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U.S. equities moved modestly higher and posted weekly gains for the second week in a row. The rally came courtesy of a host of relatively favorable December reports out of China and a surge in U.S. housing starts. Not all economic data was good though, as University of Michigan Consumer Sentiment unexpectedly fell and industrial production contracted at a faster-than-expected pace. Earnings season continued to shift into gear; results from CSX and J.B. Hunt dampened sentiment in the transportation sector and Expeditors International dropped on its Q4 warning. Treasury yields were higher and took the greenback with them. Oil prices fell and gold was higher on the day.
The Dow Jones Industrial Average added 50 points (0.2%) to 29,348, the S&P 500 was up 10 points (0.3%) to 3,327 and the NASDAQ rose 32 points (0.3%) to 9,389. 988 million shares were traded on the NYSE and 2.5 billion shares changed hands on the NASDAQ. WTI oil rose $0.02 to $58.54 per barrel and wholesale gasoline fell $0.01 to $1.64 per gallon. Elsewhere, the Bloomberg gold spot price rose $9.80 to $1,560.30 per ounce. The Dollar Index—a comparison of the U.S. dollar to six major world currencies—added 0.3% to 97.62. For the week, the Dow was up 1. 8%, the S&P 500 added 1.9% and the NASDAQ was up 2.3%.
CSX Corporation (CSX $77) reported Q4 earnings-per-share (EPS) of $0.99, above the $0.96 FactSet estimate, as revenues declined 8.0% year-over-year (y/y) to $2.9 billion, roughly in line with the Street's expectations. The company noted "tough economic conditions," and said its revenue declined due to lower volumes and negative mix from coal market headwinds. CSX issued 2020 revenue guidance that was a bit shy of estimates. Shares were lower.
J.B. Hunt Transport Services Inc. (JBHT $114) posted Q4 earnings of $1.35 per share, south of the expected $1.50, with revenues rising 6.0% y/y to $2.5 billion, mostly matching the Street's estimates. The company noted that a 2.0% increase in load volume in intermodal was partially offset with a lower revenue per load, while its interest expense grew amid higher debt levels at higher interest rates. JBHT also said its trucking segment revenue fell 20.0% primarily from lower loaded miles and lower rates per loaded mile. Shares were lower.
Gap Inc. (GPS $18) announced that it no longer intends to separate Old Navy into a standalone public company, while also reporting leadership changes and noting that it expects full-year sales to be at the high end of its previous guidance, due to better-than-anticipated promotional levels over the holiday period. Shares finished down for the day.
Expeditors International of Washington Inc. (EXPD $77) traded lower after the global logistics company warned that its Q4 EPS will be below analysts' expectations. The company noted the slowing of various global economies, trade disputes, and a customer base that is taking advantage of a market that appears to be changing from a supply and demand standpoint.
This week saw the unofficial start to Q4 earnings season, and per data compiled by Bloomberg, of the 45 S&P 500 companies that have reported thus far, roughly 62% have beat revenue forecasts, with the aggregate y/y growth rate at about 3.9%. Approximately 63% of the companies have topped earnings estimates, though the aggregate y/y profit growth rate is roughly -2.7%.
Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest 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.
Housing construction surges, industrial production and consumer sentiment dip
Housing starts (chart) for December jumped 16.9% month-over-month (m/m) to an annual pace of 1,608,000 units—the highest level since the end of 2006—well above the Bloomberg forecast of 1,380,000 units. Construction for single-unit and multi-unit structures both rose solidly, with the former in the Midwest surging to overshadow declines in single-family housing starts in the Northeast and West. November starts were revised higher to an annual pace of 1,375,000. However, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, declined 3.9% m/m to an annual rate of 1,416,000, south of expectations of 1,460,000 units, and compared to November's 1,474,000 rate.
The January preliminary University of Michigan Consumer Sentiment Index (chart) dipped to 99.1 versus expectations to match December's 99.3 level. The index remained elevated despite the dip, with the current conditions portion of the report ticking higher but the expectations component nudging lower. The 1-year inflation forecast rose to 2.5% from December's 2.3% rate, and the 5-10 year inflation forecast increased to 2.5% from December's 2.2% pace.
The Federal Reserve's industrial production (chart) dipped 0.3% m/m in December, versus estimates of a 0.2% decrease, and November's 1.1% gain was negatively-adjusted to a 0.8% rise. A drop in utilities output outweighed a modest rise for manufacturing production and a solid increase in mining activity. Capacity utilization decreased to 77.0% from the prior month's upwardly-revised 77.4% rate, matching expectations. Capacity utilization is 2.8 percentage points below its long-run average.
The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, fell to 6.80 million jobs available to be filled in November, from October's upwardly-adjusted 7.36 million figure and below forecasts calling for 7.25 million. This was the first sub-7.0 million figure since March 2018 as the largest decreases were seen in retail trade and construction sectors, while job openings fell in the South and Midwest regions. The hiring rate remained at October's 3.8% level and the separation rate held at the prior month's 3.7% rate.
Treasuries were mostly lower; the yield on the 2-year note was little changed at 1.57%, while the yield on the 10-year note added 2 basis points (bps) to 1.82% and the 30-year bond rate increased 3 bps to 2.28%.Schwab's Chief Fixed Income Strategist Kathy Jones notes in her 2020 Market Outlook: Fixed Income that ten-year Treasury yields should move higher in 2020 as recession fears ease. Kathy points out the lagged impact of the Federal Reserve's interest rate cuts, signs of stabilization in the global economy and a modest uptick in inflation expectations should provide a boost to intermediate- and long-term bond yields. However, she cautions that the risk to our outlook is the ongoing threat of trade tariffs weighing on business investment.
Global markets rally alongside U.S.
Global equities finished out the last session of the week higher, with the Stoxx Europe 600 Index touching record high territory. International markets digested some relatively favorable Chinese economic data and a surge in housing construction in the U.S. Chinese industrial production, retail sales and fixed asset investment all came in stronger than projected, while its Q4 y/y GDP growth of 6.0% was in line with forecasts. Eurozone construction output rebounded in November. U.K retail sales came in lower than expectations for December. The Bank of Korea left its monetary policy stance unchanged as expected. The euro and British pound saw pressure versus the U.S. dollar, while the yen posted modest gains. Global bond yields were mixed. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the Top Ten Global Risks For Investors in 2020, in his latest 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.
The U.K. FTSE 100 Index was up 0.9%, France's CAC-40 Index rose 1.0%, Germany's DAX Index gained 0.7%, Italy's FTSE MIB Index was 0.8% higher, Spain's IBEX 35 Index advanced 1.1%, and Switzerland's Swiss Market Index increased 1.4%. China's Shanghai Composite Index ticked 0.1% higher and the Hong Kong Hang Seng Index advanced 0.6%, while Australia's S&P/ASX 200 Index moved 0.3% higher. South Korea's Kospi Index edged 0.1% to the upside, and India's S&P BSE Sensex 30 Index finished little changed. Japan's Nikkei 225 Index gained 0.5%.
For our outlook for the global markets, Schwab's Jeffrey Kleintop delivers his 2020 Global Market Outlook: New Heroes Needed, noting that in 2020, global economic growth may depend on comprehensive trade deals and fiscal stimulus rather than actions by central bankers to reverse last year's slowdown in manufacturing and business investment.
Stocks up for second-straight week
U.S. stocks posted a second week of gains, extending a solid advance thus far in 2020, with trade worries fading after the "phase one" U.S.-China deal was signed and the revamped North American trade agreement passed through the Senate. Also, the financial sector unofficially kicked off Q4 earnings season with mostly upbeat results headlined by Dow member JPMorgan Chase & Co. (JPM $138) but Wells Fargo & Company (WFC $49) was a standout disappointment. However, a bulk of the week's heavy lifting seem to come from the global economic front, with a host of favorable Chinese economic data suggesting a rebound in activity toward the end of the year. Moreover, U.S. data showed inflation remained tame, manufacturing growth accelerated more than expected in key regions of New York and Philadelphia, jobless claims fell sharply, retail sales grew solidly, and the Fed's Beige Book showed continued growth, all preceding Friday's surge in housing starts. All but one of the eleven major market sectors rose, led by utilities, real estate, materials and technology, but energy issues declined as crude oil prices continued to retreat from the geopolitically-fueled spike seen as 2020 kicked off. The U.S. Dollar Index rose for a second-straight week and gold modestly trimmed a recent rally, while the Treasury yield curve steepened slightly.
With all U.S. markets closed on Monday in observance of Martin Luther King, Jr. Day, data will play catch up after the holiday, as the economic calendar will deliver more housing data in the form of existing home sales and Markit will release its preliminary January reads on manufacturing and services activity, while jobless claims will likely continue to garner attention and the Leading Index will bring a timely read on the economy. However, the economic front could yield some attention to the ramping up of earnings season, with several Dow members reporting, along with airlines and rail companies. Some notable technology and communications services companies will release results, like Dow members International Business Machines Corporation (IBM $138) and Intel Corporation (INTC $59), as well as Netflix Inc. (NFLX $339). Per FactSet, the technology sector is the only sector in which analysts have not lowered earnings expectations (in aggregate) since the start of Q4 and the communications services sector is one of the five sectors projected to report y/y earnings growth and is estimated to have one of the highest revenue growth rates, just behind health care and utilities.
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.
The international economic front could bring some data points that may move the markets, with reports deserving a mention including: Australia—consumer confidence, employment change and PMIs. China—prime rate decisions for 1-year and 5-year loans. Japan—Bank of Japan monetary policy decision, trade balance, and inflation statistics. Eurozone—European Central Bank monetary policy decision, Markit's Manufacturing PMI, and consumer confidence, along with German investor sentiment. U.K.—employment change and Markit's Manufacturing PMI.
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