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Schwab Market Update

Stocks Ticking Higher Following Flood of Earnings

U.S. stocks are gaining modest ground in the wake of yesterday's end of the three-day government shutdown, with a robust earnings calendar taking center stage, highlighted by Dow member Travelers Companies and Netflix. However, a retreat from multi-year highs for Treasury yields is hamstringing financials. The U.S. dollar is extending a drop to multi-year lows, while gold and crude oil prices are higher. Asia finished up on the eased U.S. political uncertainty, and Europe is mixed on upbeat data in the region and the drop in the dollar. 

At 10:52 a.m. ET, the Dow Jones Industrial Average is flat, while the S&P 500 Index is up 0.2% and the Nasdaq Composite is rising 0.5%. WTI crude oil is gaining $0.91 at $64.48 per barrel, Brent crude oil is advancing $1.06 to $70.09 per barrel, and wholesale gasoline is up $0.03 at $1.91 per gallon. The Bloomberg gold spot price is trading $3.67 higher at $1,337.58 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is dropping 0.3% to 90.11.

Dow member Procter & Gamble Co. (PG $89) reported Q4 earnings-per-share (EPS) of $0.93, or $1.19 ex-items, versus the $1.14 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $17.4 billion, roughly in line with expectations. The company said its earnings benefited from the Tax Cuts and Jobs Act (TCJA), but its gross margin came in below expectations. PG maintained its full-year sales outlook, while raising its EPS guidance to reflect the potential benefit from the TCJA. Shares are lower. 

Dow component Johnson & Johnson (JNJ $145) posted a Q4 loss of $3.99 per share, or EPS of $1.74 ex-items, compared to the projected profit of $1.72 per share, with revenues increasing 11.5% y/y to $20.2 billion, north of the expected $20.1 billion. The company said its earnings results reflected a $13.6 billion charge related to the TCJA, but it saw robust performance in its pharmaceuticals business. JNJ issued full-year guidance that was above estimates, noting that the TCJA enables it to invest in innovation at higher levels. Shares are decreasing.  

Netflix Inc. (NFLX $251) announced Q4 earnings of $0.41 per share, roughly in line with expectations, as revenues rose 32.6% y/y to $3.3 billion, mostly matching estimates. Domestic and international streaming subscriber additions easily topped forecasts and the company issued Q1 guidance that exceeded expectations. Shares are rallying.

Dow member Travelers Companies Inc. (TRV $145) reported Q4 EPS of $1.98, including charges related to catastrophe losses and the TCJA, or $2.28 ex-items, versus the forecasted $1.50, with net premiums written growing 6.0% y/y to $6.4 billion, above the expected $6.3 billion. Shares are gaining solid ground. 

Dow component Verizon Communications Inc. (VZ $53) posted Q4 earnings of $4.56 per share, or $0.86 ex-items, versus the projected $0.88, as revenues rose 5.0% y/y to $34.0 billion, above the expected $33.2 billion. Retail subscriber additions for its wireless segment easily topped forecasts, while its subscriber additions for its FiOS and DSL businesses missed estimates. The company said tax-reform legislation will have a positive impact. Shares are lower.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Taxman: Bringing Some Cheer in the New Year, the impact of the TCJA is already being felt by millions of workers—with the vast majority of the remainder getting a bump in their paychecks next month. More broadly, we should get a boost to consumption, GDP, capex and corporate earnings; but there are important offsets and considerations that suggest some enthusiasm-curbing may be in order given the later-stage in the cycle in which the TCJA was passed. Also, Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers investors analysis on the tax overhaul in his article, New Tax Law: Here’s What You Need to Know.

Growth in regional manufacturing activity slows more than expected

The Richmond Fed Manufacturing Activity Index fell to 14 in January from 20 in December, versus the Bloomberg estimate of a decrease to 20. However, readings above zero denote expansion. 
Shipments and employment solidly declined but continued to grow, while new order volume was unchanged at 16 and order backlog moved back into expansion territory.

Treasuries are higher with the yield on the 2-year note dipping 1 basis point (bp) to 2.05%, the yield on the 10-year note dropping 4 bps to 2.61%, and the 30-year bond rate declining 3 bps to 2.88%. 

Treasury yields are paring a recent rally to multi-year highs and the U.S. dollar is extending a fall to multi-year lows, amid the backdrop of broad-based global economic growth, early optimism regarding tax reform, and as global central banks appear to be turning down the path to normalization. The markets have mostly shrugged off the recent flare-up in political uncertainty as Congress yesterday voted on a short-term funding bill that ended a three-day government shutdown. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses the agreement in his latest article, Congress Strikes Deal to End Government Shutdown, noting that it just sets up another possible shutdown next month, adding a potential element of uncertainty to the market’s booming start to 2018.  

As noted in the latest Schwab Market Perspective: Party Like it's 2017!, this year seems unlikely to be a repeat of 2017 as volatility should pick up and the possibility of a larger pullback than what we saw last year has grown. Investor sentiment—often a contrarian indicator—is extended, which could mean that disappointments or surprises could be met with greater selling than we’ve seen in the recent past. We still believe that the bull has room to run as domestic economic strength is improving and global economies look better than they have in some time, so investors should stay disciplined, diversified and invested.

Europe mixed amid eased political uncertainty and data

European equities are mixed in late-day action, with yesterday's vote to end the U.S. government shutdown joining signs of progress in German coalition talks to ease political concerns, though U.K. Brexit uncertainty is lingering. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, and Vice President of Trading and Derivatives Randy Frederick also offer guidance for investors amid the political environment in the video, Political Risk: How Should Investors Respond?. Earnings and economic data in the region are also aiding sentiment, as German investor confidence rose to an eight-month high in January, and shares of Logitech International SA (LOGI $40) are rallying on its solid sales growth and boosted guidance. However, the euro has turned higher versus the U.S. dollar to cause the markets to diverge ahead of Thursday's monetary policy decision from the European Central Bank. The British pound has also reversed higher as the U.S. dollar extends a recent drop, while bond yields in the region are mostly lower. Schwab's Jeffrey Kleintop points out the Five Global Risks for Investors in 2018: geopolitics, chasing returns, private investment boom, return of inflation, and natural disasters, adding that 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. Finally, Jeff offers his latest article for international investors to digest, Expecting the Unexpected: Is a Demographic Disaster Looming?.   

The U.K. FTSE 100 Index and Spain's IBEX 35 Index are ticking 0.1% higher, France's CAC-40 Index is declining 0.2%, Germany's DAX Index is advancing 0.7%, Switzerland's Swiss Market Index is rising 0.3%, and Italy's FTSE MIB Index is decreasing 0.3%.

Asia mostly higher after BoJ decision and as U.S. ends government shutdown

Stocks in Asia finished higher, with the U.S. ending a three-day government shutdown and the Bank of Japan (BoJ) holding its monetary policy steady. As the BoJ kept its monetary policy stance unchanged, Governor Kuroda delivered his post-decision briefing and appeared to try to dampen expectations that the central bank was heading toward changing its current monetary policy stance, which had risen as the BoJ recently trimmed its monthly asset purchases. Japan's Nikkei 225 Index rallied 1.3% with the yen showing some early weakness versus the U.S. dollar. Financials were higher to boost Chinese markets as the Shanghai Composite Index gained 1.3% and the Hong Kong Hang Seng Index jumped 1.7%. Australia's S&P/ASX 200 Index advanced 0.8%, South Korea's Kospi Index gained 1.4%, and India's S&P BSE Sensex 30 Index rose 1.0%. The markets moved back into rally mode after the eased U.S. political uncertainty and Schwab's Chief Investment Strategist Liz Ann Sonders and Randy Frederick discuss the question in the video, How Much Longer Could the Bull Market Last?, talking about some of the data that Liz Ann watches to help gauge when this momentum might begin to slow down a little bit.

Schwab Center for Financial Research - Market Analysis Group

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Next Steps

Congress Strikes Deal to End Government Shutdown

Important Disclosures

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions. 

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