net interest income was roughly in line with forecasts. The financial services company released full year revenue guidance with a midpoint slightly above forecasts, while its EPS outlook was below. Shares reversed to the upside.

Tesla Inc(TSLA $302) announced that the electric car company will reduce its full-time employee headcount by 7%. TSLA also cautioned that preliminary, unaudited results indicate that Q4 profits will fall from the previous quarter. TSLA was down sharply.

Schlumberger NV (SLB $45) announced Q4 profits of $0.39 per share, or a figure ex-items of $0.36 that matched estimates, as revenues were roughly flat y/y at $8.2 billion, above the expected $8.0 billion. SLB's production revenue was above forecasts, while drilling sales were slightly below. The oilfield services company said it expects a more positive supply/demand-balance sentiment to lead to a gradual recovery in the price of oil over the course of the year. SLB added that, in the meantime, the recent oil price volatility has introduced more uncertainty around the exploration & production (E&P) spending outlook for 2019, with customers generally taking a more conservative approach at the start of the year. However, "Based on our recent discussions

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses the energy sector amid the volatility in crude oil prices in his latest, Schwab Sector Views: Drilling Down on Energy. Brad notes that there are some bullish developments in the energy space that could help support the sector as crude oil prices and the sector have bounced back modestly from the sharp drop seen last year. However, he notes that there are also some bearish undertones, in our view, that compel us to recommend that investors keep a neutral position in the energy sector.

Industrial production data rises

The Federal Reserve's industrial production report (chart) showed a 0.3% month-over-month rise in December, compared to the Bloomberg estimate of a 0.2% gain and November's downwardly-revised increase of 0.4%. The seventh-straight monthly increase was led by the strongest rise in manufacturing output (1.1%) since February 2018, and a solid increase in mining production, more than offsetting a sharp drop in utilities activity (-6.3%) as warmer-than-usual temperatures lowered the demand for heating. Capacity utilization rose to 78.7% from the prior month's upwardly-revised 78.6% rate, slightly above forecasts of 78.5%. Capacity utilization is 1.1 percentage points below its long-run average.

The January preliminaryUniversity of Michigan Consumer Sentiment Index (chart) fell to 90.7 from December's final read at 98.3, and compared to expectations for a decline to 96.8. The consumer expectations and current economic condition components of the survey both were down. The 1-year inflation forecast was unchanged at 2.7%, and the 5-10 year inflation forecast ticked higher to 2.6% from the previous 2.5% rate. The index hit the lowest level since October 2016 and the report noted a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies.

Treasuries were lower, with the yield on the 2-year note advancing 5 basis points (bps) to 2.61%, the yield on the 10-year note rising 3 bps to 2.78%, and the 30-year bond rate gaining 2 bps to 3.10%. Markets carefully watched earnings season with an eye toward slowing growth and inflation concerns as fewer economic data releases during the government shutdown appeared foster uneasiness that markets may have a limited view of the economy. Schwab's Vice President of Trading and Derivatives for the Schwab Center for Financial Research, Randy Frederick, discusses in the video, Will the Government Shutdown Have an Effect on the Market?

As noted in the latest Schwab Market Perspective: Rally Return or Continued Caution, U.S. equities have rebounded as some macro concerns have eased, however risks remain and we don’t believe that stocks are yet fully in the clear—volatility will likely persist and our tactical recommendations remain modestly defensive. Recession concerns have receded somewhat, alongside waning worries that the Federal Reserve will go too far. That said economic growth is slowing and the Fed still has a difficult road to navigate—especially given its dual mandate of price stability and full employment. Brexit drama continues but the need for investors to worry may be limited.

Global markets close out a solid weekly gain with a Friday rally

European and Asian equities finished out a solid weekly gain with a rally, bolstered by increased trade optimism following recent reports suggesting progress on the U.S.-China trade front. The lift in trade optimism began with yesterday's Wall Street Journal (WSJ) story that U.S. Treasury Secretary Steven Mnuchin proposed lifting all or some of the tariffs currently imposed on China to hasten a trade deal—though Treasury officials denied that it offered any such recommendations. Asian stocks found support from the WSJ story, with Chinese markets leading the way, as the trade hope overshadowed lingering economic worries as some heavy data looms on next week's calendar, headlined by this weekend's Q4 GDP report, which is expected to show growth slowed to a 6.4% y/y pace from Q3's 6.5% expansion. Equities in Japan were not far behind with the yen losing some ground despite December inflation figures that moved higher and as the nation's November industrial production data was revised to a smaller decline than originally reported.

Gains for European markets accelerated today, along with the rally in the U.S., as yesterday's WSJ news was followed by reports today that China may have offered to boost U.S. imports to try to shrink the trade deficit. Technology, energy and materials issues, along with auto shares, in the region helped lead the gains amid apparent hopes that a trade deal might boost China's weakening economy and help combat the global growth slowdown. On the economic front, December U.K. retail sales declined, as worries of slowing growth, along with weaker consumer spending, seemed to reemerge among investors, while the Eurozone current account surplus narrowed. Brexit fears seemed to take a backseat, though market participants will carefully watch the U.K. government's next proposal as the March 29 Brexit deadline nears. The British pound and the euro saw some pressure versus the U.S. dollar, while bond yields in the region were mixed. A U.S.-China trade deal is one of the five global upside risks that Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes his latest article, What Could Go Right in 2019?, where he lays out why having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome is a key to successful investing.

Weekly gains keep coming in 2019

Stocks posted a fourth-straight weekly gain to usher in 2019, with financials leading the way and unofficially kicking off a relatively positive start to earnings season, highlighted by results from Dow member Goldman Sachs Group, Inc. (GS $203), Bank of America Corp(BAC $29) and Citigroup Inc(C $63). Thus far, of the 56 S&P 500 companies that have reported, roughly 55% have topped sales forecasts and 80% have topped profit estimates per data compiled by Bloomberg. The 2019 rally was further bolstered by growing optimism of a U.S.-China trade deal, courtesy of a some reports of progress being made, which helped take the focus off the slowing global economy, the prolonged government shutdown, and Brexit uncertainty as this week the U.K. government lost its bid to pass an original divorce plan, but endured a no-confidence vote in Parliament. Treasury yields moved higher, with the 10-year note continuing to bounce off the near one-year low seen earlier this month, while the U.S. Dollar Index advanced and crude oil prices added to their rally.

This sets the stage for a shortened week, in which the economic calendarwill be full, courtesy of December existinghome sales reports, the Leading Index for last month, and the preliminary Markit business activity reports for January. The economic calendar could continue to more limited if the government shutdown continues.

Please note: the U.S. Markets will be closed on Monday in observance of the Martin Luther King, Jr Day holiday.

However, earnings season is poised to kick into a higher gear next week and will likely dominate the attention. The international economic front will also attract some market focus, as the Bank of Japan and European Central Bank are expected to keep their monetary policy stances unchanged.

Other international reports that are due out next week and deserve a mention include: Australia—employment change. China—retail sales, industrial production, and GDP. Japan—trade balance and consumer price inflation statistics. Eurozone—Markit's business activity reports, as well as German business and investor confidence data. U.K.—employment change.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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