Stocks Bounce Off Last Week's Drop with Tech Leading
U.S. equities finished the first trading session of the week higher, paring some of last week's solid losses. The Information Technology sector led the way after the markets were disrupted last week by amplified activism among a cohort of retail investors taking aim at highly shorted stocks. A slew of global manufacturing reports painted a positive picture for the sector, with U.S. reports showing continued solid growth but intensifying cost pressures. Uneasiness surrounding the rise in COVID-19 new cases and variants persisted, but was countered by recent further progress on the vaccine/treatment fronts. Earnings season is set to remain in high gear this week, with Thermo Fisher Scientific posting upbeat results to get the ball rolling. Treasuries were higher, putting modest pressure on yields and the U.S dollar continued to bounce, while gold and crude oil prices gained ground. Europe finished with widespread gains and markets in Asia rallied. The Dow Jones Industrial Average rose 229 points (0.8%) to 30,212, the S&P 500 Index was up 60 points (1.6%) at 3,774, and the Nasdaq Composite increased 333 points (2.6%) to 13,403. In heavy volume, 1.0 billion shares were traded on the NYSE and 6.9 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.35 to $53.55 per barrel. Elsewhere, the Bloomberg gold spot price advanced $12.64 to $1,860.29 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.5% higher to 91.04. The stock markets rebounded somewhat to kick off the week following last week's ramp up in volatility that came amid the extremely elevated frothiness that has left the markets vulnerable to shocks to the system. The increased choppiness in the markets has come in the form of amplified activism among a cohort of retail investors taking aim at highly shorted stocks. The Schwab Center for Financial Research (SCFR) discusses the disruption in the article, Stocks Fall Again as Trading Surges. The SCFR points out how this latest surge in speculative trading behavior reinforces the need for investor caution, and the recent moves in many stocks have little fundamental backing, and the level of frothy sentiment continues to make the market vulnerable to profit-taking and rampant sector rotation. A declining percentage of stocks are trading above key moving averages, indicating a deterioration in market breadth, and stretched stock valuations remain a risk. "Despite the turbulent week, we should remember that market drops are an unavoidable feature of investing," says Mark Riepe, head of the SCFR. Mark adds that, "Our investing principles don't change during market volatility, and yours shouldn't, either," pointing out that our advice is not to jump into the fray of frenzied speculation, but to rely on traditional disciplines around asset allocation and diversification. Thermo Fisher Scientific Inc. (TMO $515) reported Q4 earnings-per-share (EPS) of $6.24, or $7.09 ex-items, versus the $6.56 FactSet estimate. Revenues grew 54.0% year-over-year (y/y) to $10.6 billion, north of the Street's projection of $9.6 billion. The manufacturer of scientific instruments and laboratory equipment, along with software and services, said it delivered strong growth in Q4, generating $3.2 billion of COVID-19 response revenue and accelerating growth momentum in the base business. Shares were higher. Q4 earnings season is set to remain in high gear, which has seen stronger than expected results but muted responses as the equity markets had come into the season running hot. Of the 187 S&P 500 companies that have reported thus far, roughly 74% have topped revenue forecasts and approximately 83% have bested earnings projections, per data compiled by Bloomberg. Thus far, y/y sales growth has been nearly unchanged, while earnings expansion is on track to be up nearly 4.0%. The markets were a bit defensive last week as all the major sectors saw red figures, with the Real Estate and Consumer Staples sectors outperforming, while cyclically natured and value sectors—Energy, Materials, Consumer Discretionary and Financials—led to the downside. For analysis of all the major market sectors, check out our Schwab Sector Views: New Era in Washington. Finally, keep up with our latest views on the markets, including the implications of the changed political front, on our Market Insights page on www.schwab.com and follow us on Twitter @SchwabResearch. January manufacturing remains solidly in expansion, but price pressures continue to ramp up The January Institute for Supply Management (ISM)Manufacturing Index (chart) showed manufacturing growth (a reading above 50) decelerated more than anticipated. The index declined to 58.7 from December's downwardly revised 60.5 level, and versus the Bloomberg consensus estimate of a dip to 60.0. This index came off the highest level since early 2018 as new orders and production growth declined but both figures remained north of 60, and employment moved modestly further into expansion territory. Prices remained elevated, rising 4.5 points to 82.1, a level not seen since April 2011, indicating continued supplier pricing power. The ISM said, "The manufacturing economy continued its recovery in January. Survey committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are continuing to cause strains that limit manufacturing growth potential. However, panel sentiment remains optimistic (three positive comments for every cautious comment), similar to December levels." The final January Markit U.S. Manufacturing PMI Index was unexpectedly revised higher to 59.2 from the preliminary level of 59.1, where is was forecasted to remain, and above December's 57.1 level. A reading above 50 denotes expansion and this was the highest on record pushed up by accelerated expansions in output and new orders. However, the report did note that cost pressures intensified amid raw material shortages, but firms were able to partially pass on higher costs, with selling prices rising at the fastest pace since July 2008. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and Markit weights its index components differently, while it surveys a wider range of companies. Construction spending (chart) rose 1.0% month-over-month (m/m) in December, versus projections of a 0.9% gain, and following November's upwardly revised 1.1% increase. Residential spending rose 3.1% m/m but non-residential spending declined 0.8%. Treasuries were slightly higher with the rate on the 2-year note little changed at 0.11%, while the yields on the 10-year note and the 30-year bond were down 2 basis points (bps) at 1.07% and 1.83%, respectively. Bond yields remain choppy after last week's ramped up volatility applied some pressure to rates and supported a rebound in the U.S. dollar to the high end of a range established following some noticeable weakness in the greenback in the second half of 2020. Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, Why Longer-Term Treasury Yields Are Rising noting 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. Tomorrow's economic calendar will be dormant, but the docket will heat up later in the week and is poised to bring a host of key reports that have a chance to compete for market attention with the unfolding Q4 earnings season. Wednesday will bring reads on the services sector via Markit and ISM, as well as the first look at the January employment picture, courtesy of the ADP Employment Change report ahead of Thursday's initial jobless claims for the week ended January 30 and culminated with Friday's key January nonfarm payroll report. Schwab's Chief Investment Strategist Liz Ann Sonders offers in her article, Bridging the Gap(s): Converging and Diverging Trends Stemming From the Crisis, a review of the year that was, while analyzing and dissecting the nature of the K-shaped recovery in both the economy and stock market. Also, one of the major economic obstacles to a return to pre-pandemic activity is overcoming the painfully elevated level of unemployment as discussed in Liz Ann Sonders' commentary, 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. Europe rebounds as manufacturing data pours in European equities finished higher, with most major sectors rising, led by Information Technology, Materials, Industrials and Financials, while the Energy sector lagged. The markets digested a heavy dose of January manufacturing reports across the globe to kick off the week, with data out of China and Australia continuing to depict growth, while German and U.K. output were revised to higher rates of growth than was initially reported, and U.S. reports showed continued solid expansion. The global market rebound from last week's drop also found support from some signs of stabilization in the U.S. markets and a strong lead from Asia, though earnings season is set to remain in high gear and central bank monetary policy decision out of Australia, India and the U.K. are on the week's horizon. Further progress on the COVID-19 virus and variants also likely helped foster the recovery and overshadow a much larger than expected drop in German retail sales for December. The euro and British pound traded lower versus the U.S. dollar, which has stabilized somewhat, and bond yields in the core Eurozone regions and the U.K. gained ground. Political uncertainty is lingering on this side of the pond and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, points out in his article, An Investors' Guide to the 2021 Elections, last month marked the end of a long U.S. political contest, but a year of political challenges is just getting started overseas. The U.K. FTSE 100 Index was up 0.9%, France's CAC-40 Index and Italy's FTSE MIB Index advanced 1.2%, Germany's DAX Index and Switzerland's Swiss Market Index rose 1.4%, and Spain's IBEX 35 Index increased 0.5%. Stocks in Asia finished nicely higher to rebound from last week's drop that came amid the heightened volatility in the U.S. and festering uneasiness regarding the fight against continued spreading of COVID-19 cases and variants, that also fostered some countered trends gains for the U.S. dollar. Schwab's Jeffrey Kleintop discusses the Top Five Global Investment Risks In 2021, noting that they 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 markets geared up for some January global business activity reports and central bank announcements out of Australia, India and the U.K. China and Australia got the ball rolling, with the former announcing Manufacturing PMI reports that showed output from the sector slowed but continued to suggest expansion, while the latter showed its activity accelerated. China's Shanghai Composite Index advanced 0.6% and Australia's S&P/ASX 200 Index traded 0.8% to the upside. Japan's Nikkei 225 Index rose 1.6%, with the yen holding onto Friday's decline, South Korea's Kospi Index gained 2.7%, and the Hong Kong Hang Seng Index increased 2.2%. Indian markets led to the upside, jumping 5.0% on the heels of this weekend's release of the government's annual budget plan that appeared to please the markets and come in better than had been feared.
Tomorrow's international economic calendar will offer the monetary policy decision from the Reserve Bank of Australia, housing prices from the U.K., CPI from France, as well as GDP from Italy and the Eurozone. ©2021 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.
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