Eased Tightening Concerns Power Stocks Higher for the Week

U.S. equities finished mostly higher, notching solid weekly gains and fresh record highs along the way. The moves came amid eased concerns over global monetary policy tightening, while yesterday's agreement between the White House and a bipartisan group of Senators on a $1.2 trillion infrastructure package also buoyed sentiment. Most sectors were in the green today, but Information Technology suffered some, keeping the Nasdaq more rangebound. In equity news, Dow member NIKE posted strong quarterly profits and offered upbeat guidance, while shares of FedEx saw pressure after it reported mixed results, and the banking sector was in focus after the Fed's release of stress test results. On the economic front, personal income and spending figures were mixed and consumer sentiment was revised slightly lower but still up from the prior month. Treasuries were lower and the U.S. dollar was little changed, while gold nudged to the upside and crude oil prices were higher. Europe finished mixed but was able to post gains for the week, and Asia finished out in positive fashion.

The Dow Jones Industrial Average rose 237 points (0.7%) to 34,434, the S&P 500 Index increased 14 points (0.3%) to 4,281, while the Nasdaq Composite ticked 9 points (0.1%) lower to 14,360. In heavy volume, 2.8 billion shares were traded on the NYSE and 7.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.75 to $74.05 per barrel. Elsewhere, the Bloomberg gold spot price increased $3.66 to $1,788.83 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 91.79. Markets were solidly higher for the week, as the DJIA jumped 3.4%, the S&P 500 advanced 2.7%, and the Nasdaq Composite moved 2.4% to the upside.

Dow member NIKE Inc. (NKE $154) reported fiscal Q4 adjusted earnings-per-share (EPS) of $0.93, topping the $0.51 FactSet estimate. Revenues of $12.3 billion rose 96.0% year-over-year (y/y) and were up 21.0% compared to 2019, above the Street's forecast of $11.0 billion. Gross margin was stronger than expected and the company's digital sales were 73.0% higher y/y. North America posted record revenues, up 141% y/y and 29% above the same period in 2019, while its Europe, Middle East and Africa sales registered similar growth, though its China segment missed. The company said, "NIKE’s brand momentum is a testament to our authentic consumer connections, digital strength and continued operational execution." The company issued current fiscal year guidance that topped forecasts and announced an upbeat longer-term outlook. Shares rallied over 15%.

FedEx Corporation (FDX $292) posted fiscal Q4 adjusted EPS of $5.01, just shy of the Street's $5.02 forecast, with revenues rising 29.9% y/y to $22.6 billion, exceeding the forecasted $21.5 billion. The company said its results were primarily driven by volume growth and disciplined revenue and portfolio management, partially offset by costs to support strong demand, increased variable compensation expense, and higher labor rates. Shares traded lower.

The Financials sector was in focus after the Federal Reserve released the results of its stress test of the banking industry, which showed that large banks continue to have strong capital levels and could continue lending to households and businesses during a severe recession. The results could lead to increased returns to shareholders in the form of share repurchases and dividends. For a look at our recent upgrade of the Energy sector and our rationale for our downgrade of the Financials sector in our Schwab Sector Insights: A View on 11 Equity Sectors. Stocks in the sector were again higher after the group helped lead the markets to fresh record highs yesterday ahead of the results.

The Schwab Center for Financial Research (SCFR) offers our 2021 Mid-Year Market Outlook: Peak or Pause?, noting that looking ahead to the second half of 2021, we think there are some notable market risks associated with the combination of peak economic/earnings growth rates, higher inflation, Federal Reserve policy and some stretched investor sentiment conditions.

Amid this backdrop, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her article, Turn Turn Turn: Rotations Persist, how the market has become less binary in terms of leadership, with macro factors having a waning influence in favor of company/industry fundamentals. She adds that she continues to believe stock-oriented investors should take a hybrid approach—with a focus on both growth and value factors, regardless of sector biases within Growth or Value indexes (in other words, emphasize lower-case “g” and “v” more than upper-case “G” and “V”). Liz Ann also points out that investing based on fundamentals will never go out of style, while cautioning investors to remember that neither FOMO (fear of missing out) nor HODL (holding on for dear life) are investment strategies.

Check out all our market commentary on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

Personal income and spending report mixed, consumer sentiment improves month over month

Personal income (chart) declined 2.0% month-over-month (m/m) in May, versus the Bloomberg forecast of a 2.5% decrease, following April's unrevised 13.1% drop. Personal spending came in flat, below estimates of a 0.4% gain and compared to the prior month's upwardly-adjusted 0.9% rise. The May savings rate as a percentage of disposable income was 12.4%.

The PCE Deflator increased 0.4% m/m, below expectations of a 0.5% gain and versus April's unadjusted 0.6% increase. Compared to last year, the deflator was 3.9% higher, in line with estimates and compared to April's unrevised 3.6% gain. Excluding food and energy, the PCE Core Index rose 0.5% m/m, south of expectations of a 0.6% increase and versus April's unadjusted 0.7% rise. The index was 3.4% higher y/y, matching estimates, and above April's unadjusted 3.1% increase.

The June final University of Michigan Consumer Sentiment Index (chart) was revised lower to 85.5, versus expectations to be revised to 86.5 from the preliminary reading of 86.4. The downward revision came as both the current conditions and the expectations portions of the survey were adjusted to the downside. However, the overall index was higher versus May's 82.9 level, as a solid improvement in the expectations component versus the prior month more than offset a slight decline in the current conditions portion. The 1-year inflation forecast came in at 4.2%, down from May's 4.6% rate, and the 5-10 year inflation forecast decreased to 2.8% from the prior month's 3.0% forecast.

Treasuries were mostly lower, as the yield on the 2-year note was flat at 0.27%, while the yield on the 10-year note gained 4 basis points (bps) to 1.53% and the 30-year bond rate rose 6 bps to 2.16%.

Treasuries have been choppy as of late in the wake of last week's slightly more hawkish monetary policy stance from the Fed, while Chairman Jerome Powell this week followed that up with dovish Congressional testimony. Schwab's Liz Ann Sonders discusses the Fed's tweak to its monetary policy in her latest article, Fed Still Hasn't Found What it's Looking For.

Liz Ann points out that longer term, inflation's trajectory will be largely dependent on the labor market and whether wage growth becomes persistent and pervasive—possibly leading to a "wage-price spiral" type of inflation. She discusses how we sit in the transitory camp and while we wait to see how this fleshes out, it's important to point out that inflation can't be viewed in a vacuum. She concludes by saying that it's too soon to judge whether the Fed's firm belief that inflation will be "transitory" comes to fruition; but other factors need to be considered in the meantime, including economic (and productivity) growth and further healing in the labor market.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in our latest Schwab Market Perspective: Beneath the Surface, we expect the process of the Fed tapering to be gradual and unlike the 2013 "taper tantrum," it won't come as a surprise, and yields are well above the recession lows. She adds that nonetheless, we do expect bond yields to rise moderately over the second half of the year. Kathy concludes by pointing out that at current levels, bond yields are inconsistent with a strengthening economy, increasing supply of Treasuries to be absorbed by the market, and the risk that inflation settles at higher than 2% longer-term.

Europe mixed but positive for the week, Asia higher

European equities finished mixed, but posted solid gains for the week. The markets continued to assess global monetary policies after U.S. Fed Chairman Jerome Powell this week offered some dovish testimony, which was followed by a similar tone out of the Bank of England (BoE) yesterday. Moreover, the action followed yesterday's gains which came as the U.S. announced an agreement on a $1.2 trillion infrastructure spending package. The Financials and Health Care sectors traded higher, while Consumer Staples and Information Technology issues saw some pressure. In economic news, Italian consumer and manufacturing confidence reports both improved more than expected in June. The euro was little changed versus the U.S. dollar, while the British pound extended yesterday's decline that came on the heels of the BoE's monetary policy decision. Bond yields in both the Eurozone and the U.K. were higher.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his 2021 Mid-Year Outlook: Global Stocks and Economy, noting how the recovery is now over and a new global economic expansion has begun. He discusses how the new economic cycle has seen stock market leadership pass from the U.S. to Europe.

The U.K. FTSE 100 Index was up 0.4%, France's CAC-40 Index ticked 0.1% lower, Germany's DAX Index and Switzerland's Swiss Market Index were 0.1% higher, Italy's FTSE MIB Index rose 0.4%, and Spain's IBEX 35 Index gained 0.2%.

Stocks in Asia finished higher in the final session of a choppy week that saw Japanese markets post some wild swings. The advance follows the extended rally in the U.S. as concerns about tightening global monetary policies continued to fade and the world's largest economy announced an agreement on a highly-anticipated infrastructure spending package of $1.2 trillion. The markets also likely eyed this week's slight pullback in the U.S. dollar from last week's spike and recent actions out of China to crackdown on speculation in the commodity and cryptocurrency markets. In economic news, Japan's June consumer price inflation out of Tokyo was flat compared to forecasts of a decline. Amid the market choppiness, check out our article, How Traders Can Take Advantage of Volatile Markets, in which we offer four steps to consider, which implemented with a disciplined approach can help you learn to manage volatility for your benefit—while helping you minimize risks.

Japan's Nikkei 225 Index gained 0.7% even as the yen gained some ground late in the day, and China's Shanghai Composite Index advanced 1.2%. Elsewhere, South Korea's Kospi Index and Australia's S&P/ASX 200 Index both increased 0.5%. India's S&P BSE Sensex 30 Index traded 0.4% to the upside and the Hong Kong Hang Seng Index moved 1.4% higher.

Stocks snapback from last week's tumble

U.S. stocks rallied on the week, bouncing back from last week's drop to make fresh record highs. Participation was relatively broad, with solid gains for the Financials, Industrials, Materials and Health Care sectors being accompanied by respectable advances for Information Technology, Consumer Discretionary and Communications Services issues. Energy was again the leader as crude oil prices extended a weekly winning streak to five, while the defensively-natured and interest rate sensitive Utilities sector was the lone group in the red. Cyclical and growth sectors both found some bullish support as the Treasury yield curve steepened somewhat after last week's decisive flattening and optimism resurfaced regarding the passage of a highly-anticipated infrastructure spending plan as President Joe Biden reached an agreement with a group of bipartisan Senators on a $1.2 trillion package. Moreover, monetary policy concerns eased as Fed Chairman Jerome Powell delivered dovish testimony on Capitol Hill after last week's incrementally hawkish monetary policy decision unnerved the markets. Economic data continued to suggest solid expansion but not hot enough the evoke inflation or monetary policy tightening concerns, as June manufacturing and services sector growth remained solid for June, weekly initial jobless claims decelerated again but came in a bit above forecasts, and home sales remained hampered by supply issues in May.

Next week, the economic calendar is poised to command attention with the June Consumer Confidence report getting the ball rolling, while the docket will heat up with the June ISM Manufacturing Index. However, the labor market could grab the lion's share of attention as jobless claims for the week ended June 26 will precede the closely-followed nonfarm payroll report for June. Finally, a host of Fedspeak may continue to be scrutinized given the market's hyper-sensitivity to the path of monetary policy. Ahead of the data, Schwab Jeffrey Kleintop offers his latest article, Is Good Data Now Bad News?, discussing how it is possible that good data could be interpreted as bad news for the U.S. stock market at least in the near-term as strong economic data, especially on jobs, could prompt the Fed to unwind earlier. In contrast, good news may remain good news for international stocks, because the rise in inflation has not been seen globally and central bankers in Europe and Japan are not under pressure to communicate tighter policy.

Next week's international economic calendar will also likely bring some potential market-moving data points, headlined by China's June Manufacturing and Non-Manufacturing PMIs and a key report on Japan's Q2 manufacturing sentiment, known as the Tankan survey. Other reports on the global docket include; Australia—trade balance. India—Manufacturing PMI. Japan—retail sales and industrial production. Eurozone—economic confidence and consumer price inflation statistics, along with German retail sales and unemployment change. U.K.—Q1 GDP.

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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Eased Tightening Concerns Power Stocks Higher for the Week

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