Investors Remain Rattled by Fed's New Tilt

U.S. equities finished out another volatile week solidly lower, with the Dow and S&P 500 posting sharp weekly losses and the Nasdaq erasing its advance for the week. Volatility persisted in the wake of Wednesday's incremental shift by the Fed to a slightly more hawkish tone which has caused uncertainty to rise regarding how soon the central bank will begin to rein in its asset purchases. Comments from St. Louis Fed President Bullard—a non-voting member this year—added to the Fed's hawkish tenor with his comments this morning. Treasuries were mixed, with yields on the short-end jumping and the long-end falling to flatten the yield curve, pressuring cyclically-natured sectors, notably Financials. The U.S. dollar continued its rally and gold modestly added to the tumble seen this week, while crude oil prices rebounded slightly from yesterday's fall. In equity news, Adobe topped quarterly expectations and issued upbeat guidance, and Fox Corporation increased its share buyback program. The economic calendar was void of any major releases today. Europe finished with broad losses, while markets in Asia finished out the week mixed.

The Dow Jones Industrial Average plummeted 533 points (1.6%) to 33,290, the S&P 500 Index fell 55 points (1.3%) to 4,166 and the Nasdaq Composite declined 131 points (0.9%) to 14,030. In very heavy volume, as a result of quadruple witching day—where options and futures contracts simultaneously expire for stocks and indexes—2.7 billion shares were traded on the NYSE and 6.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.60 to $71.64 per barrel. Elsewhere, the Bloomberg gold spot price declined $3.19 to $1,770.31 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.4% to 92.23. Markets were lower for the week, as the DJIA tumbled 3.5%, the S&P 500 lost 1.9%, and the Nasdaq Composite moved 0.3% to the downside.

Adobe Inc. (ADBE $566) reported adjusted Q2 earnings-per-share (EPS) of $3.03, topping the $2.81 FactSet estimate, with revenues rising 23.0% year-over-year (y/y) to $3.8 billion, just north of the Street's forecast of $3.7 billion. The company said it had an "outstanding" Q2 as Creative Cloud, Document Cloud and Experience Cloud continue to transform work, learn and play in a digital-first world. ADBE added that it delivered strong Digital Media annualized recuring revenue and Digital Experience bookings, as well as record cash flows from operations. ADBE issued Q3 earnings and revenue guidance that was above expectations. Shares were higher.

Fox Corporation (FOX $36) announced that its Board of Directors has authorized incremental stock repurchases of up to an additional $2.0 billion. FOX said this stock buyback program reflects its unwavering confidence in the long-term investment case for the company, which is underpinned by the strength of its core brands and the sustainability of its business, and which it believes is well positioned to continue to generate healthy free cash flow. Shares gained ground.

The Schwab Center for Financial Research (SCFR) offers our 2021 Mid-Year Market Outlook: Peak or Pause?. The SCFR notes 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 it’s been a highly-rotational stock market this year in terms of leadership; with aggressively-speculative themes peppered in. Liz Ann cautions investors to remember that neither FOMO nor HODL are investment strategies.

Check out all our market commentary, including our podcast featuring Liz Ann Sonders on Putting Inflation in Perspective on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

Treasuries remain choppy in the wake of Wednesday's Fed monetary policy decision

Treasuries were mixed, with the economic calendar void of any major releases to close out the week. The yield on the 2-year note gained 5 basis points (bps) to 0.26%, while the yield on the 10-year note declined 6 bps to 1.44%, and the 30-year bond rate decreased 8 bps to 2.02%.

Treasuries remained choppy after yesterday's rebound from Wednesday's drop that lifted yields solidly due to the initial reaction to the Fed's monetary policy decision, in which the Central Bank pulled forward its time frame for when it may begin to raise its benchmark target for the fed funds rate, while boosting its inflation and economic growth forecasts. The U.S. dollar has also rallied noticeably in the wake of the Fed's announcement. Schwab's Liz Ann Sonders discusses the Fed's decision in her latest article, Fed Still Hasn't Found What it's Looking For, noting that investors will likely remain uber-focused on inflation over the next couple of months. She adds that at least a portion of the upside pressure—the base effects relative to last year’s pandemic-related deflation—should begin to fade quickly, while supply chain disruptions and bottlenecks could take a bit longer and will vary from product to product and industry to industry.

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.

Despite Wednesday's noticeable rise, bond yields have shrugged off recent data showing hotter-than-expected inflation and Schwab's Chief Fixed Income Strategist Kathy Jones notes in her 2021 Mid-Year Outlook: Fixed Income, how we see the recent plateau in yields as a pause before the next wave higher given the economic and inflation risks we see for the second half of the year.

Europe lower to close out the week, Asia mixed

European equities finished with widespread losses, with the global markets continuing to react to this week's monetary policy decision out of the world's largest economy of the U.S., which brought an incrementally more hawkish stance, pulling forward its target fed funds rate lift-off forecast in the wake of increased inflation and economic growth outlooks. Moreover, some comments from a Fed official today added to the slightly more hawkish tone and appeared to keep uncertainty elevated regarding how soon the Fed may begin to rein in its asset purchases. The Financial sector was one of the worst performers, while Energy issues led the broad-based decline. The euro and British pound were lower as the U.S. dollar added to this week's rally in response to the Fed's changed tone. Bond yields in the U.K. dipped, and rates in the Eurozone were mixed. In economic news, U.K. retail sales came in below forecasts for May.

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 and Italy's FTSE MIB Index fell 1.9%, Germany's DAX Index and Spain's IBEX 35 Index were down 1.8%, France's CAC-40 Index declined 1.5%, and Switzerland's Swiss Market Index traded 0.6% lower.

Stocks in Asia finished mixed as the markets remain choppy in the wake of this week's U.S. monetary policy decision, which delivered a slightly more hawkish tilt against the backdrop of festering inflation pressures and economic recovery optimism. Schwab's Jeffrey Kleintop offers his article, Signs Inflation's Surge Is Transitory, noting while it's very early to say the rise in inflation has passed, there are signs that the fastest part of the rebound in inflation might soon be over. Jeff adds that raw material prices have pulled back from the highs of early May and supply chains for intermediate goods like semiconductors may be starting to improve. He concludes by noting that if these early signs continue to signal a deceleration of the upsurge in price pressures, market worries over inflation could begin to lessen. Monetary policy remained in focus as the Bank of Japan (BoJ) followed the U.S. Fed's decision by leaving its stance unchanged and extending its pandemic-induced lending program. Accompanying the BoJ's decision, Japan reported that its core consumer price inflation unexpectedly ticked higher for May.

Japan's Nikkei 225 Index declined 0.2% with the yen firming a bit, and China's Shanghai Composite Index finished little changed. The Hong Kong Hang Seng Index gained 0.9% and India's S&P BSE Sensex 30 Index finished flat. South Korea's Kospi Index and Australia's S&P/ASX 200 Index both ticked 0.1% higher.

Stocks slide as markets adjust to Fed's tweaked policy stance

U.S. stocks finished lower on the week, with the S&P 500 and Dow leading to the downside and the Nasdaq relinquishing early gains as the markets reacted to a slightly more hawkish tilt from the Fed after leaving its monetary policy stance unchanged. The Central Bank pulled forward it its forecast for when it could begin to adjust the fed funds target higher, while raising its outlooks for economic growth and inflation. Uncertainty ramped-up regarding how soon the Fed will go from discussing to implementing the tapering of its monthly asset purchases. Accompanying the downside move in the equity markets, the Treasury yield curve flattened noticeably, with the yield on the 2-year note almost doubling and longer-term yields, such as the 30-year bond, falling. Moreover, the currency markets reacted sharply, with the U.S. Dollar Index rallying to levels not seen since April, while gold also moved decisively to the downside. Although commodity prices continued to come off the boil, crude oil prices continued to charge higher, boosting its string of weekly gains to four.

The economic calendar offered little help to counter the bearish mood as May retail sales came in softer than expected, manufacturing growth in New York and Philadelphia slowed for June, jobless claims snapped a string of weekly decelerations, and inflation figures on wholesale and import prices continued to run hotter than expected in May. Against this backdrop, the reversal of the rotation into value or cyclically-natured sectors that had weighed on growth sectors continued this week as Information Technology stocks outperformed, while Materials and Financials issues fell sharply to lead the weekly market decline.

Next week, volatility is likely to remain in the markets as the economic calendar will deliver some data points that could garner attention, with existing home sales for May getting the ball rolling. The report will be followed by June preliminary Manufacturing and Services PMIsfrom Markit, May new home sales, preliminary May durable goods orders, the final read on Q1 GDP, jobless claims for the week ended June 19, May personal income and spending, and the final University of Michigan Consumer Sentiment Index. However, given the hyper-focus of the markets on inflation and the Fed's incrementally more hawkish tone that has fostered uncertainty regarding the commencement of Fed tapering, next week's flood of Fedspeak could bring the heaviest contributor to the market action. The full roster of speakers will be headlined by Fed Chairman Jerome Powell's testimony on Capitol Hill on Tuesday regarding the COVID-19 response and the economy.

Next week's international economic calendar is also poised to offer some data points/events that could command attention given the aforementioned backdrop, headlined by a host of preliminary Manufacturing and Services PMIs, notably out of Japan, the Eurozone and the U.K. Other reports that deserve a mention include; Australia—retail sales. China—1-year and 5-year loan prime rate decisions. Eurozone—consumer confidence, along with German business sentiment. U.K.—the Bank of England monetary policy decision.

As market choppiness appears set to remain, 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.

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Investors Remain Rattled by Fed's New Tilt

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