Stocks Able to Eke Out Gains

In a volatile session, U.S. equities were able to finish with modest gains, as investors weighed ramped-up U.S./China trade tensions and dismal April retail sales and industrial production reports against an unexpected improvement in consumer sentiment and a contraction in New York manufacturing activity that decelerated more than expected. On the equity front, Applied Materials and VF Corp missed quarterly expectations, while Dow member Nike provided an update on its operations. Treasury yields were higher as bond prices moved lower, and the U.S. dollar saw some modest pressure. Gold gained ground and crude oil prices extended a recent recovery. Europe and Asia finished mixed.

The Dow Jones Industrial Average rose 60 points (0.3%) to 23,685, the S&P 500 Index increased 11 points (0.4%) to 2,864, and the Nasdaq Composite moved 71 points (0.8%) higher to 9,015. In heavy volume, 1.4 billion shares were traded on the NYSE and 4.2 billion shares changed hands on the NASDAQ. WTI crude oil gained $1.64 to $29.52 per barrel and wholesale gasoline added $0.06 to $0.97 per gallon. Elsewhere, the Bloomberg gold spot price advanced $13.94 to $1,744.24 per ounce, while the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.1% lower to 100.42. Markets were lower for the week, as the DJIA lost 2.8%, the S&P 500 declined 2.4%, and the Nasdaq Composite fell 1.3%.

Applied Materials Inc. (AMAT $52) reported fiscal Q2 earnings-per-share (EPS) of $0.82, or $0.89 ex-items, versus the $0.93 FactSet estimate, with revenues rising 12.0% year-over-year (y/y) to $4.0 billion, below the Street's forecast of $4.1 billion. The company noted challenges created by COVID-19, but said while the situation remains fluid, based on the visibility it has today, its supply chain is recovering and underlying demand for its semiconductor equipment and services remains robust. Shares were lower.

Dow member Nike Inc. (NKE $87) announced that it is encouraged by the recovery it is seeing in Greater China and South Korea, with 100% of Nike-owned stores and over 95% of partner stores open. The company added that in these markets, retail traffic trends are progressing and while physical store traffic remains below prior year levels, this is largely offset by higher conversion rates and continued strong digital demand. NKE added that it has gradually reopened a small number of NIKE-owned stores across North America, Europe, Middle East and Africa (EMEA) and Asia Pacific, Latin America (APLA), as states and countries within each of these geographies ease quarantine measures and begin marketplace recovery. Shares finished higher.

V.F. Corporation (VFC $52) reported fiscal a Q4 loss of $1.22 per share, or EPS of $0.10 ex-items, compared to analysts' expectations of an $0.18 per share profit, as revenues declined 11.0% y/y to $2.1 billion, south of the projected $2.4 billion. The parent of Vans, Dickies, the North Face and Timberland brands said COVID-19 has impacted some of its suppliers and many of its facilities continue to manufacture and distribute products globally in reduced capacity and it is actively monitoring its supply chain and implementing mitigation plans. VFC said it expects Q1 revenue to be down slightly more than 50.0% y/y and due to the uncertainty of the duration and severity of COVID-19, it is not possible to provide a financial outlook for the current fiscal year. The company added that all of its retail stores in Asia have re-opened and it has started to reopen stores in EMEA, while it is prepared to begin a phased reopening of North American stores. Shares were lower.

With the markets displaying wide swings amid the COVID-19 pandemic and flood of dismal economic data, which are being countered by the massive fiscal and monetary policy relief efforts and the reopenings of global economies, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, High Speed: Bear and Bull Both Running at Full Speed, how both the bear market and subsequent rally have occurred at warp speed; yet the economic recovery may be disappointing to what the market's now "priced in." Liz Ann adds in her article, Loss, Strain & Butterflies: Earnings Plunging, Stocks Ignoring, that stocks and earnings don't always travel in the same direction. However, she points out that net earnings revisions do tend to track more consistently with how stocks are performing; and her best guess is that there are more downward earnings revisions to come. Liz Ann concludes that perhaps she is being naïve, but she would think the ride will remain quite bumpy—at least throughout the remainder of earnings season.

U.S./China tensions continued to flare-up after the White House reportedly moved to block global chipmakers from supplying Chinese telecom company Huawei Technologies Co. Ltd., fostering some concerns regarding potential retaliation from China and putting some pressure on the tech sector. Amid the heightened volatility in the markets, for timely news and analysis follow Schwab experts from the SCFR on Twitter at @SchwabResearch, and investors can stay up-to-date on all the content that Schwab offers on the unparalleled market action at www.schwab.com/volatility.

April retail sales drop, but May consumer sentiment improves

Advance retail sales (chart) for April fell by a record 16.4% month-over-month (m/m), versus the Bloomberg forecast of a 12.0% drop, and March's favorably-revised 8.3% decrease. Last month's sales ex-autos dropped 17.2% m/m, compared to expectations of an 8.5% decline and March's upwardly-revised 4.0% decrease. Sales ex-autos and gas fell 16.2% m/m, compared to estimates of a 7.6% decrease, and March's reading was adjusted positively to a 2.6% decline. The control group, a figure used to calculate GDP, was down 15.3% m/m, compared to projections of a 5.0% decrease and versus March's upwardly-adjusted 3.1% gain.

The plunge in April came as clothing sales tumbled nearly 79%, electronics and appliances sales dropped roughly 61%, and furniture sales fell about 59%, while most other categories were also sharply lower. However, sales at non-store retailers—which includes online activity—rose 8.4%.

The May preliminary University of Michigan Consumer Sentiment Index (chart) unexpectedly improved to 73.7 versus expectations of a drop to 68.0 from April's 71.8 reading. The surprising rebound for the index came as the current conditions component of the survey improved solidly and the expectations portion fell by a smaller amount than anticipated. The 1-year inflation forecast rose to 3.0% from April's 2.1% rate, and the 5-10 year inflation forecast ticked higher to 2.6% from the prior month's 2.5% level.

The Federal Reserve's industrial production (chart) dropped 11.2% m/m in April, slightly better than estimates of a 12.0% fall, and versus March's favorably-adjusted 4.5% decline. This was the largest drop in the 101-year history of the index amid the COVID-19 disruption, as manufacturing output fell by the most on record as the pandemic led many factories to slow or suspend operations throughout the month, while mining and utilities production also decreased solidly. Capacity utilization fell to 64.9% from the prior month's upwardly-revised 73.2% rate, but slightly above expectations of 63.8%. Capacity utilization is 14.9 percentage points below its long-run average.

The Empire Manufacturing Index, a measure of activity in the New York region, improved from a record low of -78.2 in April to –48.5 in May, better than forecasts of -60.0. A reading below zero denotes contraction.

Business inventories (chart) declined 0.2% m/m in March, matching forecasts, and versus February's downwardly-adjusted 0.5% decrease.

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, declined by a smaller amount than expected to 6.19 million jobs available to be filled in March, from February's upwardly-revised 7.00 million figure and compared to forecasts calling for 5.80 million. The report showed the hiring rate declined to 3.4% from February's 3.8% rate and separations jumped to 9.6% from 3.7%.

Treasuries finished lower following the data, as the yield on the 2-year note was little changed at 0.15%, while the yields on the 10-year note and the 30-year bond moved 2 basis points higher to 0.64% and 1.31%, respectively.

With the Fed ramping up purchases of Treasuries and mortgage-backed securities, as well as lending support to some areas of the corporate and municipal debt markets, Schwab's Chief Fixed Income Strategist Kathy Jones offers insight into how to invest in the bond markets during this unprecedented time in her Q2 Bond Market Outlook: Looking Beyond the Coronavirus Crisis. Also, Schwab's Fixed Income Director, Cooper Howard, CFA, discusses the heightened focus on the municipal bond markets in his article, Coronavirus and the Municipal Bond Market: Questions and Answers, while Fixed Income Strategist, Collin Martin, CFA, delivers a look at What Happens When a Corporate Bond is Downgraded?

Europe and Asia mixed amid focus on reopenings and data

European equities finished mixed, as the markets continued to eye reopening progress in Asia, with China posting stronger-than-expected industrial production in April, along with the continued commencement of reopenings in key regions of Europe and phased restarts in the U.S. The signs of improvement in early May economic data in the U.S. appeared to also lend some support and overshadow Q1 GDP reports in the region. Eurozone output contracted 3.2% y/y, slightly better than the projected 3.3% drop, while Germany's economic activity shrank 2.3% y/y, larger than the forecasted 2.0% decline. The euro ticked higher versus the U.S. dollar, but the British pound lost ground, while bond yields in the region mostly moved to the upside. The stock markets have been sheltered somewhat from the severe COVID-19 disruption by the plethora of global fiscal and monetary policy relief measures being deployed and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his latest article, What's the Future Payback for the Stimulus. Jeff notes that it is becoming increasingly clear that the massive global stimulus is being financed by a rise in money, not debt and the biggest difference between a one-time rise in money compared to a rise in debt is a potentially brighter economic outlook. He adds that the biggest risk may be that this isn't a one-time event and in the future, governments might be more inclined to keep on running big budget deficits financed by central bank money potentially leading to slower growth, weaker currencies, unwanted inflation, and central bank insolvency.

The U.K. FTSE 100 Index was up 1.0%, Germany's DAX Index rose 1.2%, France's CAC-40 Index ticked 0.1% higher and Switzerland's Swiss Market Index gained 0.4%, while Italy's FTSE MIB Index shed 0.1% and Spain's IBEX 35 Index decreased 1.1%.

Stocks in Asia finished mixed, with the markets digesting a host of April Chinese economic data, while continuing to monitor the progress of global economic reopenings, the flood of global fiscal and monetary policy relief efforts, and resurfacing U.S./China tensions. China's industrial production rebounded much more than expected, while its retail sales fell more than anticipated and fixed asset investment fell by a slightly larger amount than projected. Schwab's Jeffrey Kleintop provides a look at monitoring the progress of global economic reopenings in his commentary, Dashboards: Measuring Recovery In Real Time, and he provides weekly updates of the dashboard data under the Twitter handle: @jeffreykleintop. Jeff also discusses What Will The Recovery Look Like?, noting how early signs in Asia of a V-shaped rebound are encouraging, but may instead look more like a square root, flattening out as weaker global growth saps Asian economic momentum in the second quarter. Jeff concludes with noting that emerging markets, led by China and South Korea, are leading the recovery in the economy and markets as they did during the global recessions of 2000-02 and 2008-09.

China's Shanghai Composite Index and the Hong Kong Hang Seng Index both dipped 0.1%, while Japan's Nikkei 225 Index gained 0.6%. South Korea's Kospi Index ticked 0.1% higher and Australia's S&P/ASX 200 Index jumped 1.4%, though India's S&P BSE Sensex 30 Index edged 0.1% lower.

Stocks pare recent rally this week as sentiment shifts slightly defensive

U.S. stocks fell on the week, trimming a recent rally but remaining comfortably north of the March lows. The mood in the markets appeared to tilt toward a defensive stance as optimism regarding the reopenings of some key global economies and the commencement of restarts in parts of the U.S. was hampered by reports of new COVID-19 clusters showing up in Asia and Europe. Also, U.S./China trade tensions continued to resurface to dampen conviction, while the economic calendar delivered some painful April data points. Inflation figures declined to keep concerns about a potential deflationary environment emerging alive, and the futures markets continued to suggest the Fed may have to consider the possibility of negative rates, culminating with the record drops for retail sales and industrial production. Moreover, weekly initial jobless claims, although decelerating, remained heartbreakingly high near the 3.0 million mark to bring the total COVID-19 unemployment impact so far to north of 36.0 million people. Fed Chairman Jerome Powell offered some sobering remarks regarding the uncertain outlook, making the case for further fiscal stimulus measures though he did reiterate the Central Bank's reluctance to explore the idea of negative rates. House democrats proposed a new $3.0 trillion relief package but the Senate seemed to throw cold water on the prospects of it receiving Congressional approval.

Q1 earnings season continued to wind down and offer little in the way of clarity of earnings and revenues going forward. With 90% of the S&P 500 companies in the books, roughly 60% have topped revenue forecasts and nearly 67% have bested earnings projections, with y/y revenue growth sitting at 0.9% and EPS on track to be down 7.3%, per data compiled by Bloomberg. The healthcare sector was the lone group to post positive weekly figures and consumer staples also outperformed most other sectors but still finished lower. Real estate issues fell sharply, along with industrials and financials, while energy stocks also dropped despite a sharp rise in crude oil prices on signs the massive supply overhang may be getting chewed through slowly amid the global economic reopenings. Gold rallied to multi-year highs and the U.S. dollar saw some demand, though the Treasury yield curve flattened a bit after a recent uptick.

Next week, with some of retail giants putting the finishing touches on earnings season, housing data will dominate the economic calendar, with the May NAHB Housing Market Index followed by April reads on housing starts and building permits and existing home sales. May reports on manufacturing activity will also likely garner heightened scrutiny, with the Philly Fed Manufacturing Index and Markit's preliminary Manufacturing PMI hitting the tape. Other data points that could cause some market reaction will come in the form of Markit's Services PMI for May, the minutes from the Fed's April monetary policy meeting, the April Leading Index, and initial jobless claims for the week ended May 16. Fed commentary will also pour in, with Chairman Powell testifying before the Senate Banking Committee and speaking again at the "Fed Listens" event next week.

The international economic docket will also provide some potential market-moving reports, headlined by a host of May preliminary PMI reports on business activity out Australia, Japan, the Eurozone and U.K. Other reports that deserve a mention include: China—1-year and 5-year loan prime rate decisions and April home prices. Japan—Q1 GDP, core machine orders and trade balance. Eurozone—April new car registrations, May consumer confidence and consumer price inflation for April, along with German investor sentiment for May. U.K.—March employment change, April inflation statistics, and retail sales for last month.

Our latest Schwab Market Perspective: Riding the Liquidity Wave, discusses the several reasons for the sharp gains for the U.S. stock markets in April and early May, including the massive injection of liquidity from both the Federal Reserve and Congress, the historically common trait of stocks rebounding in advance of the trough in economic activity and as the globe gets past the peak in lockdowns. Market volatility underscores the importance of having a portfolio that contains a variety of asset classes, including stocks and bonds, balanced in a way that reflects your risk tolerance and investment timeline. It's also a good idea to rebalance your portfolio periodically to bring it back to your original asset allocation targets.

Important Disclosures

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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Stocks Able to Eke Out Gains

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