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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: 1/28/2020 11:15 AM EST

Stocks Trimming Yesterday's Drop

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U.S. stocks are trimming yesterday's drop that came amid lingering fears of the spreading of the coronavirus, with jumps in Consumer Confidence and regional manufacturing output helping aid the recovery. The markets are digesting some mixed earnings reports from Dow members 3M, United Technologies and Pfizer, along with Harley-Davidson, while the Fed is set to begin its two-day monetary policy meeting today. Treasury yields are recovering a bit from some recent weakness, shrugging off softer-than-expected core components of durable goods orders. The U.S. dollar and crude oil prices are higher, while gold is seeing some pressure. Asia finished mostly lower but markets in China and Hong Kong remained closed for holidays, and Europe is rebounding.

At 10:49 a.m. ET, the Dow Jones Industrial Average is up 0.7%, the S&P 500 Index is rising 1.0%, and the Nasdaq Composite is advancing 1.2%. WTI crude oil is gaining $0.63 to $53.77 per barrel, Brent crude oil is increasing $0.58 at $59.16 per barrel, and wholesale gasoline is $0.03 higher at $1.52 per gallon. The Bloomberg gold spot price is dropping $13.28 at $1,568.78 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is moving 0.2% higher to 98.14.

Dow member 3M Company (MMM $168) reported Q4 earnings-per-share (EPS) of $2.15 excluding charges related to restructuring and litigation, versus the $2.11 FactSet estimate, as revenues rose 2.1% year-over-year (y/y) to $8.1 billion, roughly in line with the Street's expectation. MMM issued 2020 EPS guidance that had a midpoint below forecasts. As part of the company's restructuring efforts, it announced that it will reduce its headcount by 1,500 jobs. Shares are solidly lower.

Dow component United Technologies Corporation (UTX $153) posted Q4 EPS of $1.32, or $1.94 ex-items, compared to the projected $1.84, with revenues rising 8.0% y/y to $19.6 billion, north of the expected $19.4 billion. Shares are trading higher.

Dow member Pfizer Inc. (PFE $39) announced a Q4 loss of $0.06 per share, or EPS of $0.55 ex-items, versus the expected profit of $0.58 per share, as revenues declined 9.0% y/y to $12.7 billion, roughly in line with forecasts. PFE issued 2020 EPS and revenue guidance with midpoints south of the Street's estimates. PFE is trading to the downside.

Harley-Davidson Inc. (HOG $33) reported Q4 earnings of $0.09 per share, or $0.20 ex-items, compared to the forecasted $0.24, with revenues decreasing 8.5% y/y to $874 million, below the projected $922 million. Shares are lower.

With Q4 earnings season kicking into high gear, read why we continue to feel how fundamentals continue to support an overweight to large caps (S&P 500) at the expense of small caps (Russell 2000) in Schwab's Chief Investment Strategist Liz Ann Sonders' article, Best of What's Around: Sticking with Large Caps. Moreover, we have updated our ratings for the major market sectors as discussed in the Schwab Center or Financial Research's Schwab Sector Views: New Sector Ratings for the New Year. We upgraded communications services stocks to marketperform from underperform and the financial sector to outperform from marketperform, while downgrading the materials and utilities sectors to underperform from marketperform.

Delphi Technologies PLC. (DLPH $16) is surging over 60% after agreeing to be acquired by BorgWarner Inc. (BWA $36) in an all-stock transaction valued at about $3.3 billion. Under the terms of the deal, DLPH stockholders will receive a fixed exchange ratio of 0.4534 shares of BWA for each share owned, with BWA shareholders owning approximately 84% of the combined company and DLPH stockholders expected to own 16%. BWA is trading lower.

Consumer Confidence jumps, durable goods orders mixed, as Fed starts two-day meeting

The Conference Board's Consumer Confidence Index (chart) jumped to 131.6 in January, from December's upwardly-revised 128.2 level, versus the Bloomberg estimate of 128.0. The surge for the index to the highest level since August 2019 came as both the Present Situation Index and Expectations Index of business conditions for the next six months improved solidly. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—increased to 37.4 from the 33.5 level posted in December.

December preliminary durable goods orders (chart) rose 2.4% month-over-month (m/m), well above estimates of a 0.3% increase and compared to November's downwardly-revised 3.1% decline. The volatile headline figure jumped as orders for transportation grew sharply, due to a surge in defense aircraft and parts. However, ex-transportation, orders dipped 0.1% m/m, versus forecasts of a 0.3% gain and versus November's negatively-adjusted 0.4% decline. Moreover, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 0.9%, compared to projections of a 0.2% rise, while the prior month's figure was revised lower to a 0.1% gain. Orders for computers, machinery, and electrical equipment and appliances fell, while demand for communications equipment moved solidly higher.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index posted a 2.6% y/y gain in home prices in November, versus expectations of a 2.4% increase. Compared to the prior month, home prices were 0.5% higher on a seasonally adjusted basis, compared to forecasts of a 0.4% gain.

The Richmond Fed Manufacturing Activity Index for January jumped back into a level depicting expansion (a reading above zero), surging to 20 versus forecasts calling for the figure to rise to -3 from December's -5 level. New orders, shipments and order backlogs all moved into expansion territory.

Treasuries are lower, with the yield on the 2-year note rising 2 basis points (bps) to 1.45%, while the yields on the 10-year note and the 30-year bond are gaining 4 bps to 1.65% and 2.10%, respectively. Schwab's Chief Fixed Income Strategist Kathy Jones provides a look at fixed income investing in her article, Bonds vs. Bond Funds: Which is Right for You?.

Bond yields are rebounding slightly, along with the equity markets, after seeing pressure amid ramped-up fears regarding the impact of the spread of the coronavirus that began in China, as discussed by Schwab's Liz Ann Sonders in her latest article, Virus: Could it be the Catalyst to Change Sentiment? The Federal Open Market Committee (FOMC) is set to commence its two-day monetary policy meeting later this morning. The FOMC has made it clear it will likely be on hold for some time, but scrutiny of the FOMC's statement and customary press conference by Chairman Jerome Powell could ramp up, given the eased trade tensions, signs of global stabilization, subdued inflation, continued efforts by the Central Bank to calm the overnight lending markets, and the aforementioned coronavirus worries, that have occurred since its last meeting in December.

Europe rebounding from yesterday's drop

European equities are recovering in late-day action from yesterday's global market slide that came courtesy of exacerbated fears regarding the spread of the coronavirus, with earnings season ramping up and ahead of tomorrow's monetary policy decision from the Fed. Shares of SAP SE (SAP $132) are seeing some pressure even after posting stronger-than-expected earnings and raising its guidance as the German software company missed on revenue expectations. The euro and British pound are lower versus the U.S. dollar, while bond yields in the region are higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, Will Europe Lead In 2020 As 2019 Risks Fade, how the receding risks posed by Brexit and the trade wars should provide a tailwind to Europe's economy. Jeff adds that European economic data is improving relative to economist estimates at a pace not seen in years, but notes that there is some risk that sequels to trade wars and Brexit could cause pressures to reemerge later this year with the potential to undermine the Eurozone’s improving economic momentum.

The U.K. FTSE 100 Index is up 0.9%, France's CAC-40 Index and Switzerland's Swiss Market Index are gaining 1.0%, Germany's DAX Index is advancing 0.8%, Italy's FTSE MIB Index is rallying 2.4%, and Spain's IBEX 35 Index is rising 1.2%.

Asia lower as virus concerns remain

Stocks in Asia finished lower with the global markets falling on intensified fears regarding the spread of the coronavirus that has hampered activity in the key Chinese Lunar New Year, while digesting the ramped-up earnings season in the U.S. and awaiting tomorrow's monetary policy decision from the Fed. Japan's Nikkei 225 Index declined 0.6%, with the yen choppy after seeing some support from safe-haven posturing as of late, while India's S&P BSE Sensex 30 Index moved 0.5% to the downside. South Korea's Kospi Index dropped 3.1% and Australia's S&P/ASX 200 Index fell 1.4%, with both markets returning to action following yesterday's holiday breaks. Volume remained lighter than usual with markets in China and Hong Kong continuing to be closed for holidays. Schwab's Jeffrey Kleintop, discusses the Top Ten Global Risks For Investors in 2020, in his article, pointing out that they are all surprises to the consensus view: return of inflation, trade tensions don’t fade, manufacturing recovery fails, Brexit ends badly, rising costs prevent earnings rebound, job cuts, geopolitical conflict, surprise election outcome, increased regulation, and ineffective monetary policy. Jeff adds that having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome are key to successful investing.

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