The holiday-shortened week began with stocks lower amid the fluid events unfolding in Ukraine. Following the announcement from Russian President Vladimir Putin that he would immediately recognize the independence of two separatist regions of eastern Ukraine, Russian forces moved into the two regions, in what some global leaders have termed the beginning of an invasion. In response, President Biden cut off resources to the two Ukrainian regions and announced further sanctions on Russia, while Germany halted the certification of the Nord Stream 2 pipeline. News on the economic front was mixed, as preliminary reads on manufacturing and services sector activity came in better than expected, consumer confidence dipped, home prices rose more than forecasts, and the Richmond Manufacturing Index surprised to the downside. Some retailers began to put the finishing touches on earnings season, as Dow member Home Depot and Macy's posted upbeat results. Treasuries were mixed, with the yield curve flattening, and the U.S. dollar was little changed, while gold gained modest ground, and crude oil prices increased following the news out of Ukraine. Markets in Europe were mixed in a choppy session amid the increased tensions in the region, while markets in Asia were lower.

The Dow Jones Industrial Average declined 483 points (1.4%) to 33,597, the S&P 500 Index shed 44 points (1.0%) to 4,305, and the Nasdaq Composite decreased 167 points (1.2%) to 13,382. In heavy volume, 5.0 billion shares of NYSE-listed stocks were traded, and 4.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.70 to $91.91 per barrel. Elsewhere, the gold spot price traded $2.70 higher to $1,902.50 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was unchanged at 96.07.

Dow member Home Depot, Inc. (HD $316) reported adjusted Q4 earnings-per-share (EPS) of $3.21, just above the $3.18 FactSet estimate, as revenues grew 10.7% year-over-year (y/y) to $35.7 billion, exceeding the Street's forecast of $34.9 billion. Same store sales rose 8.1%, versus forecasts for a 5.0% rise, and its inventories were up 32.7% y/y. HD announced a 15% increase in its quarterly dividend, marking the 140^th consecutive quarter the company has paid a dividend. Despite the report, shares of HD were sharply lower.

Macy's Inc (M $24) reported adjusted Q4 EPS of $2.45, north of the $2.01 FactSet estimate, as revenues grew 27.8% y/y to $8.67 billion, above the Street's forecast of $8.46 billion. Same store sales grew 26.5% y/y on an owned-plus-licensed basis and were up 5.2% versus Q4 2019. Digital sales increased 12% y/y in Q4 and were up 36% versus the fourth quarter of 2019. The retailer released full-year guidance that was above expectations and also announced a new share buyback program. Shares fell.

As Q4 earnings season heads down the home stretch, of the 425 companies that have reported results in the S&P 500, 69.8% have topped revenue forecasts, while 76.4% have bested earnings expectations, per data compiled by Bloomberg. Compared to last year, revenue growth is on pace to be up 15.8% and earnings expansion is on track for 27.4%.

The markets have seen some wild swings as the markets grapple with the Fed tightening uncertainty and still solid absolute earnings growth during the quarter but some relative deterioration compared to the previous four quarters. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Smoke on the Water … Fire Down Below, how results have bucked the trends of the past six quarters—with a lower percentage by which companies have been exceeding consensus estimates. As for Fed policy, Liz Ann adds that as has nearly always been the case historically, a shift in the monetary policy backdrop can mark significant turning points in the equity market and typically lead to more frequent bouts of volatility. Liz Ann also notes how the much stronger-than-expected January nonfarm payroll report likely confirmed the Fed's full-steam ahead message for the near term in her latest commentary, Surprise, Surprise: Jobs Surged.

In our latest Schwab Market Perspective: Slipping Gears, we discuss how in recent weeks, it has felt like the U.S. stock market slips a gear every so often, dropping sharply as investors search for traction in uncertain terrain. Many of the individual stocks in the major U.S. stock indexes are down 20% or more from their peaks this year, creating the equivalent of a stealth bear market, even if the indexes themselves haven't hit that point. At the same time, investors are bracing for the Federal Reserve to start raising interest rates in March. Other major central banks are already doing so, representing a remarkable policy shift from only a few months ago. From a global perspective, although investors generally believe rising U.S. rates often lead to a downturn in emerging-market stocks, that isn't always the case. Meanwhile, the tense Russia-Ukraine situation has affected the Russian stock market, but if history is a guide, the impact is unlikely to spread.

With the markets volatile, find all our market commentary on our Market Insights page, including our article, Market Volatility: Schwab's Quick Take, and follow us on Twitter at @SchwabResearch.

Data mixed as yield curve flattens

The preliminary Markit U.S. Manufacturing PMI Index for January rose to 57.5 from January's unrevised 55.5 figure, and versus the Bloomberg consensus estimate of an increase to 56.0, but the index remained in expansion territory as denoted by a reading above 50. The preliminary Markit U.S. Services PMI Index showed growth (above 50) for the key U.S. sector rose more than expected, jumping to 56.7 from January's 51.2 figure and compared to forecasts of an increase to 53.0.

The Conference Board's Consumer Confidence Index (chart) fell to 110.5 in February from January's downwardly-revised 111.1 level, and versus the Bloomberg estimate calling for a reading of 110.0. The overall index was dragged by the Expectations Index of business conditions for the next six months portion of the index, which fell to 87.5 from January's downwardly-revised 88.8 level, while the Present Situation Index portion of the survey increased to 145.1 from the previous month's negatively-revised 144.5 level. On employment, the labor differential—consumers’ appraisal of jobs being "plentiful" minus being "hard to get"—fell to 42.0 from the 43.0 level posted in January.

The Richmond Fed Manufacturing Activity Index remained in expansion territory (a reading above zero) but surprisingly fell to 1 from January's 8 reading, well below forecasts of 10. New order volume fell into negative territory for the first time in 5 months. Capacity utilization also fell to negative territory, while shipments and order backlogs both did the same.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed an 18.56% year-over-year (y/y) gain in home prices in December, slightly above estimates of an 18.10% rise. Compared to the prior month, home prices were up 1.46% on a seasonally adjusted basis, compared to forecasts of a 1.10% gain.

Treasuries were mixed, as the yield on the 2-year note was up 7 basis points (bps) at 1.53%, the yield on the 10-year note was flat at 1.93%, while the 30-year bond rate was down 1 bp at 2.23%.

Treasury yields have moved higher as of late, with rates on the short-end of the curve decisively outpacing the moves on the mid-to-longer end, resulting in a dramatic narrowing of the spread between the 2-year note yield and the rate on the benchmark 10-year note. Expectations have been solidified by the Fed that it will tighten monetary policy aggressively through multiple rates hikes beginning in March. However, the markets have been volatile as they contemplate what the implications could be as uncertainty festers regarding whether the Central Bank will go against its historical norm of 25 bp hikes and opt for a 50 bp increase at some point. Moreover, the Fed has said it would also accompany this year's rate increases with efforts to shrink its more than $8 trillion balance sheet.

Schwab's Chief Fixed Income Strategist, Kathy Jones points out in her latest article, Bond Market: Waiting for Liftoff, that we expect turbulence to continue as Fed Chair Powell indicated that policy plans are not on a set course, with the Fed preferring to take a "nimble" approach. However, she adds that the markets have discounted a significant tightening in policy for this year, with the telltale signs of tight policy expectations already showing up in the markets. Kathy discusses how the yield curve has flattened, with short-term rates moving up sharply relative to long-term rates.

Kathy says while it's clear that the Fed is anxious to initiate a new tightening cycle, we think it's premature to forecast such a rapid pace of rate hikes without more clarity about its plans to reduce the amount of bonds the Fed holds on its balance sheet. The Fed released general principles for quantitative tightening but hasn't spelled out a clear plan yet. She notes how allowing bonds to mature without reinvestment can have a similar impact as hiking rates in terms of the impact on the availability of funds to the banking system. She adds that the Fed has indicated it prefers using the federal funds rate as its primary tool to set policy, but given the size of its current bond holdings, it's possible that quantitative tightening will play a bigger role in the Fed's plans in this cycle than it did in the last cycle.

The MBA Mortgage Applications Index for the week ended February 18 is the only report slated for release on tomorrow's economic calendar.

Europe mixed amid increased geopolitical tensions, Asia lower

European equities finished mixed in a choppy session on news Russian forces have moved into two breakaway regions of eastern Ukraine. Some leaders called the move an invasion, and the situation remains fluid. In swift response, German Chancellor Olaf Scholz halted the approval of gas pipeline Nord Stream 2, which is designed to bring natural gas directly from Russia to Europe and was set to double the amount of gas Germany was receiving from Russia. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, provides his Guide to Geopolitical Risk: Russia-Ukraine, where he discusses how markets have historically shrugged off geopolitical events involving Russia. He notes that Russia makes up a very small portion of the main global and emerging market indexes, while Ukraine has no exposure in such indexes. He discusses the most likely sanctions that may occur if the situation escalates, but he doesn't believe that diversified investors need to take action to protect their portfolios from the risks related to an invasion of Ukraine.

Meanwhile, the global markets continue to grapple with the prospect of tighter monetary policies on both sides of the pond. The expectations have been amplified by recent January inflation reports out of the U.S., that have come after the Bank of England (BoE) increased rates for a second straight meeting earlier this month, and the European Central Bank (ECB) sounded a more hawkish tone following its meeting in early February. The economic calendar is light today, but the German IFO Business Climate report rose more than expected, and the expectations portion of the report also rose more than projections. The British pound was lower versus the U.S. dollar, while the euro was higher. Bond yields in the U.K. and across the Eurozone rose.

The U.K. FTSE 100 Index and Spain's IBEX 35 Index nudged 0.1% to the upside, and Switzerland's Swiss Market Index was 0.6% higher, while France's CAC-40 Index and Italy's FTSE MIB Index were little changed, and Germany's DAX Index decreased 0.3%.

Stocks in Asia finished broadly lower following the increased tensions out of Russia and Ukraine that saw Russian forces move into two separatist regions of eastern Ukraine. Global monetary policy remains in focus as investors are expecting more hawkish policies moving forward. The Fed is expected to begin hiking rates next month, while the ECB has hinted at the same thing later this year, and the BoE has already hiked rates in its last two meetings. However, the People's Bank of China has instead loosened its policy, while the Bank of Japan announced it will buy its benchmark 10-year bonds to try to keep rates lower. Schwab's Jeffrey Kleintop discusses in his article, Why Invest Internationally?, why investors should look for opportunities outside the U.S. by noting how a large home bias, even with international sales exposure, may not diversify investors across sectors, endangering financial goals when new economic cycles shift long term trends. In economic news, Hong Kong saw its unemployment rate remain unchanged, and its CPI rose y/y but at a slower rate than expected and slower than the previous month.

Japan's Nikkei 225 Index declined 1.7%, with the yen holding onto some gains versus the U.S. dollar. The Hong Kong Hang Seng Index fell 2.7%, Australia's S&P/ASX 200 Index and China's Shanghai Composite Index moved 1.0% to the downside, India's S&P BSE Sensex 30 Index dipped 0.7%, and South Korea's Kospi Index finished 1.4% lower.

The international economic calendar for tomorrow will be light, offering only GDP from Hong Kong and CPI from the Eurozone.