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Schwab Market Update

Markets Gain Amid Inauguration, Earnings and Data

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U.S. equities finished higher, as investors focused on the political front as a highly contentious Presidential election came to a close with the swearing in of Joe Biden as the 46th president of the United States. Information Technology issues led the way, along with the Communications Services sector, as the markets perused a host of results as Q4 earnings season heated up. Earnings from Morgan Stanley, along with Dow members Procter & Gamble and UnitedHealth, fostered mixed reactions, while Netflix rallied on its much stronger-than-expected subscriber additions and cash flow guidance. Housing was the focus of the economic front, with homebuilder sentiment retreating for a second month from November's record high and mortgage applications pulling back from the prior week's jump. Treasuries were little changed, as was the U.S. dollar, while gold was solidly higher and crude oil prices saw modest gains. Markets in both Europe and Asia finished to the upside.

The Dow Jones Industrial Average rose 258 points (0.8%) to 31,188, the S&P 500 Index was up 53 points (1.4%) at 3,852, and the Nasdaq Composite increased 260 points (2.0%) to 13,457. In heavy volume, 992 million shares were traded on the NYSE and 6.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.33 to $53.31 per barrel. Elsewhere, the Bloomberg gold spot price jumped $28.89 to $1,869.17 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was unchanged at 90.50.

Netflix Inc. (NFLX $586) announced Q4 earnings-per-share (EPS) of $1.19, below the $1.36 FactSet estimate, as revenues rose 21.5% year-over-year (y/y) to $6.6 billion, roughly in line with the Street's expectation. The company's total streaming paid net additions was 8.5 million, well above the expected 6.5 million. The company said it is becoming an increasingly global service with a noticeable portion of its streaming additions coming outside North America.

NFLX issued Q1 EPS and revenue guidance that was above expectations, while its total streaming additions outlook was below forecasts. The company added that it believes it is very close to becoming sustainably free cash flow positive and it currently anticipates free cash flow will be around break even and it believes it no longer has a need to raise external financing for its day-to-day operations. NFLX also said as it generates excess cash, it intends to explore returning cash to shareholders through ongoing stock buybacks. Shares rallied over 15%.  

Morgan Stanley (MS $75) posted Q4 EPS of $1.81, well above the projected $1.30, with revenues rising 25.6% y/y to $13.6 billion, easily topping the expected $11.6 billion. The company said it saw "excellent performance across all three businesses and geographies," headlined by solid y/y gains in investment banking, and sales and trading unit revenues. MS said it enters 2021 with significant momentum. Shares dipped. 

Dow member Procter & Gamble Company (PG $132) announced fiscal Q2 EPS of $1.47, or $1.64 ex-items, compared to the expected $1.51, as revenues rose 8.0% y/y to $19.7 billion, above the forecasted $19.3 billion, with organic sales—excluding acquisitions, divestitures and foreign exchange—growing 8.0%. The company said it delivered another strong quarter of results across all key measures. PG raised its full-year guidance, noting that it expects commodity cost impact to be neutral y/y and it increased its outlook for repurchases in 2021. Shares were lower. 

Dow component UnitedHealth Group Incorporated (UNH $351) reported Q4 profits of $2.30 per share, or $2.52 ex-items, versus forecasts of $2.41, as revenues rose 7.6% y/y to $65.5 billion, north of the projected $65.0 billion. The company said its results reflect continued strong performance, impacted by COVID-19 care costs, continued voluntary consumer and customer assistance initiatives and other pandemic-related factors. UNH reaffirmed its full-year EPS outlook, including a potential net unfavorable impact to accommodate continuing COVID-19 effects and the residual impact of people deferring care in 2020, along with unemployment and other economy-driven factors. Shares slipped slightly.

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

The political front remained in focus as President-elect Joe Biden was sworn in as the 46th president, which came after Treasury Secretary nominee Janet Yellen's confirmation hearing yesterday. For a look at the impact of the changed political front and for our outlooks on equities, bonds and the global markets for 2021, visit our Market Insights page on where you can also listen to our WashingtonWISE podcast, Dems Take Control, but No Carte Blanche for Biden. Finally, be sure to follow us on Twitter @SchwabResearch.

Housing data slumps

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment in January unexpectedly declined to 83 versus the Bloomberg consensus estimate calling for it to remain at December's 86 reading. However, a level north of 50 depicts positive conditions. The index retreated for a second-straight month from November's record high and the NAHB said, "While housing continues to help lead the economy forward, limited inventory is constraining more robust growth. A shortage of buildable lots is making it difficult to meet strong demand and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability."

In other housing news, the MBA Mortgage Application Index decreased by 1.9% last week, following the prior week's 16.7% jump. The pullback came as the Refinance Index fell 4.7% to more than offset a 2.7% gain for the Purchase Index. The average 30-year mortgage rate increased 4 basis points (bps) to 2.92%.

Treasuries were little changed, as the yields on the 2-year and 10-year notes were flat at 0.13% and 1.09%, respectively, while the 30-year bond rate ticked 1 bp lower to 1.83%.

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.

More housing data is in store on tomorrow's economic calendar, courtesy of the December housing starts and building permits report, with starts estimated to have increased 0.8% month-over-month (m/m) to an annualized level of 1,560,000 units and permits to have declined 1.8% m/m to 1,605,000 units. Weekly initial jobless claims for the week ended January 16 will also be released, forecasted to show 935,000 first-time applications for unemployment were filed. The Philly Fed Manufacturing Index will round out the docket, anticipated to tick higher to 11.3 for January from December's 11.1 level, with a reading above zero denoting an expansion in activity.

Europe and Asia higher as U.S. political front remained in focus, earnings season heats up

European equities traded to the upside amid a ramp-up in earnings season, bolstered by Netflix's report, while Information Technology issues continued to grind higher. Also, the global markets appeared to find support from the closure of the contentious political front in the world's largest economy of the U.S. as President-elect Joe Biden was sworn in as the 46th president. 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 today 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 euro dipped versus the U.S. dollar and the British pound traded to the upside, while bond yields in the core Eurozone regions were mixed and U.K. rates gained modest ground. In economic news, U.K. inflation figures for December were a bit hotter than expected, while Eurozone consumer price inflation remained subdued for last month.

The U.K. FTSE 100 Index was up 0.4%, France's CAC-40 Index rose 0.5%, Germany's DAX Index gained 0.8%, Italy's FTSE MIB Index advanced 0.9%, Switzerland's Swiss Market Index increased 0.6%, while Spain's IBEX 35 Index ticked 0.1% higher.

Stocks in Asia finished mostly higher with the contentious U.S. political front gaining some closure as President-elect Joe Biden is set to be inaugurated today, while the recent weakness in the U.S. dollar continued to paint a positive backdrop for emerging markets. Hong Kong markets remained in rally mode, with strength in tech issues continuing to boost the index which gained 1.1%, bolstered by a jump in shares of Alibaba Group Holding Ltd. (BABA $266) after founder Jack Ma reappeared after an extended absence from the public. China's Shanghai Composite Index advanced 0.5%, South Korea's Kospi Index rose 0.7%, Australia's S&P/ASX 200 Index increased 0.4%, and India's S&P BSE Sensex 30 Index traded 0.8% to the upside. However, Japan's Nikkei 225 Index declined 0.4%, with the yen firming a bit. In economic news, China left its 1-year and 5-year loan prime rates unchanged, while Australia's consumer confidence dipped somewhat for this month.

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.

Tomorrow's international economic calendar will offer trade figures from Japan as well as the monetary policy decision from the nation's central bank, employment data from Australia, industrial sales and orders from Italy, as well as the monetary policy decision from the European Central Bank.

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