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Stocks Continue to Notch Weekly Gains

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U.S. stocks capped off another weekly gain that began after the Christmas Eve tumble, ahead of a long holiday weekend. U.S.-China trade optimism, bolstered by another round of meetings scheduled for next week, underpinned the markets, along with an agreement to avert another government shutdown, which was followed by President Donald Trump's emergency declaration to cover the shortfall in border security funding. Stocks shrugged off a mixed earnings front, with NVIDIA rising after its report but Deere falling after delivering its results. Treasury yields were mixed as a snapped positive streak for industrial production was accompanied by a stronger-than-expected rebound in consumer sentiment. The U.S. dollar dipped, while gold and crude oil prices rose.

The Dow Jones Industrial Average (DJIA) rose 444 points (1.7%) to 25,883, the S&P 500 Index gained 30 points (1.1%) to 2,776, and the Nasdaq Composite added 45 points (0.6%) to 7,472. In moderately-heavy volume, 947 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil advanced $1.18 to $55.59 per barrel and wholesale gasoline increased $0.06 to $1.57 per gallon. Elsewhere, the Bloomberg gold spot price grew $8.77 to $1,321.35 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—dipped 0.1% to 96.88. Markets were nicely higher for the week, as the DJIA surged 3.1%, the S&P 500 Index jumped 2.5%, and the Nasdaq Composite rallied 2.4%.

NVIDIA Corporation (NVDA $157) reported a Q4 gain of $0.92 per share, or earnings-per-share (EPS) of $0.80 ex-items, versus the FactSet estimate calling for a profit of $0.77. Revenues decreased 24.3% year-over-year (y/y) to $2.2 billion, roughly matching projections. The company released datacenter revenues that missed estimates, while management stated it expected fiscal 2020 revenues to be "flat or down slightly" y/y and that it fully expects to return to sustained growth. Shares rose.

PepsiCo, Inc. (EP $116) announced Q4 EPS ex-items of $1.49, in line with forecasts, with revenues flat y/y at $19.5 billion, matching estimates. The beverage and snack producer's organic revenue growth that broadly surpassed expectations. The company issued full-year EPS guidance that was below expectations, but shares traded higher as PEP raised its annualized dividend by 3% to $3.82 per share and the Street appears to be reacting favorable to its multi-year productivity plan.

CBS Corporation (CBS $51) reported Q4 EPS of $1.49, or $1.50 ex-items, versus the forecasted $1.53, with revenues growing 2.6% y/y to $4.0 billion, slightly below the estimated $4.1 billion. However, the company's direct-to-consumer (DTC) subscription results that hit its target ahead of schedule and guidance for DTC growth seem to be getting cheered by the Street and shares were nicely higher.

Deere & Company (DE $159) announced fiscal Q1 EPS of $1.54, versus the forecasted $1.76, with net sales of equipment coming in at $6.9 billion, in line with estimates. Management noted headwinds from higher costs for raw materials and logistics and "customer concerns over tariffs and trade policies," but added that its construction and forestry machinery have continued at a "strong pace." DE reaffirmed its full-year guidance, noting that it believes cost pressures should abate and hopefully it will soon have more clarity around trade issues, and it remains cautiously optimistic about its prospects for the year ahead. Shares traded to the downside.

Mattel Inc. (MAT $14) dropped sharply after the toy company issued full-year operating earnings guidance that was well below the Street's expectations and said it sees Q1 gross sales to be lower y/y.

Industrial production falls, while consumer sentiment moves higher

The Federal Reserve's industrial production report (chart) showed a 0.6% month-over-month (m/m) fall in January, snapping a string of seven-straight monthly gains, compared to the Bloomberg estimate and December's downwardly-revised increase of 0.1%. Manufacturing output decreased, primarily as a result of a large drop in motor vehicle assemblies, while mining and utilities production rose. Capacity utilization declined to 78.2% from the prior month's upwardly-revised 78.8% rate, slightly below forecasts of 78.7%. Capacity utilization is 1.6 percentage points below its long-run average.

The February preliminary University of Michigan Consumer Sentiment Index (chart) rose to 95.5 from January's final read at 91.2—which was a two-year low—and compared to expectations for a rise to 93.7. The consumer expectations and current economic condition components of the survey both were up. The 1-year inflation forecast decreased to 2.5% from 2.7%, and the 5-10 year inflation forecast descended to 2.3% from the previous 2.6% rate.

The Import Price Index (chart) fell 0.5% m/m for January, south of projections of a 0.2% loss, following December's unrevised 1.0% decline. Compared to last year, prices were down by 1.7%, slightly below forecasts of a 1.6% descent and compared to December's upwardly revised 0.5% decrease.

The Empire Manufacturing Index showed output from the New York region rose more than expected and remained at a level denoting expansion (a reading above zero) for February. The index increased to 8.8 from January's unrevised 3.9 level, with the forecast calling for an increase to 7.0.

Treasuries were mixed, with the yield on the 2-year note rising 2 basis points (bps) to 2.51% and the yield on the10-year note ticking 1 bp higher to 2.66%, while the yield on the 30-year bond dipped 1 bp to 2.99%. Bond yields mostly rose after a recent tick lower that was likely somewhat fostered by the Fed's recent pivot to a more dovish stance as discussed by Schwab's Chief Fixed Income Strategist Kathy Jones in her latest article, Rate Hike Pause: Why Did the Federal Reserve Change its Tone?.

Please note: All U.S. markets will be closed on Monday in observance of the Presidents' Day holiday.

Europe higher on global trade developments, while Asia mostly drops

European equities finished broadly higher, following mixed U.S. markets yesterday on weaker-than- expected retail sales data out of the U.S., while investors closely watched Beijing for signs of U.S./China trade talk progress. The White House released a statement that the world's two largest economies had engaged in detailed and intensive discussions, but that much work remains on trade negotiations. Spanish Prime Minister Pedro Sanchez is anticipated to call a snap general election following parliament's rejection of his 2019 budget proposal. The economic data in the region was mixed as U.K. retail sales bounced back more than expected in January, on the heels of U.S. retail data for December seeing the biggest monthly drop in nine years yesterday. European Union new car registrations continued to decrease and the Eurozone trade surplus shrank slightly more than expected. Bond yields in the region were mixed and the British pound gained ground on the U.S. dollar. The euro saw some pressure after European Central Bank board member Benoit Coeure suggested that new stimulus measures are possible, as the slowdown in the region is "clearly stronger and broader" than expected and the inflation "path also will be shallower." 

Stocks in Asia finished mostly lower, with weaker retail sales data in the U.S. and hopes of a trade deal between the world's two largest economies among the macro concerns that appeared to weigh on investors' minds. Yesterday's U.S. retail sales data seemed to shock many economists and causing markets to question the health of the consumer. A week of U.S./China trade talks ended, while U.S. Trade Representative Robert Lighthizer said that both sides made headway on difficult issues. Chinese President Xi Jinping stated that China was "willing to solve the bilateral economic disputes and frictions through cooperation," but that "cooperation has principles." Chinese stocks saw increased pressure as inflation data missed expectations to counter yesterday's much stronger-than-expected exports numbers. Japanese stocks fell as the yen extended yesterday's gains versus the U.S. dollar. South Korean markets came under pressure as some key technology issues trimmed gains from earlier in the week. Indian stocks dipped as political uncertainty ahead of national elections continued to weigh, while trade data was set to be released after the closing bell. India's January exports rebounded a bit y/y while imports were flat. However, Australian equities managed to eke out a gain with the energy sector rising amid this week's gains for crude oil prices. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Tax War: Will Global Competition to Lower Taxes Lift Growth?, discussing the potential for global competition to lower corporate tax rates, aimed at supporting slowing global economic and earnings growth.

Stocks continue weekly string of gains

U.S. stocks finished higher for the seventh week out of eight, with earnings season continuing to be mostly better than expected, while optimism of a trade deal between the U.S. and China—or at least a potential push-out of the March 1 tariff truce deadline—and a deal to avert a second government shutdown in two months bolstered conviction. The earnings front headed down the backstretch and with nearly 80% of S&P 500 companies having reported thus far, about 60% have topped revenue forecasts and roughly 71% have bested profit projections, per data compiled by Bloomberg. Dow member Cisco Systems Inc. (CSCO $49) highlighted the week's earnings calendar though fellow Dow component Coca-Cola Company (KO $46) was punished by its results. Energy, materials and industrials led a broad-based advance for the major sectors—with the defensive utilities sector the lone decliner—amid the trade optimism, which also helped boost crude oil prices despite a much larger-than-expected build in oil inventories, along with the Venezuela turmoil and recent reports of further supply cuts by Saudi Arabia. Treasury yields and the U.S. dollar nudged higher even as inflation data suggested pricing pressures remain subdued and the delayed December retail sales report—due to the shutdown—surprisingly dropped to likely keep recession concerns simmering but Fed worries in check. These moves came as economic concerns outside the U.S., notably China and Europe, appeared to continue to buoy the demand for the greenback and U.S. government securities. 

Next week earnings season will continue to head toward the finish line and the economic calendar will be cut a bit short by Monday's holiday. However, housing and manufacturing will be in focus, with the NAHB Housing Market Index and existing home sales sandwiching the Philly Fed Manufacturing Index, preliminary durable goods orders (for December) and Markit's Manufacturing PMI Index. Also, the Fed will deliver the minutes from its January monetary policy decision that concluded with a more dovish statement, the Leading Index and Markit's Services PMI Index.   

As noted in the latest Schwab Market Perspective: Be Careful What You Wish For, the sharp rebound in U.S. stocks since the Christmas Eve 2018 low has been a welcome development for the bulls, but we are concerned that the pendulum may have swung a bit too far. The fourth quarter 2018 earnings season has been healthy, but estimates for this year’s first quarter have descended into negative territory. Meanwhile, the Fed has turned more dovish; but why and for how long are relevant questions. Trade continues to be at the center of investors’ attention—the recent positive news from talks with China may be overplayed and there are other potential trade disputes simmering.

International reports that could move the markets next week include: Australia—employment change. China—new home prices and lending statistics. India—trade balance. Japan—core machine orders, trade balance and consumer price inflation. Eurozone—consumer confidence, Markit's business activity reports and consumer price inflation, along with German investor and business sentiment and Q4 GDP. U.K.—employment change. 

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