Labor Report Misses Again but Stocks Close out the Week Higher

U.S. stocks managed to finish with a second-straight weekly advance on the heels of the May labor report that showed a solid acceleration in job growth but at a pace that was below forecasts. Growth stocks, notably the Information Technology and Communications Services sectors, led the way as Treasuries rose to apply downside pressure on yields and the U.S. dollar gave back yesterday's gains. Gold and crude oil prices traded to the upside. In equity news, Broadcom topped quarterly expectations, Costco Wholesale posted strong May same-store sales growth, Lululemon Athletica topped earnings estimates and raised its guidance, and CrowdStrike Holdings saw pressure despite exceeding profit forecasts and issuing favorable guidance. Europe showed some late-day momentum to finish mostly higher, and Asia finished mixed, but action remained choppy amid the grappling with economic optimism and inflation uncertainty.

The Dow Jones Industrial Average rose 179 points (0.5%) to 34,756, the S&P 500 Index gained 37 points (0.9%) to 4,230 and the Nasdaq Composite increased 200 points (1.5%) to 13,814. In moderate volume, 802 million shares were traded on the NYSE and 4.3 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.81 to $69.62 per barrel. Elsewhere, the Bloomberg gold spot price rose $20.76 to $1,891.51 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.4% to 90.12. Markets were higher for the week, as the DJIA advanced 0.7%, the S&P 500 gained 0.6%, and the Nasdaq Composite rose 0.5%.

Broadcom Inc. (AVGO $475) reported adjusted fiscal Q2 earnings-per-share (EPS) of $6.62, topping the $6.43 FactSet estimate, as revenues rose 15.0% year-over-year (y/y) to $6.6 billion, north of the projected $6.5 billion. The company said, "Due to the strength in demand for semiconductors across our multiple end markets, we delivered 20% year-over-year increase in semiconductor revenue." AVGO said its Q3 outlook projects this y/y growth to sustain, as it continues to see strong demand from service providers and hypercloud. The company issued Q3 revenue guidance that was just above expectations. Shares were higher.

Costco Wholesale Corporation (COST $388) posted a 22.8% y/y gain in May same-store sales, down from the prior month's 32.5% increase, with E-commerce sales rising 12.1% and U.S. sales gaining 22.0%. Shares traded higher.

Lululemon Athletica Inc. (LULU $330) announced Q1 adjusted EPS of $1.16, compared to the forecasted $0.91, with revenues rising 88.0% y/y to $1.2 billion, topping the forecasted $1.1 billion. The athletic apparel company said its results reflect significant growth in the business compared to both 2020 and 2019, and its momentum remains strong as it enters Q2. LULU added that the strength of its financial position allows it to continue to deliver against the Power of Three growth strategies, while it leverages both near- and long-term opportunities. As such, the company raised its full-year guidance. Shares were higher.

CrowdStrike Holdings Inc. (CRWD $207) reported Q1 adjusted earnings of $0.10 per share, versus the expected $0.05 per share profit, as revenues jumped 70% y/y to $303 million, topping the forecasted $292 million. The cybersecurity company said it saw strength in multiple areas of the business, added $144 million in net new annual recurring revenue (ARR) in the quarter and grew ending ARR 74% y/y to exceed $1.19 billion. CRWD issued full-year guidance that was above expectations. Shares were lower despite the results, continuing the choppiness seen in 2021 after rallying sharply off the March 2020 lows.

As we reach the final month of Q2 that has seen some choppy action in the markets, Schwab's Chief Investment Strategist Liz Ann Sonders offers her 2021 Mid-Year Outlook: U.S. Stocks and Economy. Liz Ann discusses how peak growth rates for the economy and earnings are likely behind us, setting the economy up for a boom-settle scenario in the second half of the year.

Liz Ann Sonders also notes in her commentary, Is the Stock Market Disconnected From the Economy?, that perhaps so, but less so lately given stronger economic data. She gives a look under the hood of performance trends over the past year that has revealed a nuanced relationship between the stock market and the COVID-19 economy.

Keep up with all our market commentary during the volatile market action at our Market Insights page on www.schwab.com and follow us on Twitter at @SchwabResearch.

May nonfarm payroll report shows job growth accelerated but at a slower rate than expected

Nonfarm payrolls (chart) rose by 559,000 jobs month-over-month (m/m) in May, compared to the Bloomberg consensus estimate of a 675,000 rise, and following April's upwardly-adjusted increase of 278,000. Excluding government hiring and firing, private sector payrolls increased by 492,000, versus the forecasted rise of 610,000 after increasing by an upwardly-revised 219,000 in April. The labor force participation ratedipped to 61.6% from April's 61.7% rate, and compared to the forecasted 61.8% rate. The U.S. Bureau of Labor Statistics said notable job gains occurred in leisure and hospitality, in public and private education, and in health care and social assistance.

The unemployment rate declined to 5.8% from April's 6.1% rate, compared to expectations of a decrease to 5.9%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—dipped to 10.2% from the prior month's 10.4% rate. The long-term unemployed—those jobless for 27 weeks are more—declined by 431,000 to 3.8 million but is 2.6 million higher than in February 2020. Additionally, the number of permanent job losers decreased by 295,000 to 3.2 million but is 1.9 million higher than in February 2020. Average hourly earnings gained 0.5% m/m, compared to projections of a 0.2% gain, and April's unrevised 0.7% increase. Y/Y, wages were 2.0% higher, north of estimates of a 1.6% increase. Finally, average weekly hours remained at April's downwardly-revised 34.9 rate, in line with estimates.

Factory orders (chart) declined 0.6% m/m in April, versus estimates of a 0.2% dip, and compared to March's upwardly-revised 1.4% gain. Durable goods orders—preliminarily reported last week—were unrevised at a 1.3% decrease for April, and excluding transportation, orders were unadjusted at a 1.0% increase. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—were revised lower to a 2.2% gain.

Treasuries rose following the employment report, with the yield on the 2-year note dipping 1 basis point (bp) to 0.15%, the yield on the 10-year note falling 7 bps to 1.56%, and the 30-year bond rate declining 6 bps to 2.23%.

The markets continue to assess the implications of inflation pressures on monetary policy and Schwab's Chief Fixed Income Strategist Kathy Jones offers her articles, Inflation Expectations are Up. Should Investors Worry?, and Is 1970s-Style Inflation Coming Back?

Moreover, Schwab's Managing Director and Fixed Income Strategist Collin Martin, CFA, and Senior Fixed Income Research Analyst, Christina Shaffer discuss how rising inflation pressures and expectations can impact various asset classes in the article, Rising Inflation: What It Means for TIPS and Other Investments.

Europe mostly higher as markets digest U.S. labor report, Asia finishes week mixed

European equities finished mostly higher after gaining some momentum in afternoon action as the markets digested the U.S. May nonfarm payroll report that showed accelerated solid job growth but at a rate below forecasts. Conviction remained stymied somewhat by uncertainty regarding if rising inflation pressures will pull-forward some tightening of extremely-loose monetary policies across the globe sooner than expected. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest 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. Dips for the Financials and Energy sectors were more than offset by a solid advance in Information Technology issues, along with gains for Materials and Health Care stocks. In economic news in the region, Eurozone retail sales fell more than expected m/m in April, while U.K. construction output growth accelerated more than expected in May as reported by Markit. The euro and the British pound traded higher versus the U.S. dollar. Bond yields in the Eurozone and the U.K. were mostly lower.

The U.K. FTSE 100 Index and France's CAC-40 Index ticked 0.1% higher, Germany's DAX Index gained 0.4%, Italy's FTSE MIB Index and Switzerland's Swiss Market Index advanced 0.5%, while Spain's IBEX 35 Index traded 0.6% lower.

Stocks in Asia finished mixed as the markets continue to grapple with the implications of rising inflation pressures on the highly-accommodative global monetary policies, while likely treading with some caution ahead of today's U.S. May employment report. Amid this backdrop, the Reserve Bank of India (RBI) held its monetary policy stance unchanged. Japan's Nikkei 225 Index declined 0.4%, with the yen modestly giving back some of yesterday's slide, while China's Shanghai Composite Index moved 0.2% to the upside. South Korea's Kospi Index and the Hong Kong Hang Seng Index both decreased 0.2%, though Australia's S&P/ASX 200 Index advanced 0.5%. India's S&P BSE Sensex 30 Index traded 0.3% to the downside following the RBI's monetary policy decision. Amid the persistent divergence in the Asian markets, Schwab's Jeffrey Kleintop offers in his article, What's Working? Two Ideas For Investors, two investment themes that have been rewarding investors with outperformance.

Stocks rise in final session of the week to finish in the green

In a holiday-shortened week, U.S. stocks managed to solidify a weekly gain on Friday as the May employment report seemed to cool concerns about the Fed reining in its extremely-accommodative monetary policy as signs continue to suggest a solid economic recovery. Despite the weekly advance, the S&P 500 Index remained stuck in a two-month range near record highs as the markets continue to grapple with economic optimism and uncertainties regarding inflation and potential Fed policy tweaks. The positive economic sentiment was preserved as Friday's nonfarm payroll data was preceded by strong May manufacturing and services growth as reported by the ISM and Markit, while initial jobless claimscontinued to decelerate to pandemic lows. However, the Fed's Beige Book—an anecdotal read on economic activity across the nation that policymakers use as a tool to prepare for their next monetary policy meeting—showed economic activity accelerated but inflation pressures continue to fester. The Energy sector again led the weekly gains as crude oil prices remained in rally mode on the economic optimism and as OPEC and its allies, known as OPEC+, maintained its previous plan to ease production cuts over the coming months. The Information Technology sector continued to regain footing for a second-straight week, but Consumer Discretionary and Health Care issues finished with weekly declines as the markets remained choppy. For the week, the U.S. dollar nudged slightly higher, Treasury yields dipped, and gold trimmed a recent rally.

Next week, with the Fed going silent ahead of the next two-day monetary policy meeting expected to conclude on June 16, the economic calendar is poised to continue to garner scrutiny amid the backdrop of economic optimism and inflation uncertainty. As the markets try to assess whether rising pricing pressures will prove to be transitory or structural, next week's release of the Consumer Price Index (CPI) and the inflation outlooks in the preliminary June University of Michigan Consumer Sentiment Index are likely to headline the economic front. However, there are other reports on the docket that could foster some market reactions, courtesy of the NFIB Small Business Optimism Index, the trade balance, JOLTS' job openings report, and initial jobless claims for the week ended June 5.

The international economic front is also likely to garner some attention next week with reports worth noting including: China—trade balance, CPI and PPI and lending statistics. Japan—Q1 GDP revision, machine tool orders, and labor earnings. Eurozone—the European Central Bank monetary policy decision and Q1 GDP revision, along with German factory orders, investor confidence and trade balance. U.K.—monthly GDP, industrial/manufacturing production and trade balance.

Schwab's Liz Ann Sonders notes in her latest commentary, Is the Stock Market Disconnected From the Economy?, that perhaps so, but less so lately given stronger economic data. Liz Ann gives a look under the hood of performance trends over the past year that has revealed a nuanced relationship between the stock market and the COVID-19 economy.

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Labor Report Misses Again but Stocks Close out the Week Higher

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