Schwab Market Update | January 4, 2021

Schwab Market Update

Stocks Begin 2021 on a Sour Note

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U.S. stocks stumbled out of the gates for 2021, as early gains quickly gave way to losses, with major U.S. indices closing lower in the first trading session of the new year. Much of the negative sentiment on the day appeared to be fostered by worsening COVID-19 trends, as the rise in new cases of the virus as well as the sluggish vaccine rollout stoked the virus concerns. U.S. political uncertainty also added a layer of trepidation to the markets, as tomorrow's Georgia Senate runoff results could potentially have meaningful impacts on future legislation. These worries mostly overshadowed an early-morning boost provided by upbeat global December manufacturing reports.  In other economic news, construction spending rose at a smaller amount than anticipated. Tesla posted upbeat Q4 deliveries, while M&A news poured in, headlined by Teledyne Technologies' agreement to acquire fellow sensor technology company FLIR Systems in a transaction valued at about $8.0 billion. Treasury yields were mixed, while the U.S. dollar remained near multi-year lows. Crude oil prices turned lower and gold rallied. Asia finished mostly higher, but Japan lagged, and Europe gained ground.

The Dow Jones Industrial Average fell 383 points (1.3%) to 30,224, the S&P 500 Index was down 55 points (1.5%) at 3,701, while the Nasdaq Composite decreased 190 points (1.5%) to 12,698. In heavy volume, 1.2 billion shares were traded on the NYSE and 6.4 billion shares changed hands on the Nasdaq. WTI crude oil was $0.90 lower at $47.62 per barrel. Elsewhere, the Bloomberg gold spot price rallied $44.24 to $1,942.91 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was little changed at 89.93.

Tesla Inc. (TSLA $730) rose after the electric vehicle maker reported stronger-than-expected deliveries for Q4 of 180,570 units, and its 2020 deliveries of 499,550 vehicles almost hit Chief Executive Officer Elon Musk's target of 500,000.  

In M&A news, Teledyne Technologies Incorporated (TDY $362) announced an agreement to acquire fellow sensor technology company FLIR Systems Inc. (FLIR $52) for $56.00 per share in cash and stock, in a transaction valued at about $8.0 billion. Under the terms of the deal, FLIR shareholders will receive $28.00 per share in cash and 0.0718 shares of TDY for each share owned. FLIR rallied over 15% and TDY traded lower. 

Moreover, Centene Corporation (CNC $61) announced an agreement to acquire Magellan Health Inc. (MGLN $94) for $95.00 per share in cash for a total enterprise value of $2.2 billion. CNC said the transaction will broaden and deepen its whole health capabilities and establish a leading behavioral health platform. CNC gained ground and MGLN jumped over 10%. 

U.S. stocks came off record high territory in the first session of 2021 as the markets grappled with the worsening COVID-19 virus trends and coinciding reinstatement of stringency measures, along with some uncertainty on the political front and a slower-than-expected pace of vaccine rollouts. Schwab's Chief Investment Strategist Liz Ann Sonders, Chief Fixed Income Strategist Kathy Jones and Chief Global Investment Strategist Jeffrey Kleintop, CFA, discuss the recent run in the equity markets in our latest Schwab Market Perspective: Watching the Wheels, encouraging news about COVID-19 vaccines has boosted hope for stronger economic growth, kicking off a rotation in stocks and equity sectors as investors look to a brighter future.

However, near-term volatility is possible, as we're not yet out of the coronavirus tunnel. Globally, emerging-market stocks have begun to outpace international developed stocks and U.S. stocks, another sign of rotation and a possible signal of things to come in 2021. A similar turning has been seen in the fixed income market, where emerging-market and high-yield bonds have outperformed U.S. Treasuries in recent months.

The first hurdles for the markets as the calendar shifts to 2021 will come from the political front, courtesy of tomorrow's Georgia runoff Senate elections and Congress' count of electoral votes to declare a 2020 Presidential election winner on Wednesday. The outcome of the runoff elections will determine the composition of Congress and could prove pivotal in future legislation, notably implications for tax policy, fiscal relief, and infrastructure spending as discussed in our podcast, Georgia's Runoff Carries Outsized Impact

For more on our outlooks for equities, bonds and the global markets for 2021, as well as our latest Schwab Sector Views: Could 2021 Be Normal?, check out our Market Insights page on, and follow us on Twitter at @SchwabResearch.

December manufacturing activity read surprisingly revised higher to kick off the New Year

The final December Markit U.S. Manufacturing PMI Index was unexpectedly revised higher to 57.1 from the preliminary level of 56.5, above the Bloomberg forecast of a slight downward adjustment to 56.3 and November's 56.7 level. A reading above 50 denotes expansion and this was the highest level since September 2014 amid further substantial increases in output and new orders. However, Markit noted that supply chain disruptions were the most severe on record and the industry saw the sharpest rise in cost burdens since April 2018. 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 0.9% month-over-month (m/m) in November, versus projections of a 1.0% gain, and following October's upwardly-revised 1.6% increase. Residential spending rose 2.6% m/m but non-residential spending declined 0.6%.

Treasuries were mixed, as the yield on the 2-year note ticked 1 basis point lower to 0.12%, the yield on the 10-year was little changed at 0.91%, and the yield on the 30-year bond added 1 bp to 1.65%.

Schwab's Kathy Jones notes in her latest 2021 Fixed Income Outlook: Calmer Waters, how we see the potential for 10-year Treasury bond yields to trade in a range of 1% to as high as 1.6% in 2021, reflecting the prospects for real economic growth to recover at a faster pace amid the backdrop of the vaccine rollout and further fiscal stimulus. Meanwhile, short-term interest rates are likely to remain pinned near zero throughout the year as the Fed waits to "normalize" interest rates until inflation rises. Consequently, the yield curve should steepen as the difference between short and long-term yields expands.

The economic calendar for tomorrow will pick up with the Institute for Supply Management’s (ISM) Manufacturing Index, forecasted to decline to 56.7 in December from the 57.5 level previously posted, and then with a read of the ISM Non-manufacturing Index, expected to come in slightly lower at 54.7 for December compared to 55.9 in November.

Asia and Europe mostly higher as data and vaccine optimism outweigh near-term concerns

European equities traded higher, as the markets found support from a plethora of strong manufacturing reports and progress on the rollout of COVID-19 vaccines. The powerful backdrop of unprecedented global monetary and fiscal support also appeared to aid the solid start to 2021. The positive sentiment from the data and vaccine fronts seemed to be help the markets look past some of the near-term rough waters presented by the persistent rise in virus cases. The U.S. political front was also in focus as key events await starting with tomorrow's Georgia Senate runoff elections. Manufacturing output out of the Eurozone for last month, reported by Markit, showed growth remained solid, led by Germany, while U.K. output in the sector expanded at a faster pace than originally-estimated. The data followed similar positive reads on the manufacturing sector out of Asia and comes ahead of data out of the U.S. The euro traded higher versus the U.S. dollar, which resumed a slide, though the British pound lost ground on the greenback, paring a recent rise that came on the heels of the final-hour post-Brexit trade agreement between the U.K. and European Union. Bond yields in the Eurozone and the U.K. mostly traded lower. 

Schwab's Jeffrey Kleintop notes in his latest article, A Vaccine: The Best 2020 Holiday Gift, how a COVID-19 vaccine being administered globally has lifted the stock markets around the world. But he cautions that the reality of the rollout faces risks that could extend the time frame for mass immunizations. Jeff adds that we expect markets to be volatile in coming months while the threat of new lockdowns weighs against the hope of recovery, although we believe we may be on the verge of a period of international stock market outperformance.

The U.K. FTSE 100 Index was up 1.7%, Germany's DAX Index ticked 0.1% higher, France's CAC-40 Index rose 0.7%, Italy's FTSE MIB Index traded 0.4% higher, and Spain's IBEX 35 Index and Switzerland's Swiss Market Index increased 0.3%.  

Stocks in Asia finished mostly to the upside with the global markets digesting a host of upbeat manufacturing data for last month, while progress on multiple COVID-19 vaccines appeared to continue to overshadow the near-term impact of reinstated measures to combat the persistent rise in new virus cases. Manufacturing growth for last month out of China, Australia, South Korea and India remained solid, and output for the sector in Japan nudged back into expansion territory. In other economic news, South Korea's December exports rose at a pace that doubled estimates. The recent drop in the U.S. dollar continued to provide a positive backdrop, particularly in Emerging Markets, along with the massive amount of global monetary and fiscal support. China's Shanghai Composite Index and the Hong Kong Hang Seng Index both rose 0.9%, while South Korea's Kospi Index rallied 2.5%. Australia's S&P/ASX 200 Index advanced 1.5% and India's S&P BSE Sensex 30 Index traded 0.6% higher. However, Japan's Nikkei 225 Index declined 0.7%, with the yen firming a bit and as the nation's government said it is considering a state of emergency in Tokyo and surrounding areas amid rising COVID-19 cases. As 2021 commences, Schwab's Jeffrey Kleintop discusses the Top Five Global Investment Risks in 2021, noting how risk is often the result of a very high degree of confidence among market participants in one specific outcome.   

Tomorrow’s international calendar will get underway with German reads on retail sales as well as unemployment, followed by Swiss CPI, and the M3 release from the Eurozone.

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