Schwab Market Update | December 8, 2021

Schwab Market Update

Markets Finish Higher to Keep Rally Intact

 

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U.S. equities finished higher to add to a two-session rally that took the S&P 500 back to within a stone's throw of record high territory, courtesy of eased concerns regarding the Omicron variant. The markets have been volatile lately with the yield curve flattening as the variant uncertainty was accompanied by the recent hawkish pivot by the Fed. Aiding in sentiment, preliminary results of Pfizer's and BioNTech's study of their vaccine against the variant showed three doses signaled neutralization. In other equity news, Toll Brothers topped Q4 earnings and revenue expectations, but Stitch Fix offered softer-than-expected guidance. On the economic front, job openings came in above forecasts and the quit rate fell, while mortgage applications rose. Treasuries were mixed, and the U.S. dollar traded lower, while crude oil prices were higher, and gold nudged to the upside in choppy action. Europe finished mixed following a recent rebound, while markets in Asia were higher amid the tempered variant worries.   

The Dow Jones Industrial Average rose 35 points (0.1%) to 35,755, the S&P 500 Index increased 14 points (0.3%) to 4,701, and the Nasdaq Composite gained 100 points (0.6%) to 15,787. In heavy volume, 4.1 billion shares of NYSE-listed stocks were traded, and 4.5 billion shares changed hands on the Nasdaq. WTI crude oil advanced $0.31 to $72.36 per barrel. Elsewhere, the gold spot price gained $2.00 to $1,786.70 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.88.

Pfizer Inc. (PFE $51) and partner BioNTech SE (BNTX $292) announced that preliminary results of a study of their COVID-19 vaccine showed that three doses neutralize the Omicron variant, while two doses show significantly reduced neutralization. The companies added that they continue to advance the development of a variant-specific vaccine for Omicron and expect to have it available by March in the event that an adaption is needed to further increase the level and duration of protection, with no change expected to the companies' four billion dose capacity for 2022. Shares of both companies were lower.

Toll Brothers Inc. (TOL $72) reported fiscal Q4 earnings-per-share (EPS) of $3.02, above the $2.48 FactSet estimate, as home sales rose 18.0% year-over-year (y/y) to $3.0 billion, north of the forecasted $2.9 billion. The luxury homebuilder said demand remains very strong, as the housing market continues to benefit from solid fundamentals, including favorable demographics, pent up demand from over a decade of underproduction of new homes, low mortgage rates, a tight resale market, and permanent changes to the way Americans view life, work and home. The company added that it believes these trends will continue to drive strong well into the future. However, TOL noted that it, like the rest of the industry, continue to be challenged by significant supply chain and labor constraints that are extending delivery times for its homes. Shares were higher. 

Stitch Fix Inc. (SFIX $19) posted a fiscal Q1 loss of $0.02 per share, compared to the $0.14 per share shortfall that was expected, with revenues rising 19.0% y/y to $581 million, above the forecasted $571 million. The online personal shopping and styling service said it saw strong performance from both its Fix and Freestyle segments as it introduced new product features and expanded merchandise selections. However, the company said its active clients were below estimates, while it issued Q2 guidance that came in below forecasts. Shares fell over 20%. 

For a look at the recently ramped-up volatility, read the Schwab Center for Financial Research's commentary, Market Volatility: Schwab's Quick Take, where we point out how from a global stock market perspective, policymaker and consumer responses will be key regarding the economic impact. We discuss how market volatility is unsettling, but historically not unusual, and if you've built an appropriately diversified portfolio that matches your time horizon and risk tolerance, it's likely the recent market drop will be a mere blip in your long-term investing plan. However, it can be hard to do nothing when markets are rough.

Schwab's Chief Investment Strategist Liz Ann Sonders also offers her 2022 U.S. Market Outlook: Under Pressure, where she discusses where we go from here given that the pandemic is not exactly behind us. She discusses the macro backdrop that includes slower growth and a move to tighter monetary policy, which tends to usher in higher intra-market correlations and greater tail risks. We recommend a bias toward quality and not trying to time the market. There are concerns for 2022, but investing should always be a disciplined process over time.

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

Job openings higher than expected, mortgage applications rise

As labor shortage remains a drag on business sentiment, the Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, showed a rise to 11.03 million jobs available to be filled in October, from September's upwardly-revised 10.60 million rate. The Bloomberg consensus estimate called for a 10.47 million level. The report showed the hiring rate remained at September's 4.4% level, and separations declined to 4.0% from the prior month's 4.2% pace. The quit rate fell to 2.8% from September's 3.0% pace.

The MBA Mortgage Application Index increased 2.0% last week, following the prior week's drop of 7.2%. The rise came as a 9.0% jump for the Refinance Index more than offset a 5.0% fall for the Purchase Index. The average 30-year mortgage rate dipped 1 basis point (bp) to 3.30%.

Treasuries were mixed, as the yield on the 2-year note lost 1 bp to 0.68%, while the yield on the 10-year note rose 4 bps to 1.52%, and the 30-year bond rate gained 10 bps to 1.90%.

The Treasury yield curve has flattened noticeably as of late amid the Omicron variant uncertainty and as the Fed is expected to discuss speeding up its monthly asset purchase tapering campaign at next week's monetary policy meeting.

Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest 2022 Fixed Income Outlook: Rough Waters how we expect another wave up in bond yields in 2022 as central banks around the world shift away from the very easy policies of the past few years. Kathy points out that with the pandemic-era policies ending, investors should be prepared for shifting tides and the risks and opportunities they present.

Tomorrow's economic calendar will be light, offering only weekly initial jobless claims for the week ended December 3, forecasted to show 228,000 first-time unemployment applications were filed.

Europe mixed following a two-day bounce, Asia finishes higher 

European equities finished mixed on the heels of a two-day recovery amid eased concerns about the ultimate impact of the new COVID-19 Omicron variant that has been detected in several countries around the world, and has roiled the markets as of late. This new variant has added more uncertainty regarding future economic activity, the ongoing supply-chain challenges, and rising inflation pressures, as well as government and central bank responses. Last week's comments from Fed Chairman Jerome Powell in the U.S. continued to garner attention after he pivoted to a more hawkish stance to combat the persistent inflation pressures by saying the Central Bank will discuss speeding up its tapering campaign despite the uncertainty toward the variant. In economic news, French business sentiment improved more than expected for November. The euro rose versus the U.S. dollar but the British pound was nearly flat, while bond yields in the Eurozone and the U.K. traded to the upside.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest 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.

The U.K. FTSE 100 Index was little changed and Switzerland's Swiss Market Index traded 0.7% higher, while France's CAC-40 Index was down 0.7%, Germany's DAX Index decreased 0.8%, Italy's FTSE MIB Index fell 1.4%, and Spain's IBEX 35 Index traded 1.0% lower.

Stocks in Asia finished broadly higher as choppiness in the markets continued with preliminary data regarding the impact of the new Omicron variant suggesting it may be less lethal than the Delta variant. The markets also continued to digest central bank decisions this week in the region as the Reserve Bank of India decided to keep its monetary policy stance unchanged and to retain its accommodative policy stance as long as necessary. The decision follows yesterday's announcement out of Australia to keep its monetary policy unchanged and comes ahead of next week's key decision in the U.S. The global markets have been volatile due to the uncertainties and following last week's hawkish comments from Fed Chairman Powell in the U.S. The central bank decisions also follow this week's announcement out of China to cut the reserve requirement ratio—the amount of cash that most banks must keep in reserve—as expected to combat the country's slowing economy. The variant has fostered uncertainty regarding the ultimate economic impact and government responses, adding to the uncertainty regarding ongoing supply-chain issues and the resulting inflationary pressures.

Schwab's Jeffrey Kleintop offers his 2022 Global Outlook: Slowing But Not Slow, noting how global GDP surpassed its pre-pandemic level in 2021, and although it's expected to slow in 2022, it is still expected to grow at an above average rate. In addition, Jeff adds that fiscal policy in the U.K. and Europe is expected to support economic growth, while central banks have been slow to end their loose monetary policy, and supply and inflationary pressures may soon ease up. Amid all this, Jeff highlights four themes for investors: consider international stocks, go green and look at eco-friendly investments, look into firms that are buying back shares, and guard against potential gluts that might emerge. In other economic news in the region, Japan's Q3 GDP was revised to a slightly larger dip than expected. 

Japan's Nikkei 225 Index increased 1.4%, with the yen holding steady, and China's Shanghai Composite Index rose 1.2%. The Hong Kong Hang Seng Index ticked 0.1% higher, India's S&P BSE Sensex 30 Index rallied 1.8%, Australia's S&P/ASX 200 Index gained 1.3%, and South Korea's Kospi Index moved 0.3% higher.

Reports on tomorrow's international economic calendar include CPI and PPI from China, machine tool orders from Japan, and trade figures from Germany.

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