Complete Stock Comeback Falls Short

U.S. stocks finished mixed as choppiness in the markets returned to stymie the Dow and S&P 500 attempts to overcome early week losses, though the Nasdaq managed to snap a string of four-straight weekly losses. Conviction appeared conflicted amid a host of strong global data, while Fed uncertainty remained palpable as signs of rising inflation figures continued to pour in. Optimism of strong global economic recoveries was bolstered by May business activity reports today that showed U.S. and U.K. growth registering records and Eurozone output the strongest in over three years, but Markit noted that cost burdens continued to be keenly felt. Earnings reports also painted a positive picture, headlined by strong results and guidance from Deere & Company and Applied Materials. Treasuries were little changed, while the U.S. dollar recovered somewhat as volatility for the greenback continued. Gold and crude oil prices gained ground. In other economic news, April existing home sales unexpectedly dropped. Asia finished the week out in mixed fashion and Europe traded mostly higher following the data.

The Dow Jones Industrial Average rose 124 points (0.4%) to 34,208, while the S&P 500 Index dipped 3 points (0.1%) to 4,156 and the Nasdaq Composite declined 65 points (0.5%) to 13,471. In moderate volume, 966 million shares were traded on the NYSE and 3.6 billion shares changed hands on the Nasdaq. WTI crude oil advanced $1.64 to $63.58 per barrel. Elsewhere, the Bloomberg gold spot price rose $2.81 to $1,880.02 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.2% to 89.99. Markets were mixed for the week, as the DJIA decreased 0.5% and the S&P 500 shed 0.4%, while the Nasdaq Composite advanced 0.3%.

Deere & Company (DE $360) reported fiscal Q2 earnings-per-share (EPS) of $5.68, above the $4.51 FactSet estimate, as net sales of equipment grew 33.7% year-over-year (y/y) to $11.0 billion, topping the Street's forecast of $10.6 billion. The company said with another quarter of solid performance, it closed out the first half of the year on a highly encouraging note as its results received support across its entire business lineup, reflecting healthy worldwide markets for farm and construction equipment. DE raised its full-year net income outlook, but noted that while it is performing at a high level, it expects to see increased supply-chain pressures through the balance of the year, and it is working closely with key suppliers to secure the parts and components that its customers need to deliver essential food production and infrastructure. Shares were higher.

Applied Materials Inc. (AMAT $129) posted adjusted EPS of $1.63, exceeding the forecasted $1.51, with revenues rising 41.0% y/y to $5.6 billion, north of the projected $5.4 billion. The chip equipment company said its "record performance" is underpinned by broad-based strength across its semiconductor businesses. AMAT issued Q3 EPS and revenue guidance that was above estimates, pointing out that it is confident in its ability to outperform its markets as large, secular trends create sustainable demand for semiconductors and its leadership in materials engineering becomes increasingly critical to deliver new chip technologies. Shares, which were up over 50% year-to-date after yesterday's close, finished lower despite the results.

The markets have seen volatility ramp up amid concerns about the implications of recent signs of rising inflation pressures and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest commentary, World of Inflation: Transitory or More Nefarious?, how inflation has become an obsessed-about topic; with the latest CPI report reinforcing inflationists' fears. Liz Ann addresses the question of whether the Fed is right that it’s only a "transitory" problem?

For more on the market volatility as of late, which has been exacerbated by choppiness in the cryptocurrency markets check out our Market Insights page on www.schwab.com, where you can also find our Bitcoin FAQs. Finally, stay on top of all our analysis as it comes out by following us on Twitter at @SchwabResearch.

May manufacturing and services growth accelerates, existing home sales surprisingly decline

The preliminary Markit U.S. Manufacturing PMI Index for May improved to 61.5 from April's unrevised 60.5 figure, moving further into expansion territory as denoted by a reading above 50. The Bloomberg consensus estimate called for the index to dip to 60.2. The preliminary Markit U.S. Services PMI Index showed growth (above 50) for the key U.S. sector jumped, rising to 70.1 from April's 64.7 figure, and compared to forecasts of a dip to 64.3.

Markit said private sector firms across the U.S. signaled an unprecedented expansion in business activity in May. Growth was driven by the fastest service sector upturn on record, with the increase in manufacturing output also accelerating amid stronger client demand. New orders rose for the fifth month in a row with demand getting a boost from greater customer confidence and the further reopening of the economy. New export business rose at the fastest pace since the series began in September 2014, while employment continued to grow but at a slower pace compared to April. However, the release noted that increasing cost burdens continued to be keenly felt, as the rate of input price inflation soared to a new survey record high.

Existing home sales dropped 2.7% month-over-month (m/m) in April to an annual rate of 5.85 million units, versus expectations of a slight increase to 6.07 million units from March's unrevised 6.01 million rate. However, existing home sales were up 33.9% y/y.

This was the third-straight monthly decline and the National Association of Realtors (NAR) said all but one of the four major regions witnessed m/m drops, while each saw double-digit y/y gains. Sales of single-family homes were down m/m but up solidly y/y, while purchases of condominiums and co-ops were up m/m and y/y. The median existing home price was up 19.1% from a year ago to $341,600, marking the 110th straight month of y/y gains as prices rose in every region. Unsold inventory at a 2.4-months pace at the current sales rate was up slightly m/m but down sharply from the from the 4.0-months pace a year earlier. Existing home sales reflect contract closings instead of signings and account for a large majority of the home sales market.

NAR Chief Economist Lawrence Yun said, "Home sales were down again in April from the prior month, as housing supply continues to fall short of demand." Yun added that, "We'll see more inventory come to the market later this year as further COVID-19 vaccinations are administered and potential home sellers become more comfortable listing and showing their homes. The falling number of homeowners in mortgage forbearance will also bring about more inventory."

Treasuries were little changed, with the yield on the 2-year note ticking 1 basis point (bp) higher to 0.15%, the yield on the 10-year note flat at 1.62%, and the 30-year bond rate dipping 1 bp to 2.32%.

Amid the increased attention on rising inflation pressures Schwab's Chief Fixed Income Strategist Kathy Jones offers in her latest article, Inflation Expectations are Up. Should Investors Worry?, how investors can take steps to navigate the changes as we see that a modest rise in inflation may lift longer-term bond yields. Kathy also notes in her commentary, Is 1970s-Style Inflation Coming Back?, that although we expect higher prices over the next few years, a return to that level of inflation is unlikely. Moreover, Schwab's Managing Director and Fixed Income Strategist Collin Martin, CFA, and Senior Fixed Income Research Analyst, Christina Shaffer discuss in the article, Rising Inflation: What It Means for TIPS and Other Investments, how rising inflation pressures and expectations can impact various asset classes.

Europe mostly higher, Asia mixed following strong data and U.S. rebound yesterday

European equities traded mostly higher, seeming to find some support from the resiliency in the U.S. yesterday that ended a three-session losing streak. The markets moved higher as a flood of data showed economic activity is ramping up as COVID-19 restrictions ease in the region as vaccine rollouts gain steam. Markit's Eurozone Composite PMI for May increased to 56.9, from April's 53.8 level, and versus the expected rise to 55.1. The index is a gauge of both manufacturing and services sector activity and hit the fastest pace of expansion in more than three years, with manufacturing growth accelerating slightly but the services sector expansion jumping. Moreover, Markit's U.K. Composite PMI improved to 62.0 this month from April's 60.7, and versus the expected 61.9 reading. Markit said this was the fastest pace of expansion since it began conducting the survey, with manufacturing growth decisively accelerating and the expansion in the services sector remaining robust. In other economic news, U.K. April retail sales surged 9.2%, following the 5.1% gain in March and topping estimates of a 4.5% increase. The euro and the British pound dipped versus the U.S. dollar, while bond yields in the Eurozone and the U.K. traded lower.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Is Stagflation Back?, noting how the constraint on global growth this year has evolved from the supply of vaccines to the supply of nearly everything else. Jeff adds that the shortage of supplies indicates risk of economic weakness coupled with rising prices. Yet, he points out that these forces of stagflation may be offset through prompting central banks to continue stimulus, lawmakers to rollout additional fiscal stimulus in the U.S. and Europe, and business leaders to invest in a wave of capital spending, accompanied by a sharp rebound in output by the service sector.

The U.K. FTSE 100 Index was little changed, while France's CAC-40 Index and Switzerland's Swiss Market Index were up 0.7%, Germany's DAX Index gained 0.4%, Spain's IBEX 35 Index advanced 0.9%, and Italy's FTSE MIB Index increased 1.1%. Stocks in Asia finished mixed in the final session of the week, following the snapped three-day losing streak out of the U.S. yesterday, while the markets continued to grapple with elevated inflation worries and what implications that can have on the extremely-accommodative global monetary policies. Moreover, expectations of accelerating economic recoveries across the world remain and the region kicked off a global read on May business activity. Japan's manufacturing output slowed slightly but remained in expansion territory, while the contraction in the nation's services sector accelerated. Australia reported that its manufacturing sector grew at a faster pace than in April, and the strong expansion for its services sector remained despite a slight slowdown. In other economic news, Japan's national consumer price inflation dipped in April by a slightly smaller amount than anticipated. Japan's Nikkei 225 Index gained 0.8%, even as the yen extended a recent rise. India's S&P BSE Sensex 30 Index outperformed, rising 2.0% and Australia's S&P/ASX 200 Index nudged 0.2% to the upside. However, China's Shanghai Composite Index declined 0.6% and the Hong Kong Hang Seng Index finished little changed, while South Korea's Kospi Index slipped 0.2%. With volatility in the global markets lingering, Schwab's Jeffrey Kleintop offers his article, What's Working? Two Ideas For Investors, discussing two investment themes that have been rewarding investors with outperformance.

Stocks see another second-half comeback

U.S. stocks experienced a tale of two halves for the second-straight week, rebounding after hump day with the Information Technology sector leading the charge. The first half of the week once again saw the bears work off some of the froth built up in the markets as inflation concerns remained the major contributor. Also, conviction was stymied by worries that the Fed may be getting behind curve and could be forced to act sooner and swifter to keep the price stability side of its dual mandate under control.

As such, the midweek release of the minutes from the Fed's April monetary policy meeting headlined the economic front. The report showed policymakers acknowledged the solid recovery in the economy but continued to stress that we remain far from meeting its goals of maximum employment and price stability. However, the biggest reaction in the markets seemed to come from commentary on the discussion of asset purchases. The minutes noted that, "A number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases." Treasury yields and the U.S. dollar briefly spiked on the report but settled back to pre-release levels as the week matured.

The markets also grappled with a decisive miss in April housing starts that likely did little to ease concerns about the severe drought in the supply of homes for sale. The retail sector put the finishing touches on Q1 earnings season, with Dow member Walmart Inc. (WMT $142) and Target Corporation (TGT $225) highlighting the calendar, though strong results from Dow component Home Depot Inc. (HD $316) and Lowe's Companies Inc. (LOW $192) failed to lift their shares. In choppy trading for the week, Treasury yields finished little changed, the U.S. dollar dipped, crude oil prices fell and gold moved higher. The market leaders had a defensive tilt, with Health Care, Real Estate and Consumer Staples the outperformers, while the Industrials and Energy sectors fell, along with Consumer Discretionary, Materials and Financials.

Next week, inflation will likely remain top of mind for the markets and reports on the economic calendar, such as May Consumer Confidence, the first revision (of two) of Q1 GDP, personal income and spending, and the final May University of Michigan Consumer Sentiment Index, are likely to be dissected with a keen eye on their inflation components. The economic week will also deliver new home sales and the preliminary durable goods orders report both for April.

The international economic week will be relatively light but offer a few data points worth noting; China—industrial profits. Japan—department store sales and Tokyo inflation figures. Eurozone—economic confidence, along with German business confidence and retail sales.

As noted in our latest Schwab Market Perspective: Will the Economy Overheat?, a boom in spending has stirred fears of economic overheating, which has coincided with a surge in commodity prices and a lift in traditional inflation metrics. Europe’s economy is finally turning the corner, leaving its double-dip recession behind. Meanwhile, interest rates have been in a holding pattern over the past month despite inflation fears, suggesting the bond market has already discounted much of the rebound in the economy since last year.

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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Complete Stock Comeback Falls Short

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