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Politics in Focus as Stocks Finish Higher

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U.S. equities finished on the plus side on the first session of a shortened week following the long holiday weekend, as the markets awaited President-elect Joe Biden's inauguration tomorrow, while also paying attention to Treasury Secretary nominee Janet Yellen's confirmation hearing. Financials saw only a modest uptick, as the gains were held in check following mixed reactions to results from Dow member Goldman Sachs Group and Bank of America as Q4 earnings season continues to heat up. In M&A news, Lumentum Holdings agreed to acquire Coherent in a cash and stock transaction valued at $5.7 billion. Meanwhile, shares of General Motors jumped after announcing a collaboration with Microsoft on driverless vehicles. The economic calendar was void of any major releases today, but is set to heat up tomorrow with housing in focus, while Treasuries were little changed and the U.S. dollar saw some weakness. Gold fell slightly and crude oil prices gained ground. Europe finished lower, with monetary policy decisions looming from the Bank of Japan and the European Central Bank, while markets in Asia were mixed.

The Dow Jones Industrial Average rose 116 points (0.4%) to 30,931, the S&P 500 Index was up 31 points (0.8%) at 3,799, and the Nasdaq Composite increased 199 points (1.5%) to 13,197. In heavy volume, 1.1 billion shares were traded on the NYSE and 6.1 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.56 to $52.98 per barrel. Elsewhere, the Bloomberg gold spot price declined $1.63 to $1,836.63 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 90.50.

Dow member Goldman Sachs Group Inc. (GS $294) reported Q4 earnings-per-share (EPS) of $12.08, above the $7.45 FactSet estimate, as revenues grew 18.0% year-over-year (y/y) to $11.7 billion, topping the Street's forecast of $10.0 billion. The provision for credit losses came in lower y/y but was higher quarter-over-quarter. The company's investment banking revenues easily topped forecasts, along with its equity trading revenues, while its fixed income trading performance was a bit shy of forecasts. Also, its asset management and consumer and wealth management units came in north of expectations. GS said it was a challenging year on many fronts and it hopes this year brings much needed stability and a respite from the pandemic, but it remains ready to handle a wide range of outcomes and is poised to meet the needs of its clients. Shares were lower after a recent rally.

Bank of America (BAC $33) posted Q4 EPS of $0.59, above the Street's forecast of $0.55, though revenues, which decreased 10.0% y/y to $20.1 billion, missed the expected $20.6 billion. Net interest income rose and came in just above forecasts and its provision for loan losses was noticeably below estimates. BAC said in Q4, it continued to see signs of a recovery, led by increased consumer spending, stabilizing loan demand by its commercial customers, and strong markets and investing activity. Shares of BAC dipped.  

In M&A news, Lumentum Holdings Inc. (LITE $94) announced an agreement to acquire Coherent Inc. (COHR $197) in a cash and stock transaction valued at $5.7 billion. Under the terms of the deal, COHR shareholders will receive $100.00 per share in cash and 1.1851 shares of LITE for each share they own. The companies said the combination unites COHR's leading photonics and lasers businesses, with LITE's leading telecom, datacom and 3D sensing photonics businesses, creating a diversified photonics technology company with significantly increased scale and market reach. COHR is rallied nearly 30% and LITE fell over 10%.  

Shares of General Motors Company (GM $55) jumped after the automaker said it was partnering with Microsoft Corporation (MSFT $216) on driverless cars. The tech-giant will join with GM and Hyundai Motor Co. Ltd. (HYMPY $48) in a combined $2 billion equity investment for its startup self-driving vehicle named the Cruise.

With the Financials sector continuing to unofficially kick off Q4 earnings season, check out our latest Schwab Sector Views: New Era in Washington, for 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 will also be in focus this week a day ahead of President-elect Joe Biden's inauguration and as Treasury Secretary nominee Janet Yellen faces her confirmation hearing later this morning. 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.

Treasury yields flat and U.S. dollar sees pressure ahead of economic week

Treasuries finished little changed to begin the holiday-shortened week with the economic calendar void of any major releases today. The rates on the 2-year and 10-year notes, along with the 30-year bond, were flat at 0.13%, 1.09% and 1.83%, respectively.

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.

Although the economic docket was quiet today, the markets assessed this morning's confirmation hearing for former Fed Chair and Treasury secretary nominee Janet Yellen. Her remarks regarding President-elect Joe Biden's new $1.9 trillion fiscal relief plan is garnering attention. Yellen noted that "Neither the President-elect, nor I, propose this relief package without an appreciation for the country's debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs." Moreover, she noted the need to create "more prosperity for more people," as she pointed out that well before the pandemic, we were living in a K-shaped recovery, one where wealth built on wealth while working families fell further and further behind. The markets looked to see how she views the U.S. dollar, as Yellen noted that the U.S. does not seek a weaker dollar for competitive advantage.  

One of the major economic obstacles to a return to pre-pandemic activity is the labor market and Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Scar Tissue: Weak Jobs Report Emphasizes COVID's Scars, how small business trends bear watching—notably hiring plans as well as most significant constraints on hiring.

This week, shortened by Monday's holiday, Q4 earnings season will kick into a higher gear to likely garner heavy attention but the economic calendar will also be of interest, beginning tomorrow with a focus on housing. The January NAHB Housing Market Index will be released, forecasted to remain at December's reading of 86, with 50 the demarcation point between good and poor conditions. MBA Mortgage Applications for the week ended January 15 will also be released.

As noted in our latest Schwab Market Perspective: A Narrow Path Up, U.S. stocks have continued to climb amid optimism about a vaccine-led economic recovery, but it's a narrow path and buoyant investor sentiment could easily be deflated by bad news. Although global economic growth has struggled, an acceleration in vaccinations in major countries could support stronger growth in the second quarter. Meanwhile, after months of languishing near record lows, 10-year Treasury yields have risen to their highest level since March 2020, as the bond market focuses on the potential for stronger growth and higher inflation in 2021.

Europe lower despite data and ahead of U.S. political events, Asia mixed

European equities lost steam to finish lower, despite a positive open for the U.S. after a long holiday weekend and some upbeat economic data in the region. The markets awaited tomorrow's inauguration of U.S. President-elect Joe Biden and digested today's confirmation hearing of U.S. Treasury Secretary nominee Janet Yellen. Optimism of further fiscal spending and ramped-up efforts to boost the COVID-19 vaccine rollout appeared to paint a somewhat positive backdrop to limit the losses, but concerns lingered regarding the impact of the resurgence in COVID-19 cases and variants as some measures have been reinstated to contain the virus. In economic news, German investor confidence for January came in well above expectations and Eurozone construction output for November rebounded. The euro and British pound traded higher versus the U.S. dollar, ahead of this week's monetary policy decision from the European Central Bank, while bond yields in the core Eurozone regions and the U.K. traded to the upside.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the Top Five Global Investment Risks In 2021. Jeff points out that the top five global risks for investors in 2021 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. 

The U.K. FTSE 100 Index and Switzerland's Swiss Market Index dipped 0.1%, France's CAC-40 Index and Italy's FTSE MIB Index declined 0.3%, Germany's DAX Index shed 0.2%, and Spain's IBEX 35 Index dropped 0.7%.

Stocks in Asia finished mixed as the U.S. markets are set to return to action following yesterday's holiday break. A weaker U.S. dollar appeared to aid emerging markets, while cyclically-natured sectors also seemed to find demand ahead of the change of leadership in the U.S. However, the markets remained focused on the impact of the reinstated measures to combat the resurgence of the COVID-19 virus and variants. Hong Kong's Hang Seng Index rallied 2.7% to lead the way, bolstered by data suggesting mainland Chinese investors poured a record amount of capital into Hong Kong markets. China's Shanghai Composite Index declined 0.8%. Japan's Nikkei 225 Index advanced 1.4%, with the yen losing ground late in the session, and ahead of this week's monetary policy decision from the Bank of Japan. Australia's S&P/ASX 200 Index gained 1.2%, led by strength in the Financials, Materials and Energy sectors. India's S&P BSE Sensex 30 Index moved 1.7% higher and South Korea's Kospi Index jumped 2.6%.

Schwab's Jeffrey Kleintop discusses in his article, A Vaccine: The Best 2020 Holiday Gift, how a vaccine being administered globally has lifted the stock markets around the world. But he cautions that the reality of the rollout faces risks that could extend the time frame for mass immunizations. Jeff adds that we expect markets to be volatile in coming months while the threat of new lockdowns weighs against the hope of recovery, although we believe we may be on the verge of a period of international stock market outperformance.

Reports slated for release on tomorrow's international economic calendar include China's decision on its 1-year and 5-year Loan Prime Rates, CPI, PPI, and the Retail Price Index out of the U.K., PPI from Germany, and CPI from the Eurozone.

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