Stocks Recover…Somewhat

U.S. equities finished the last trading session of the week on an up note, but yesterday's plunge amid elevated worries of a second-wave of COVID-19 brought the major indexes solidly in the red for the week, snapping a three-week winning streak. The concerns dampened reopening optimism, which has been a key catalyst of the decisive bounce off of the March lows, while this week's dovish Fed outlook appeared to also stymie conviction. In equity news, Adobe posted mixed Q2 results, Lululemon missed quarterly forecasts, and Dick's Sporting Goods reinstated its dividend program. Treasury yields were higher after the curve noticeably flattened Thursday and the U.S. dollar added to a recent rebound, while gold gained modest ground and crude oil prices nudged lower. Domestic economic data showed that a preliminary read on June consumer sentiment improved more than expected and import prices rose in May. Overseas, markets in Europe and Asia finished out the week mixed.

The Dow Jones Industrial Average rose 477 points (1.9%) to 25,606, the S&P 500 Index increased 39 points (1.3%) to 3,041 and the Nasdaq Composite gained 96 points (1.0%) to 9,589. In heavy volume, 1.2 billion shares were traded on the NYSE and 4.3 billion shares changed hands on the NASDAQ. WTI crude oil nudged $0.08 lower to $36.26 per barrel and wholesale gasoline was unchanged at $1.12 per gallon. Elsewhere, the Bloomberg gold spot price advanced $3.74 to $1,731.44 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.5% at 97.21. For the week, the markets snapped a three-week winning streak to finish solidly lower, as the DJIA tumbled 5.6%, the S&P 500 fell 4.8%, and the Nasdaq Composite declined 2.3%.

Adobe Inc. (ADBE $407) reported fiscal Q2 earnings-per-share (EPS) of $2.27, or $2.45 ex-items, versus the $2.32 FactSet estimate, as revenues rose 14.0% year-over-year (y/y) to a record $3.1 billion, south of the Street's expectation of $3.2 billion. The company said its digital media segment revenues rose 16.0% y/y, and its digital media experience subscription revenues rose 14.0%, excluding its advertising cloud segment, which it accelerated its previously stated strategy of eliminating the low-margin business during the quarter in light of the macroeconomic environment. The company said due to the macroeconomic environment and strategic shifts for its advertising cloud business, it withdrew its full-year guidance provided in December 2019. Shares traded higher.

Lululemon Athletica Inc. (LULU $296) posted Q1 EPS of $0.22, one penny shy of the Street's forecast, as revenues declined 17.0% y/y to $652 million, south of the projected $692 million. LULU noted the impact of the COVID-19 pandemic, which resulted in temporary closures of stores across the globe. However, the company said it has reopened stores in mainland China and it has begun to reopen stores in North America, Europe and certain countries in Asia Pacific. LULU added that due to the impact that COVID-19 is having across the globe, and the rapid and continuous developments, it is not providing detailed financial guidance for 2020 at this time. Shares were lower.

Dick's Sporting Goods Inc. (DKS $39) gained solid ground after the company announced that it has reinstated its dividend program, while noting that it is seeing strong early sales results as stores have reopened and it expects to have nearly 100% of its stores reopened by June 30.

Stocks pulled back sharply yesterday after the decisive rally off of the March lows that had ushered in fresh record highs for the Nasdaq and pushed the S&P 500 Index to levels flirting with positive territory for the year. Reports of a rise in new COVID-19 cases in some states fostered concerns about a potential second wave of the virus after the recent surge in the equity markets had been fueled somewhat by optimism of progress on economic reopenings.

Also, the markets continue to digest Wednesday's monetary policy decision from the Federal Reserve that included an outlook for a sharp rebound in economic output in 2021 from a dismal 2020, while the Central Bank put a floor under its monthly asset purchases and plans to keep its target for the fed funds rate near zero until 2022. For an in-depth look at the Fed's decision, check out Schwab's Chief Investment Strategist Liz Ann Sonders' latest commentary, Fed and Watered: Rates to Stay Near Zero. Liz Ann also offers her article, Disconnect the Dots: Main Street vs. Wall Street, noting how surging liquidity and hopeful virus treatment/vaccine news have been significant tailwinds behind stocks, but heightened complacency could breed risks, with no shortage of potential negative catalysts.

Stay on top of the markets during this unprecedented time by following experts from the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and by visiting www.schwab.com/volatility to see all the content Schwab offers on the unparalleled market action.

June consumer sentiment improves, import prices rise in May

The June preliminary University of Michigan Consumer Sentiment Index (chart) improved to 78.9 versus the Bloomberg expectation of a rise to 75.0 from May's 72.3 reading. The larger-than-expected upswing for the index came as the both the current conditions and the expectations portions of the survey gained ground. The 1-year inflation forecast declined to 3.0% from May's 3.2% rate, and the 5-10 year inflation forecast dipped to 2.6% from the prior month's 2.7% level.

The Import Price Index (chart) increased 1.0% month-over-month (m/m) for May, compared to the Bloomberg expectation of a 0.6% rise, and following April's unrevised 2.6% drop. Compared to last year, prices were down 6.0%, compared to forecasts of a 6.4% fall and versus April's unrevised 6.8% drop.

Treasuries were lower, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.19%, while the yields on the 10-year note and the 30-year bond were up 5 bps at 0.71% and 1.46%, respectively.

The Treasury yield curve flattened Thursday, with the markets grappling with increased concerns regarding a potential second wave of COVID-19 cases and in the wake of the Fed's dovish monetary policy decision this week. Bond yields had seen a recent rise that was especially noticeable on the mid-to-long end of the curve, amid the rally in the stock markets and the backdrop of the massive amount of monetary and fiscal policy stimulus. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her article, Stimulus = Inflation? Why It May Be Different This Time, how despite massive fiscal and monetary stimulus, we believe there's little risk of inflation in the next few years.

Europe and Asia mixed to close out the week

European equities finished mixed, with most markets rebounding from yesterday's broad-based tumble in late-day action, but still solidly lower for the week, as the global markets assessed the flare-up in second-wave COVID-19 concerns and this week's dovish outlook from the Federal Reserve in the U.S. The equity markets pulled back this week from a recent surge on optimism of economic reopenings and the massive amount of global monetary and fiscal policy relief measures. The euro and British pound fell versus the U.S. dollar, which snapped-back yesterday from a slide as of late as risk-on sentiment faded on the aforementioned uneasiness. Bond yields in the region, outside the U.K. and Switzerland, were lower. In economic news, U.K. GDP, industrial production and manufacturing output data for April all fell sharply, while Eurozone industrial production for April dropped decisively but by a slightly smaller amount than economists had anticipated. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers his 2020 Mid-Year Outlook: Global Stocks and Economy, noting that in our 2020 Global Market Outlook, we cited many indicators pointing to heightened risk of a recession; now we highlight increasing signs of a recovery from one.

The U.K. FTSE 100 Index and France's CAC-40 Index were up 0.5%, Spain's IBEX 35 Index advanced 0.2% and Italy's FTSE MIB Index rose 0.4%, while Germany's DAX Index lost 0.2% and Switzerland's Swiss Market Index traded 0.3% lower.

Stocks in Asia finished mixed to close out the week, following yesterday's global stock market decline that trimmed a recent rally as sentiment shifted to a cautious stance on a flare-up in concerns regarding a second-wave of COVID-19 with new U.S. cases being reported out of the world's largest economy. The markets also digested the reaction in the bond and foreign exchange markets as the resurfaced second-wave uneasiness was met with a dovish monetary policy outlook from the Fed. Schwab's Jeffrey Kleintop, CFA, offers his article, What's the Future Payback for the Stimulus? Japan's Nikkei 225 Index declined 0.8%, on the heels of the recent firming of the yen and as data showed the nation's industrial production fell more than previously reported in April. China's Shanghai Composite Index finished little changed and the Hong Kong Hang Seng Index decreased 0.7%. South Korea's Kospi Index fell 2.0% and Australia's S&P/ASX 200 Index dropped 1.9%, though India's S&P BSE Sensex 30 Index rose 0.7%, supported by auto, energy and telecom issues as the economy continues to reopen.

Stocks snap weekly winning streak

U.S. stocks snapped a string of three-straight weekly gains that boosted the Nasdaq to all-time highs and the S&P 500 within shouting distance of positive territory for the year. Reopening optimism that fostered a recent rotation into cyclically-natured sectors and financials faded on flared-up concerns about a potential second-wave of COVID-19. The markets also stumbled in the wake of the Fed's monetary policy decision, which delivered a gloomy outlook for 2020, but showed its target for the fed funds rate is expected remain near zero until at least 2022 and that it will maintain asset purchases at the current pace. Treasury yields gave back most of last week's gains as bond prices rose and the U.S. dollar regained some footing after a recent stumble. Gold rallied and crude oil prices fell solidly. All major market sectors fell, with energy, financials, industrials and materials dropping decisively to lead the broad-based pullback. In other economic news for the week, coming off last-Friday's surprisingly strong May labor report, small business optimism improved more than expected for last month, while consumer, wholesale and import inflation data all remained subdued and initial jobless claims continued to moderate but remained painfully elevated.

Next week's economic calendar will heat up, with a look at May retail sales, along with June manufacturing reports out of the key regions of New York and Philadelphia. Also, housing reports are poised to garner market focus, courtesy of the June NAHB Housing Market Index, along with May reports on building permits and housing starts. Other reports that could also contend for attention would likely be initial jobless claims for the week ended June 13th, as well as the May Leading Index. However, in light of this week's market-moving Fed monetary policy decision, next week's two-day semi-annual policy report to Congress by Fed Chairman Jerome Powell will likely headline the docket.

The international economic calendar will also bring some reports that could foster some attention, with reports worth noting including: Australia—employment change. China—industrial production, retail sales and new home prices. India—trade balance and wholesale price inflation. Japan—Bank of Japan monetary policy decision and trade balance. Eurozone—trade balance, new car registrations, and consumer price inflation figures, along with German investor confidence. U.K.—Bank of England monetary policy decision, employment change, retail sales and inflation statistics.

As noted in our latest Schwab Market Perspective: Mixed Signals, many have been confounded by the stock market's surge since March 23rd amid less-than-rosy U.S. economic data. That disconnect narrowed on Thursday. Ongoing volatility underscores the precariousness of the recent rally. Even as the S&P 500 Index rallied to recoup much of the losses made since its March 23rd low, we have cautioned that a second wave of coronavirus cases could upend investor confidence, raising the prospect of a fresh round of social-distancing restrictions or layoffs. We suggest investors resist the urge to react to daily market movements, make sure your portfolio is appropriately diversified, and make sure your portfolio is consistent with your goals, risk tolerance, and preferences.

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Stocks Recover…Somewhat

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