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Posted: 12/14/2018 4:15 PM EST

Stocks Tumble to Finish Out the Week

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U.S. equities finished out the week solidly lower on the day, while also notching weekly losses, as global growth concerns ratcheted higher amid disappointing economic reports out of China and the Eurozone, overshadowing a stronger-than-expected U.S. November retail sales report. News on the equity front didn't help, as both Costco and Adobe disappointed with their earnings reports, while Starbucks' longer-term outlook garnered scrutiny. Treasury yields were lower, along with crude oil and gold prices, while the U.S. dollar was higher.

The Dow Jones Industrial Average (DJIA) plunged 497 points (2.0%) to 24,101, the S&P 500 Index dropped 51 points (1.9%) to 2,600, and the Nasdaq Composite tumbled 160 points (2.3%) to 6,911. In heavy volume, 982 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.38 to $51.20 per barrel and wholesale gasoline was down $0.05 at $1.43 per gallon. Elsewhere, the Bloomberg gold spot price lost $3.45 to $1,238.54 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.4% to 97.44. Markets were lower for the week, as the DJIA fell 1.2%, the S&P 500 Index declined 1.3%, and the Nasdaq Composite decreased 0.8%.

Adobe Inc. (ADBE $230) reported fiscal Q4 earnings-per-share (EPS) of $1.48, or $1.90 ex-items, versus the $1.88 FactSet estimate, as revenues rose 22.0% year-over-year (y/y) to $2.4 billion, roughly in line with expectations. The company's performance of its Creative Cloud segment seemed to be highlighted by the Street but its current year guidance appeared to foster some uncertainty due to some noise regarding its recent acquisition of Marketo. Shares finished lower.

Costco Wholesale Corporation (COST $207) posted fiscal Q1 EPS of $1.73, or $1.61 ex-items, versus the forecasted $1.62, as revenues rose 10.2% y/y to $35.1 billion, roughly in line with estimates. Q1 same-store sales rose 7.5% y/y, below the projected 8.8% increase. COST's operating and gross margin figures came in south of estimates and shares were solidly lower.

Starbucks Corporation (SBUX $65) saw pressure amid some scrutiny on the Street of the company's long-term financial targets, notably its forecast for same-store sales growth in China.

Shares of Dow member Johnson & Johnson (JNJ $133) fell noticeably after a Reuters report that suggested the company knew for decades about asbestos in baby powder talc. The report quotes a JNJ spokesperson saying "thousands of independent tests show its talc is safe," adding that "any suggestion that JNJ knew or hid information about the safety of talc is false."

Shares of YRC Worldwide Inc. (YRCW $3) tumbled to apply further pressure on the transportation sector after the Department of Justice announced that it has sued the trucking company, along with Roadway Express and Yellow Transportation, alleging that these companies systematically overcharged the government for freight carrier services and made false statements to the government that hid their misconduct.

Retail sales and industrial production reports positive, business activity reports miss

Advance retail sales (chart) for November rose 0.2% month-over-month (m/m), above the Bloomberg forecast of a 0.1% gain, and October's figure was revised solidly higher to a 1.1% gain. Last month's sales ex-autos were up 0.2% m/m, matching expectations, and compared to October's favorably-revised 1.0% increase. Sales ex-autos and gas grew 0.5%, compared to estimates of a 0.4% gain, and October's figure was revised higher to a 0.7% rise. The control group, a figure used to calculate GDP, increased 0.9%, well above projections of a 0.4% gain, and compared to October's favorably-revised 0.7% increase. Nonstore retail sales—which includes online activity—rose solidly to lead the way, along with purchases at electronics and appliance stores and at furniture and home furnishing establishments. Building materials and clothing sales dipped, while sales at gasoline stations fell.

The preliminary Markit U.S. Manufacturing PMI Index showed growth slowed more than expected, declining to 53.9 in December, from November's 55.3 figure, and versus estimates calling for a dip to 55.0. Moreover, the preliminary Markit U.S. Services PMI Index showed growth also decelerated more than expected for the key U.S. sector, decreasing to 53.4 from November's 54.7 figure, versus expectations to nudge lower to 54.6. Readings above 50 for both indexes denote expansion.

The Federal Reserve's industrial production report (chart) showed a 0.6% m/m rise in November, compared to estimates of a 0.3% gain and October's downwardly-revised decrease of 0.2%. Manufacturing output was flat, while mining and utilities production both grew. Capacity utilization rose to 78.5% from the prior month's downwardly-revised 78.1% rate, and versus forecasts of 78.6%. Capacity utilization is 1.3 percentage points below its long-run average.

Business inventories (chart) increased 0.6% m/m in October, matching forecasts and following September's upwardly-revised 0.5% gain.

Treasuries were higher, as the yield on the 2-year note fell 3 basis points (bps) to 2.73%, while the yield on the 10-year note and the 30-year bond declined 2 basis points to 2.89% and 3.14%, respectively. The recent flattening of the yield curve and inversion of some short term yields compared to the 5-year have garnered market attention and fostered concerns as discussed in our article, What's Going on With the Yield Curve?, featuring Schwab's Chief Fixed Income Strategist Kathy Jones who also offers her 2019 Market Outlook: Fixed Income.

The U.S. dollar is rising, while equities came under heavy pressure, with the global markets likely cautious ahead of next week's Fed monetary policy decision, which has seen some heightened uncertainty regarding if the Central Bank will announce another rate hike despite rising global concerns. Moreover, some disappointing Chinese and Eurozone economic data today followed yesterday's dovish tone from the European Central Bank and commentary that noted slowing economic activity, to exacerbate global growth concerns and offset the confirmation from China that it will suspend additional tariffs on U.S. autos and parts, which added to the recent uptick in trade optimism.

Amid this environment, check out our 2019 Market Outlook: Be Prepared, in which we note that investors should be prepared for increasing market volatility, and possibly even a bear market, in the coming year, as rising interest rates, declining liquidity and sluggish global growth—with trade conflicts as an additional headwind—may weigh on economic growth and market performance in 2019.

Europe and Asia lower as global growth concerns persist

European equities finished broadly lower, with global growth concerns continuing to hamper sentiment. Disappointing Chinese economic data was followed by reports showing European Union new car registrations fell last month and Markit's preliminary December Composite PMI Index—a gauge of business activity out of the services and manufacturing sectors—showed growth unexpectedly slowed. This was the slowest pace of growth in the gauge of manufacturing and services sector activity in over four years, led by a drop into contraction territory for France, likely due to the recent unrest in the nation amid the "Yellow Vests" protests. The growth uneasiness overshadowed the recent tick higher in trade optimism between the U.S. and China. The euro and British pound fell versus the U.S. dollar on the data and as Brexit uncertainty remained elevated, while bond yields in the region were mostly lower. Uncertainty ahead of next week's Fed monetary policy decision also likely hamstrung conviction. As the global markets remain choppy amid a flood of global noise heading into the New Year, read Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, 2019 Market Outlook: Global Stocks and Economy, in which he urges investors to watch the gap between unemployment and inflation rates, along with the yield curve, for signs of a peak in economic growth ahead of a potential recession.

Stocks in Asia finished mostly lower, with some disappointing November economic data out of China adding to rising global growth concerns and overshadowing the recent uptick in trade optimism, with China confirming widely-reported moves to suspend further tariffs on U.S. autos. Mainland Chinese equities and those traded in Hong Kong fell after the Asian nation's retail sales and industrial production both came in below expectations, though its fixed asset investment rose slightly more than expected. Stocks in both South Korea and Australia were also solidly lower, and Japanese equities declined sharply, with the yen nudging higher, and despite the nation's Q4 Tankan Large Manufacturing Index that showed sentiment in the sector held steady, versus estimates to dip. Meanwhile, markets in India ticked higher, with data showing the nation's wholesale price inflation cooled in November and the markets continuing to digest this week's surprise resignation of the head of the Reserve Bank of India. However, after the closing bell, India reported a sharp slowdown in its export growth for last month. With trade and global growth concerns fostering volatility among the major stock market sectors, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers his latest, Schwab Sector Views: 19 Thoughts Heading Into '19.

Stocks relinquish early weekly gains as growth concerns continue to ramp up

The stock markets looked poised for a rebound from the prior week's drop, with further signs that the U.S./China trade tensions could be thawing as talks were said to have progressed. However, the markets ran out of steam heading toward the week's finish line, giving up gains as global growth concerns were amplified by Friday's softer-than-expected economic data out of China and the Eurozone. The rising decibels regarding diverging global growth, as well as this week's tame inflation readings, appeared to be a key source of increased uncertainty surrounding what the Fed will do or potentially signal at next week's monetary policy meeting (economic calendar). Although expectations remain that the Fed will announce a December rate hike, uncertainty has ticked higher and expectations regarding further hikes next year have waned a bit amid the plethora of global noise and heightened volatility in the markets as of late.

The U.S. dollar moved higher with the British pound seeing some pressure as a key Brexit vote was delayed and U.K. Prime Minister Theresa May survived a confidence vote. The euro also declined as the aforementioned growth concerns were exacerbated by a dovish tone sounded by European Central Bank President Mario Draghi following the central bank's unchanged policy decision, along with the unrest in France and lingering Italian budget worries. Crude oil prices continued to be hamstrung, weighing on the energy sector, while financials led to the downside even as Treasury yields nudged higher on the short-to-mid end of the curve. Cyclically-sensitive sectors like industrials and materials were also lower amid the growth uneasiness. However, technology issues posted a modest rebound.

Although the markets will likely be at the mercy of Wednesday's Fed decision, other events on next week's docket could also command some attention. We will get some more clarity on the health of the housing market, which has been one area of U.S. economic concern, courtesy of the NAHB Housing Market Index, housing starts and building permits, and existing home sales. We will also get a look at the Index of Leading Economic Indicators, the final read on Q3 GDP, personal income and spending, and the revision to the December University of Michigan Consumer Sentiment Index.

As noted in the latest Schwab Market Perspective: Gathering Storm or Passing Clouds?, the last couple of weeks has been a microcosm of 2018—higher volatility and more violent moves by stocks. Heading into 2019, we think we’ll see more of the same, with investor patience likely to be tested. Economic growth is slowing, but not yet to the point of threatening a recession in the near term. Risks have risen, as evidenced by the flattening of the yield curve, with the Federal Reserve and trade relations with China holding near-term keys to both the degree of slowing and market volatility.

International reports due out next week that deserve a mentioned include: Australia—employment change. Japan—Bank of Japan monetary policy decision, trade balance and consumer price inflation. Eurozone—trade balance and consumer price inflation, along with German business confidence. U.K.—Bank of England monetary policy decision, retail sales, Q3 GDP and inflation statistics.

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