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Schwab Market Update

Stocks Mostly Higher on Friday; Finish Week with Solid Gains

U.S. stocks were mostly higher on Friday as the Nasdaq dipped below the unchanged mark, but shares posted one of the largest weekly gains in years, paring a significant portion of last week's steep declines. Reports on housing construction, import prices and consumer sentiment all registered reads above analyst forecasts, while Treasury yields were mixed and the U.S. dollar managed a solid rise. Dow member Coca-Cola and Deere announced upbeat quarterly results. Gold was lower and crude oil prices traded higher. Please note that all domestic markets will be closed on Monday in observance of Presidents' Day.  

The Dow Jones Industrial Average (DJIA) added 19 points (0.1%) to 25,219, the S&P 500 Index ticked 1 point higher to 2,732, and the Nasdaq Composite declined 17 points (0.2%) to 7,239. In moderately heavy volume, 946 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.34 to $61.68 per barrel and wholesale gasoline gained $0.02 to $1.75 per gallon. Elsewhere, the Bloomberg gold spot price decreased $5.15 to $1,348.52 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 89.15. Markets were sharply higher for the week, as the DJIA and the S&P 500 Index both rallied 4.3% and the Nasdaq Composite surged 5.3%.

Dow member Coca-Cola Co. (KO $45) reported a Q4 loss of $0.66 per share, primarily related to a charge related to the Tax Cuts and Jobs Act (TCJA), or earnings-per-share (EPS) of $0.39 ex-items, versus the FactSet estimate calling for a profit of $0.38. Revenues decreased 20.0% year-over-year (y/y) to $7.5 billion, above the projected $7.4 billion. Organic sales grew 6.0% y/y, topping forecasts. KO issued 2018 EPS guidance that was above expectations, with the company noting a lower tax rate going forward due to the TCJA. Shares rose.

Kraft Heinz Co. (KHC $71) posted Q4 EPS of $6.52, primarily reflecting benefits from the TCJA, or $0.90 ex-items, versus the forecasted $0.95, as revenues increased 0.3% y/y to $6.9 billion, roughly in line with expectations. Organic sales declined 0.6% y/y, larger than estimated, and its volume/mix decreased due to lower shipments across several categories. The company noted that, "There's no question that our financial performance in 2017 did not reflect our progress or potential." Shares traded lower.

Deere & Co. (DE $169) announced a fiscal Q1 loss of $1.66 per share, including charges related to the TCJA, or profits of $1.31 per share ex-items, compared to the expected EPS of $1.19, with revenues rising 23.0% y/y to $6.9 billion, above the projected $6.5 billion. The heavy machinery maker said it has continued to experience strong increases in demand for its products as conditions in key markets show further improvement. Shares moved higher. 

CBS Corp. (CBS $55) reported Q4 EPS of $0.10, including a charge related to the TCJA, or $1.20 ex-items, versus the forecasted $1.14, with revenues growing 11.0% y/y to $3.9 billion, exceeding the estimated $3.7 billion. Shares were lower despite the results as recent merger speculation with Viacom Inc. (VIAB $34) appeared to foster concerns among analysts and cloud the company's outlook. 

Housing construction and import inflation jump, consumer sentiment surprisingly rises 

Housing starts (chart) for January jumped 9.7% month-over-month (m/m) to an annual pace of 1,326,000 units, well above the Bloomberg forecast of a 1,234,000 unit rate. December starts were upwardly revised to an annual pace of 1,209,000. The jump in starts was supported by a 19.7% m/m gain in multi-unit activity, while single unit construction also rose solidly. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, grew 7.4% m/m in January to an annual rate of 1,396,000, after December's downwardly revised 1,300,000 rate, which was where they were expected to remain. A m/m decline single-unit permits was met with surges for multi-unit authorizations. 

The report bodes well for the housing sector that has seen supply-side issues remain a concern among homebuilders and pressure affordability. We are watching the recent run in interest rates closely as rates that move up too high or too fast could dampen demand for mortgages and threaten profits in certain areas of the financial sector as discussed by Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, in his Schwab Sector Views: What Sectors Can Tell Us About the Market Action.

The Import Price Index (chart) rose 1.0% m/m for January, north of projections of a 0.6% gain, following December's upwardly revised 0.2% rise. Compared to last year, prices were up by 3.6%, well above forecasts of a 3.0% rise and compared to December's upwardly revised 3.2% increase.

The preliminary University of Michigan Consumer Sentiment Index (chart) unexpectedly rose to 99.9 in February, from 95.7 in January, and compared to expectations of a dip to 95.5. The index moved closer to October's 13-year high of 100.7 as current economic conditions and the expectations portions of the report both improved. The 1-year and 5-10 year inflation forecasts remained at 2.7% and 2.5%, respectively.

Treasuries were mixed, with the yield on the 2-year note ticking 1 basis point (bp) higher to 2.19%, while the yields on the 10-year note and the 30-year bond decreased 4 bps to 2.87% and 3.13%, respectively.

Bond yields diverged after a recent jump and the U.S. dollar continued to chip away at losses for the week. Schwab's Chief Fixed Income Strategist Kathy Jones discusses the bond and currency markets in her article, Twin Bears: U.S. Bond Prices and Dollar Fall in Tandem, while offering analysis of the jump in yields as of late in her latest commentary, The Upside of Bond Market Volatility, as well as her timely video, What's Causing the Sudden Rise in Bond Yields?

The stock markets are extending a winning streak to six days to claw back from a recent drop to correction territory that came amid heightened volatility, fostered somewhat by concerns about rising interest rates and inflation. For more on the recent flare-up in volatility, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Volatility Gets Back in the Saddle Again.

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

Europe higher on earnings, U.S. winning streak and currency weakness; Asia mixed

European equities moved higher, with the U.S. markets poised to extend a winning streak to six sessions, while the euro and British pound pared recent gains versus the U.S. dollar. Earnings reports in the region painted a relatively positive picture, while the markets shrugged off another sign of rising inflation in the U.S. and as U.K. retail sales missed expectations for last month. Bond yields in the region finished mostly lower. The global markets have rebounded from the recent drop that is discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, in his latest article, Stocks Fall: Why Now, What's Next?. Jeff notes that bond yields may need to pause for stocks to find their footing, while growth remains strong and the pullbacks are likely to be temporary. Jeff concludes that increased volatility and the advanced stage of the business cycle mean that staying globally diversified and frequently rebalancing back to target allocations are important.

Stocks in Asia finished mixed, with the winning streak in the U.S. helping ease concerns that had jumped along with volatility leading to a global market selloff to begin the month. With the markets choppy, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading & Derivatives Randy Frederick's video, Is the Bear Back: What's Behind the Renewed Volatility, while also check out Jeff's Five Global Risks for Investors in 2018 article, in which he discusses how having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome is a key to successful investing. Japanese equities rose, showing some resiliency in the face of the continued strength in the yen. Australian securities dipped amid some weakness in the mining sector, and shares trading in India declined following late yesterday's trade data that showed export growth in the nation rose but imports jumped in January. Volume was lighter than usual as markets in China, Hong Kong and South Korea were closed for the Lunar New Year holiday.  

Bulls find the answers after correction

After plunging to correction territory last week, U.S. stocks posted a string of six-straight gains to trim a large portion of the selloff that began February. Stocks shrugged off a three-peat of January inflation reports, which confirmed recently flared-up expectations of an uptick in inflation that had contributed to the pullback in the markets but appeared not hot enough to spark another round of selling. All the major sectors rallied, the 10-year yield briefly breached the 2.90% mark, and the U.S. dollar resumed a slide to multi-year lows, which helped crude oil prices rebound from last week's drop. Outside the inflation data, the economic calendar was mixed, with small business optimism improving more than expected to close in on a record high, though retail sales missed forecasts and industrial production unexpectedly dipped. Earnings season moved onto the home stretch, with 399 of the S&P 500 companies in the books. The sales beat rate is at 78% and the upside earnings surprise rate at 79%, per data compiled by Bloomberg.

Although the week will be shortened by the holiday, the economic docket will still bring some key reports that should garner attention, with Markit's preliminary business activity reports for February being accompanied by existing home sales, the Fed's January meeting minutes, and the Leading Index.

As noted in the latest Schwab Market Perspective: Volatility…it's Back!, the long-awaited return of volatility has arrived, unnerving investors. But economic and earnings fundamentals remain strong and this is part of the process of returning to a more “normal” market environment. The U.S. economy is showing improving growth, earnings season has been strong, and earnings expectations for 2018 have surged; but expectations are elevated and the rate of improvement in both is likely to slow. Global stocks were not spared but the fundamental picture internationally also looks solid. This round of volatility should remind investors that markets do not go up forever, corrections are normal and healthy, and discipline (diversification and rebalancing in particular) is key.

International reports due out next week that deserve a mention include: Japan—trade balance and consumer price inflation. Eurozone—Markit's preliminary business activity reports and consumer price inflation, along with German business and investor confidence and Q4 GDP. U.K.—employment change and preliminary Q4 GDP.

Schwab Center for Financial Research - Market Analysis Group

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