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Flight to Safety Amid Mounting Coronavirus Concerns

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U.S. equities were solidly lower and Treasury yields plummeted amid a flight to safety caused by mounting concerns surrounding the deadly coronavirus. On the economic front, new home sales unexpectedly fell, but some regional manufacturing activity improved more than expected. D.R. Horton topped revenue forecasts and upped its guidance. Sprint posted a narrower loss than anticipated, but missed on the top line. Treasuries, the U.S. dollar and gold were higher on safe-haven flows. Oil prices fell and international equities sold-off even worse than their U.S. counterparts.

The Dow Jones Industrial Average fell 454 points (1.6%) to 28,536, the S&P 500 shed 50 points (1.5%) to 3,245 and the NASDAQ shed 176 points (1.9%) to 9,139. 978 million shares were traded on the NYSE and 2.6 billion shares changed hands on the NASDAQ. WTI oil was down $1.05 to $53.14 per barrel and wholesale gasoline fell $0.03 to $1.48 per gallon. Elsewhere, the Bloomberg gold spot price rose $5.50 to $1,583.70 per ounce.  The Dollar Index—a comparison of the U.S. dollar to six major world currencies—added 0.1% to 97.94.

D.R. Horton Inc. (DHI $60) reported fiscal Q1 earnings-per-share (EPS) of $1.16, including a benefit related to federal energy efficient homes tax credits, versus the $0.92 FactSet estimate. Revenues rose 14.3% y/y to $4.0 billion, compared to the expected $3.8 billion. The homebuilder said it continues to see good demand and a limited supply of homes at affordable prices across its markets, and economic fundamentals and financing availability remain solid. DHI raised the higher end of its 2020 revenue outlook and reaffirmed its guidance for other metrics, while issuing Q2 revenue guidance that was north of estimates. Shares were higher. 

Sprint Corp. (S $5) posted a fiscal Q3 loss of $0.03 per share, versus the Street's forecast of a $0.05 per share shortfall, as revenues declined 6.1% y/y to $8.1 billion, below the projected $8.2 billion. The company's net postpaid customer additions easily topped forecasts, though its wireless operating revenues were a bit shy of forecasts. Shares fell on the day.

Today kicked off the busiest week of Q4 earnings season, and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Best of What's Around: Sticking with Large Caps, given the high correlation between business confidence and corporate profits, we believe earnings estimates for this year remain a tad too lofty. Liz Ann adds that this should provide a continued healthy backdrop for large cap stocks to outperform their smaller cap brethren. She points out though that any meaningful pickup in economic growth—particularly if accompanied by higher inflation—could be the lifeline for which small caps have been clamoring. 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.

New home sales surprisingly dip, Treasury yields remain under pressure on virus concerns

New home sales (chart) declined 0.4% month-over-month (m/m) in December to an annual rate of 697,000, below the Bloomberg forecast calling for 730,000 units and November's downwardly-revised 697,000 unit level. The median home price was up 0.5% y/y at $331,400. New home inventory rose to a 5.7 months of supply at the current sales pace from 5.5 months in November. Sales were higher m/m in the West and Midwest but fell in the Northeast and South. Compared to the last year, sales were higher across all regions except in the South. New home sales are based on contract signings instead of closings.

The January Dallas Fed Manufacturing Index improved more than expected, but remained slightly at a level depicting contraction (a reading below zero), rising to -0.2 from -3.2 in December, and versus expectations of an increase to -2.0.

Treasuries were solidly higher, with the yield on the 2-year note declining 6 basis points (bps) to 1.44%, the yield on the 10-year note falling 8 bps to 1.60%, and the 30-year bond rate dropping 8 bps to 2.05%. 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 continuing a recent drop amid the increased global market uneasiness regarding the spread and impact of the coronavirus, while looking to this week's busy economic docket. For our analysis of the potential impact of the coronavirus, check out Schwab's Liz Ann Sonders' latest article, Virus: Could it be the Catalyst to Change Sentiment? 

Today's data began a week that will give us a preliminary December read on durable goods orders, January's Consumer Confidence Index, both reports are scheduled for tomorrow, along with another regional manufacturing report. Later in the week, the calendar will yield the first look (of three) at Q4 GDP, jobless claims, personal income and spending, the Chicago PMI, and the final January University of Michigan Consumer Sentiment Index. However, the headlining event will likely come in the form of Wednesday's monetary policy decision from the Federal Open Market Committee (FOMC). 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, and continued efforts by the Central Bank to calm the overnight lending markets, that have occurred since its last meeting in December.

As noted in our latest Schwab Market Perspective: Trends Diverge as Markets Enter 2020, the U.S. economy split sharply in 2019—manufacturing activity lagged services, corporate profits lagged stock performance—while investor sentiment surged. How long will these divergences continue in 2020? The global economy is showing signs of stabilization, but global stocks priced in much of that improvement last year. This could mean weaker global stock market performance in 2020 than in 2019, despite a better economy. Treasury bond yields are likely to move modestly higher during the first half of the year. However, market inflation expectations are low, implying the market may be unprepared for an unexpected rise in prices.

Global markets selloff as well

Global equities were broadly lower, as concerns surrounding the deadly coronavirus weighed on sentiment and especially heavily on travel-related issues. The economic calendar showed German business optimism and expectations both unexpectedly declined for this month. The euro and British pound dipped versus the U.S. dollar, while the yen found a strong safe-haven bid. Global bond yields were lower. The selloff came as the busiest week for earnings season in the U.S. looms, as well as this week's monetary policy decisions from the Fed and Bank of England. Additionally, there is still uncertainty regarding a potential trade showdown between the U.S. and European Union. 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 and Italy's FTSE MIB Index were down 2.3%, France's CAC-40 Index and Germany's DAX Index dropped 2.7%, Spain's IBEX 35 Index declined 2.0%, and Switzerland's Swiss Market Index traded 1.6% lower. Japan's Nikkei 225 Index fell 2.0%. India's S&P BSE Sensex 30 Index dropped 1.1%.  Markets in China, Hong Kong, Australia, and South Korea were 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.

Tomorrow will bring readings on Australian inflation, French and German consumer confidence, and U.K. housing prices.

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