Markets Finish Off May Positively

U.S. equities finished the last trading day of May in the plus column, procuring solid weekly gains along the way, as investors head into the three-day Memorial Day holiday weekend. Information Technology issues led the way, with almost all the sectors higher on the day, save some slight weakness in Materials. Treasury yields were able to remain calm, nudging lower amid a rise in bond prices, despite further signs of inflation and as data appeared to keep optimism of economic recovery in play. Earnings reports from Dow member Salesforce.com, Costco Wholesale, and Ulta Beauty came in above forecasts to add to the positive mood. On the economic front, personal income fell and spending rose, the final read on May consumer sentiment was revised slightly higher, and Chicago manufacturing activity posted the highest level since the 1970s. Elsewhere, the U.S. dollar regained some footing after falling to a four-month low, while gold ended higher in choppy trading and crude oil prices turned lower in muted action. Europe finished with widespread gains, while markets in Asia were mostly higher.

The Dow Jones Industrial Average rose 65 points (0.2%) to 34,529, the S&P 500 Index gained 3 points (0.1%) to 4,204 and the Nasdaq Composite increased 12 points (0.1%) to 13,749. In heavy volume, 1.1 billion shares were traded on the NYSE and 4.4 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.53 to $66.32 per barrel. Elsewhere, the Bloomberg gold spot price rose $6.59 to $1,903.13 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—inched 0.1% higher to 90.03. Markets were higher for the week, as the DJIA advanced 0.9%, the S&P 500 gained 1.2%, and the Nasdaq Composite jumped 2.1%.

Salesforce.com Inc. (CRM $238) reported adjusted Q1 earnings-per-share (EPS) of $1.21, topping the $0.88 FactSet estimate, as revenues rose 23.0% y/y to $6.0 billion, exceeding the Street's forecast of $5.9 billion. The company said it had the best first quarter in its history as its performance was strong across all financial metrics with it posting record levels of new business and strength across all products, regions, and customer size. CRM added that it believes its Customer 360 platform is proving to be the most relevant technology for companies accelerating out of the pandemic. As such, the company raised its full-year EPS and revenue guidance. Shares rose solidly.

Costco Wholesale Corporation (COST $378) posted fiscal Q3 EPS of $2.75, including $0.09 per share related to costs associated with COVID-19, primarily from $2.00 per hour premium pay, and topping the forecasted $2.32. Revenues grew 21.5% y/y to $45.3 billion, above the expected $43.7 billion. Q3 same-store sales advanced 20.6% y/y, compared to the estimated 17.4% increase. Shares were lower.

Ulta Beauty Inc. (ULTA $345) announced Q1 earnings of $4.10 per share, well above the expected $1.99, as revenues rose 65.2% y/y and 11.2% versus the same period in 2019 to $1.9 billion, above the projected $1.7 billion. Q1 same-store sales jumped 65.9% y/y, exceeding the forecasted 40.1% gain. The company said it has emerged from 2020 with strong momentum in its sales trends, market share gains, and consumer sentiment. ULTA added, "As increasing consumer confidence, the relaxation of restrictions, and a desire for newness drive increased engagement with the beauty category, our differentiated model, combined with our ongoing efforts to create meaningful guest connections, position us well to lead through the category recovery." The company boosted its full-year EPS, revenue and same-store sales guidance. Shares were higher.

The markets have been choppy as economic recovery optimism has been met with uncertainty regarding if the Fed may be forced to rein in its extremely-accommodative monetary policy sooner than expected amid the backdrop of recent signs of rising inflation pressures. 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 check out our Market Insights page on www.schwab.com and follow us on Twitter at @SchwabResearch.

Personal income and spending roughly in line, but inflation up, consumer sentiment down m/m

Personal income (chart) fell 13.1% month-over-month (m/m) in April, versus the Bloomberg forecast of a 14.2% drop, following March's downwardly-revised 20.9% jump. Personal spending increase 0.5%, matching estimates and compared to the prior month's upwardly-adjusted 4.7% rise. The April savings rate as a percentage of disposable income was 14.9%.

The PCE Deflator increased 0.6% m/m, in line with expectations and March's upwardly-adjusted increase. Compared to last year, the deflator was 3.6% higher, above estimates of a 3.5% rise and March's upwardly-revised 2.4% gain. Excluding food and energy, the PCE Core Index grew 0.7% m/m, north of expectations of a 0.6% increase and March's unrevised 0.4% rise. The index was 3.1% higher y/y, versus estimates of a 2.9% gain and March's upwardly-adjusted 1.9% increase.

The May final University of Michigan Consumer Sentiment Index (chart) was revised slightly higher to 82.9, versus expectations to be revised to 83.0 from the preliminary reading of 82.8. The modest upward revision came as a downward adjustment to the current conditions portion of the survey was just outdone by a positive revision to the expectations component. However, the overall index was lower versus April's 88.3 level, as both components were down m/m. The 1-year inflation forecast came in at 4.6%, up from April's 3.4% rate, and the 5-10 year inflation forecast increased to 3.0% from the prior month's 2.7% forecast.

The Chicago PMI surprisingly moved further north of the level depicting expansion (a reading above 50). The index rose to 75.2 in May from April's 72.1, versus estimates calling for a decline to 68.0. The index hit the highest level since the early 1970s as growth in new orders and order backlogs both accelerated, while production continued to expand, but employment fell back into contraction territory. Inflation pressures remained as prices paid continued to expand but the pace slowed somewhat.

The advance goods trade balance showed that the April deficit unexpectedly shrank, coming in at $85.2 billion, versus estimates calling for a match of March's upwardly-adjusted shortfall of $92.0 billion.

Preliminary wholesale inventories rose 0.8% m/m for April, compared to expectations of a 0.7% gain, and versus March's downwardly-revised 1.1% rise.

Treasuries ticked higher, as the yield on the 2-year note was little changed at 0.14%, while the yields on the 10-year note and the 30-year bond declined 2 basis points to 1.58% and 2.26%, respectively.

Schwab's Chief Fixed Income Strategist Kathy Jones notes that the calmness in bond yields after a spike in Q1 suggests the bond market has already discounted much of the rebound in the economy since last year. Kathy adds that we see that a modest rise in inflation may lift longer-term bond yields, and although we expect higher prices over the next few years, we don't see a return to 1970s-style level of inflation. Read more about our outlook for inflation and the bond markets in Kathy's 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.

Financials and Tech lead Europe higher, Asia also sees gains

European equities finished higher, with Financials and Information Technology issues leading a broad-based increase among the major market sectors. The moves came as the euro was little changed versus the U.S. dollar and the British pound saw some pressure against the greenback that has rebounded from a 4-month low, while bond yields in the Eurozone and the U.K. were calm after yesterday's gains. Recent economic data seemed to preserve optimism regarding economic prosperity as the U.S. and Europe continue to rollout vaccines, and counter concerns about the potential global monetary and economic impacts of the recent rise in inflation pressures. 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. In economic data in the region, Eurozone economic confidence in May improved more than expected, while France's consumer spending in April fell more than anticipated m/m.

The U.K. FTSE 100 Index was nearly flat, Germany's DAX Index rose 0.7%, France's CAC-40 Index and Switzerland's Swiss Market Index gained 0.8%, Spain's IBEX 35 Index increased 0.4%, and Italy's FTSE MIB Index advanced 0.5%.

Stocks in Asia finished mostly higher to end the week with data out of the U.S. yesterday solidifying expectations of economic recoveries in the wake of ramped-up vaccine rollouts. However, inflation worries continue to cloud the outlook for the extremely-accommodative global monetary policies and the recent rise in the Chinese yuan appeared to garner some attention. The markets have been choppy against this backdrop and 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. Japanese stocks led the way, with the Nikkei 225 Index rising 2.1% as the yen held onto yesterday's drop, while economic data showed Tokyo consumer price inflation dipped in May. However, Chinese stocks lagged, as the Shanghai Composite Index declined 0.2%. Australia's S&P/ASX 200 Index rose 1.2%, South Korea's Kospi Index advanced 0.7% and India's S&P BSE Sensex 30 Index traded 0.6% higher. The Hong Kong Hang Seng Index finished little changed.

Stocks post weekly gain as growth stocks and cyclical issues lead the way

U.S. stocks posted a weekly gain with growth stocks—Communications Services and Information Technology—conspiring with cyclically-natured issues—Industrials and Materials—to lead the way. Economic optimism appeared to drive sentiment, while bond yields remained calm to give growth stocks a reprieve from ramped-up volatility that ensued as bond yields spiked in Q1. Inflation concerns seemed to cool somewhat, despite further signs of rising inflation pressures, and even as some Fed officials continued to suggest at some point in upcoming meetings the Central Bank may need to begin discussing tapering its asset purchases. Consumer Discretionary stocks also contributed to the weekly advance as the retail sector continued to put the finishing touches on Q1 earnings season, with results remaining strong and guidance bolstering expectations of robust economic recovery as vaccine rollouts continue to ramp up and allow COVID-19 restrictions to ease further.

Some highlights of the economic calendar this week came in the form of a continued deceleration in weekly initial jobless claims to pandemic lows, stronger-than-expected core durable goods orders and continued solid expansion in regional manufacturing activity. However, inflation components of most reports showed inflation pressures continue to mount, notably Friday's 1-year inflation outlook in the May University of Michigan Consumer Sentiment Index and the April personal income and spending report. Moreover, signs that lawmakers remain at the negotiating table on an infrastructure spending plan seemed to help pave the way for the weekly advance. The U.S. dollar showed signs of stabilizing from a recent drop to near a 4-month low, longer-term Treasury yields moved lower, gold extended a recent rise, and crude oil prices rebounded solidly from last week's fall.

Although next week will be shortened by the U.S. market closures on Monday in observance of the Memorial Day holiday, the economic calendar is poised to begin a new month at full strength. ISM and Markit will begin the shortened week by delivering their May Manufacturingand Services PMIs, while the week will culminate with the May nonfarm payroll report, with job growth expected to accelerate after April's severe miss. In between the two reports will be the Federal Reserve's Beige Book report—an anecdotal read on the nation's business activity used as a policy tool to prep for the Fed's next two-day monetary policy meeting set to conclude on June 16—jobless claims for the week ended May 29, and Q1 nonfarm productivity and unit labor costs, which will be released amid the backdrop of rising inflation uncertainty. Fedspeak will also likely garner heavy attention as the markets grapple with whether the inflation pressures will force the Central Bank to taper its asset purchases sooner than expected. Fed Chairman Jerome Powell will take part in a panel on Friday on the topic of climate change in conjunction with the European Central Bank and the International Monetary Fund (IMF), but the Q&A session may deliver some color on where the central banks stand amid the global economic backdrop.

Next week's international economic calendar also has the potential to provide some market moving events, headlined by a plethora of May global Manufacturing and Services PMIs, notably out of China. Other reports worth noting include; Australia—the Reserve Bank of Australia monetary policy decision and Q1 GDP. India—Reserve Bank of India monetary policy decision and GDP figures. Japan—retail sales, industrial production, Q1 capital spending, and household spending. Eurozone—retail sales and consumer price inflation figures, along with the German unemployment change.

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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Markets Finish Off May Positively

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