Schwab Market Update

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U.S. equities are sharply lower in afternoon trading, as the rapid move higher for Treasury yields seems to be unnerving investors, while continuing to put pressure on growth issues, most notably the Information Technology and Consumer Discretionary sectors. As well, Energy and Financials sectors, which have benefited from confidence of a robust second-half 2021 recovery and the spike in rates, are pausing. Meanwhile, progress on the COVID-19 vaccine front also continues to bolster optimism for the economic outlook, amplified by some upbeat reads on durable goods orders and weekly initial jobless claims—though weather distortions may have played a role in the latter. Treasuries are falling, extending the rise in yields, and the U.S. dollar is lower, while crude oil prices are mixed and gold is seeing solid pressure. Earnings news continues to trickle in, as NVIDIA topped estimates, Anheuser-Busch warned of margin pressures, Booking Holdings remained hampered by the struggling travel industry and ViacomCBS posted an upbeat report. Europe finished mostly lower in choppy action.

At 12:50 p.m. ET, the Dow Jones Industrial Average is down 1.2%, the S&P 500 Index is decreasing 1.8%, and the Nasdaq Composite is trading 2.7% lower. WTI crude oil is up $0.44 to $63.38 per barrel and Brent crude oil is declining $0.03 to $66.15 per barrel. The Bloomberg gold spot price is dropping $29.31 to $1,775.75 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is falling 0.3% to 89.88.

NVIDIA Corporation (NVDA $534) reported Q4 earnings-per-share (EPS) of $3.10 ex-items, compared to the $2.81 FactSet estimate, with revenues rising 61.0% year-over-year (y/y) and 6.0% quarter-over-quarter (q/q) to $5.0 billion, north of the Street's $4.8 billion forecast. Including items related to expected nonrecurring items, notably acquisition-related costs, stock-based compensation expenses and income tax adjustments, the chipmaker's Q4 EPS were $2.31. NVDA said, "Our pioneering work in accelerated computing has led to gaming becoming the world’s most popular entertainment, to supercomputing being democratized for all researchers, and to AI emerging as the most important force in technology." The company issued Q1 revenue and gross margin guidance that was above expectations. Shares are lower.

Anheuser-Busch InBev SA/NV (BUD $61) posted Q4 EPS of $0.81 excluding items related to mark-to-market gains and losses linked to hedging of its share-based payment programs and the impact of "hyperinflation." The adjusted EPS figure was above the Street's expectation of $0.77. Revenues declined 4.3% y/y to $12.8 billion, roughly in line with forecasts. The beer company said its revenues were positively impacted by a continued volume recovery. BUD noted that it expects top and bottom line results in 2021 to "improve meaningfully" versus 2020, but its operating margins will be pressured by adverse channel and packaging mix, coupled with currency and commodity cost headwinds. Shares are falling.   

Booking Holdings Inc. (BKNG $2,290) announced a Q4 loss of $4.02 per share, compared to the expected shortfall of $4.28 per share, with revenues falling 63.0% y/y to $1.2 billion, mostly in line with estimates. The travel booking company said, "The travel environment continued to be challenging through Q4 of 2020 and into January 2021 as COVID-19 case counts remained very high and travel restrictions were reimposed in many parts of the world. However, in recent weeks, we have started to see some improvements in booking trends that we will continue to monitor." BKNG added that looking ahead, it is confident in its long-term future and in the eventual strong recovery of travel demand. Shares are seeing pressure.

ViacomCBS Inc. (VIAC $63) reported Q4 EPS of $1.04 ex-items, compared to the expected $1.01, with revenues rising 3.3% y/y to $6.9 billion, roughly in line with estimates. Including items not related to continuing operations, notably restructuring costs, gains/losses on investments and sales, and tax items, the company posted Q4 EPS of $1.26. The company said, "In Q4, despite the ongoing impacts of COVID-19, we finished the year with strong advertising and affiliate results that demonstrate the strength of our core businesses and achieved incredible growth across our linked streaming ecosystem, reaching nearly 30 million global subscribers." VIAC is set to hold its virtual investor event today, where it will detail its Paramount+ streaming offering. Share are lower. 

The sharp steepening of the Treasury yield curve and increased optimism has fostered some resurfaced rotation into cyclically-natured sectors and have bolstered Financials to underpin our outperform rating on the group as discussed in our latest Schwab Sector Views: The Earnings Recession Has Ended. However, Information Technology issues have underperformed as of late, with rising risk-free rates threatening some of the lofty valuations that have accompanied the sector and other growth-oriented stocks. 

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, has noted for some time that an interest rate/currency shock is one of the Top Five Global Investment Risks In 2021, reiterating 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.

Meanwhile, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, EleVation: Some V-Shaped Economic Data to Cheer, how inflation concerns are elevated; but cyclical "price shocks" would likely only give way to systemic inflation if labor market slack diminishes significantly.

Keep up with our latest views on investing in this environment at our Market Insights page on www.schwab.com and be sure to follow us on Twitter @SchwabResearch.

Treasury yields continue to run, jobless claims and durable goods orders better than expected

Treasuries are lower as optimism remains regarding a strong economic recovery in the second half of 2021 and as inflation expectations continue to gain traction. The rate on the 2-year note is advancing 5 basis points (bps) to 0.17%, the yield on the 10-year note is gaining 10 bps to 1.49%, and the 30-year bond rate is rising 8 bps to 2.32%.

For our views on what is driving the noticeable increase in bond yields and what investors should know about inflation, check out Schwab's Chief Fixed Income Strategist Kathy Jones' article, Why Longer-Term Treasury Yields Are Rising, and her commentary, along with Senior Fixed Income Research Analyst Christina Shaffer, Inflation Expectations Are Up. Should Investors Worry?. 

The increase in bond yields comes on the heels of this week's two-day monetary policy testimony on Capitol Hill from Federal Reserve Chairman Jerome Powell. The Fed Chief suggested that the Central Bank remains squarely focused on employment and fostering the recovery as nearly 10 million jobs remain lost compared to pre-pandemic levels. "The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved," Powell continued to stress, adding that the Fed does not expect inflation to rise to "troubling levels."

In economic news, weekly initial jobless claims (chart) came in at a level of 730,000 for the week ended February 20, well below the Bloomberg estimate of 825,000, and compared to the prior week's downwardly revised 841,000 level. The four-week moving average fell by 20,500 to 807,750, and continuing claims for the week ended February 13 dropped by 101,000 to 4,419,000, south of estimates of 4,460,000. The four-week moving average of continuing claims declined by 91,500 to 4,547,000. However, economists are pointing out that last week's figures may have been impacted by the severe weather conditions across the country, which may have hampered the reporting and processing of claims.

January preliminary durable goods orders (chart) jumped 3.4% month-over-month (m/m), versus estimates of a 1.1% rise and compared to December's upwardly revised 1.2% increase. Ex-transportation, orders grew 1.4% m/m, above forecasts of a 0.7% gain and compared to December's favorably adjusted 1.7% rise. However, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, were up 0.5%, below projections of a 0.8% rise, while the prior month's figure was revised nicely higher to a 1.5% increase.

The second look (of three) at Q4 Gross Domestic Product (chart), the broadest measure of economic output, showed a q/q annualized rate of expansion of 4.1%, revised from the first release's figure of a 4.0% pace of growth, and versus forecasts of an adjustment to a 4.2% gain. Q3's figure was unadjusted at a 33.4% surge. Personal consumption was revised to a 2.4% increase, south of expectations of an unrevised 2.5% rise. Q3 consumption was unadjusted at a 41.0% jump.

On inflation, the GDP Price Index was revised to a 2.1% rise, versus estimates of an unadjusted 2.0% increase, while the core PCE Index, which excludes food and energy, was unadjusted at a 1.4% gain, matching forecasts.

Pending home sales fell 2.8% m/m in January, versus estimates calling for a flat reading after December's upwardly revised 0.5% gain. Sales were 8.2% higher y/y, compared to December's favorably revised 23.1% increase. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales.

The February Kansas City Fed Manufacturing Activity Index unexpectedly moved further into a level depicting expansion (a reading above zero). The index rose to 24 from January's 17 reading, and compared to forecasts calling for a dip to 15.

Europe mostly lower in choppy action

European equities finished lower in a choppy trading session, as market participants grappled with the implications of the continued rise in global bond rates, along with persistent optimism of a noticeable second-half 2021 economic recovery. The markets also processed a continued decisively-dovish stance from the U.S. Central Bank despite rising expectations of inflation. Energy and Financials remained in rally mode amid this backdrop, while Information Technology issues modestly extended the week's downturn. In economic news, German consumer confidence remained solidly negative for March, along with a similar read on Eurozone sentiment for this month. The euro traded higher versus the U.S. dollar and the British pound was lower versus the greenback, pausing from a recent rally. 

Amid this backdrop, Schwab's Jeffrey Kleintop offers his article, Your Portfolio May Be Less Diversified Than You Think. He points out how investors with a large home bias may not be nearly as diversified across sectors as they believe and risk missing their financial goals as longer-term trends tend to shift with the start of a new global economic cycle. Jeff urges investors to consider rebalancing portfolios back toward international stocks as years of U.S. stock outperformance may have caused a drift away from longer-term asset allocation targets. He adds that fortunately, obtaining global diversification has never been easier or less expensive.

The U.K. FTSE 100 Index dipped 0.1%, Germany's DAX Index decreased 0.7%, France's CAC-40 Index and Italy's FTSE MIB Index fell 0.2% and Switzerland's Swiss Market Index declined 0.6%, while Spain's IBEX 35 Index advanced 0.6%.

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