Stocks Close Out Week in the Green After Last Minute Surge

U.S. equities rallied into the close to finish higher for the session, bringing the Dow and the S&P 500 Index into positive figures for the week, as optimism of robust economic recovery in 2021 appeared to prevail over concerns surrounding the recent spike in interest rates. Cyclically-natured sectors found support and growth stocks also contributed, as Treasuries were relatively calm. Financials have benefitted from the recent rise in interest rates and after the Federal Reserve said it will end restrictions on dividends and buybacks for firms that pass its June stress test. Energy issues also traded higher as crude oil prices rebounded with the key global trade route of the Suez Canal continuing to be blocked. Gold was higher and the U.S. dollar paused after breaching its 200-day moving average yesterday. In economic news, February personal income and spending pulled back from January's jumps, while March consumer sentiment was revised upward to the highest level since March 2020. In other equity news, the Wall Street Journal reported that Dow member Microsoft Corporation is in advanced talks to acquire messaging platform Discord for $10 billion or more. Europe finished out the week on a positive note amid the global focus on an economic recovery on both sides of the pond, while markets in Asia also saw widespread gains.

The Dow Jones Industrial Average rose 453 points (1.4%) to 33,073 and the S&P 500 Index jumped 65 points (1.7%) to 3,975, while the Nasdaq Composite was up 161 points (1.2%) at 13,139. In heavy volume, 1.1 billion shares were traded on the NYSE and 5.1 billion shares changed hands on the Nasdaq. WTI crude oil gained $2.41 to $60.97 per barrel. Elsewhere, the Bloomberg gold spot price was $4.90 higher at $1,731.83 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.1% lower to 91.72. Markets were mixed for the week, as the DJIA gained 1.4%, the S&P 500 added 1.6%, while the Nasdaq Composite shed 0.6%.

Optimism of a robust economic recovery in 2021 remained as COVID-19 vaccine rollouts continue to gain momentum while fiscal and monetary policy support remains vigorous. Interest rates were relatively calm and the U.S. dollar notched another weekly rally, breaching an important technical level in the process. As such, value and cyclically-natured issues found support, but growth issues also gained ground, shrugging off the uptick in bond yields. Schwab's Chief Investment Strategist Liz Ann Sonders discusses how investor attention has shifted from Growth to Value as the economy regains its footing, but understanding their factors and fundamentals is crucial in her latest article, It's What You Value … and Where You Find It.

Meanwhile, the Schwab Center for Financial Research (SCFR), offers our Quarterly Market Outlook: Different Speeds, delivering a few thoughts for investors on how economic growth is picking up and the stock market is trending higher, but in a choppy fashion.

Dow member Microsoft Corporation (MSFT $236) is in focus after the Wall Street Journal (WSJ) reported that the company is in advanced talks to acquire messaging platform Discord originally favored by gamers, citing people familiar with the matter. The WSJ reported that the people said the deal could be for $10 billion or more and completed next month if negotiations do not fall apart. Neither company has commented on the report. MSFT traded modestly higher.

The banking sector is gaining ground after the Federal Reserve announced that the temporary and additional restrictions on bank holding company dividends and share repurchases currently in place will end for most firms after June 30, after completion of the current round of stress tests. The Fed said firms with capital levels above those required by the stress test will no longer be subject to the additional restrictions as of that date, while firms with capital levels below those required by the stress test will remain subject to the restrictions.

One of the pillars of our outperform rating we have had on the Financials sector since June 2020 has been the relative strong balance sheets in the banking sector heading into the pandemic crisis, thanks in part to stringent regulations put in place since the financial crisis of 2008. For more on our rating for the group and all the other major market sectors check out our Schwab Sector Insights: A View on 11 Equity Sectors.

Personal income and spending pullback, consumer sentiment revised nicely higher

Personal income (chart) fell 7.1% month-over-month (m/m) in February, versus the Bloomberg forecast of a 7.2% drop, following January's upwardly revised 10.1% jump. Personal spending decreased 1.0%, versus estimates of a 0.8% decline and compared to the prior month's favorably adjusted 3.4% gain. The February savings rate as a percentage of disposable income was 13.6%.

The PCE Deflator increased 0.2% m/m, below expectations to match January's unadjusted 0.3% gain. Compared to last year, the deflator was 1.6% higher, in line with estimates and above January's downwardly adjusted 1.4% gain. Excluding food and energy, the PCE Core Index ticked 0.1% higher m/m, matching expectations and south of January's negatively revised 0.2% increase. The index was 1.4% higher y/y, versus estimates to match January's unadjusted 1.5% gain.

The March final University of Michigan Consumer Sentiment Index (chart) was revised higher than expected to 84.9, versus expectations to be adjusted slightly upward to 83.6 from the preliminary reading of 83.0. The upward revision came as both the current conditions and expectations components of the survey were revised favorably and were solidly higher m/m. The overall index was up solidly versus February's 76.8 level and posted the strongest figure since March 2020. The 1-year inflation forecast dipped to 3.1% from February's 3.3% rate, and the 5-10 year inflation forecast nudged higher to 2.8% from the prior month's 2.7% forecast.

The advance goods trade balance showed that the February deficit widened more than expected, coming in at $86.7 billion, versus estimates calling for the shortfall to increase to $86.0 billion from January's upwardly adjusted deficit of $84.6 billion.

Preliminary wholesale inventories rose 0.5% m/m for February, compared to expectations of a 0.8% gain, and versus January's upwardly revised 1.4% rise.

Treasuries were little changed, with the yields on the 2-year note and the 30-year bond flat at 0.14% and 2.36%, respectively, while the yield on the 10-year note ticked 1 basis point higher to 1.66%.

Bond yields continued to show some signs of stabilizing despite another lackluster auction of seven-year maturities yesterday, while the U.S. Dollar Index paused after a recent rally took the greenback above its 200-day moving average. Bond yields have spiked and the dollar has rallied amid continued optimism of a robust economic recovery and as monetary and fiscal policies remain highly accommodative, while inflation expectations in the short-term continue to grind higher.

Even as bond prices have seen pressure as of late, Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article Why Bonds Still Matter, that despite the blip last spring, Treasuries continue to demonstrate negative correlation with stocks over the short and medium terms, helping cement their status as a safe haven during times of market stress—and there's no clear alternative to fill that role. And, while she doesn't expect inflation to be a significant problem over the next few years, she believes holding some inflation-linked bonds, such as Treasury Inflation-Protected Securities (TIPS), makes sense, to mitigate the risk of an unexpected spike in inflation. Kathy also provides a look at the U.S. dollar in her commentary, Will the U.S. Dollar Lose its Reserve Status?.

Finally, you can keep up with our latest views on the changing market landscape at our Market Insights page on www.schwab.com, and you can follow us on Twitter @SchwabResearch.

Europe higher as Energy rebounds and cyclical stocks climb on economic optimism

European equities finished higher, with Energy issues leading the way as crude oil prices rebounded from yesterday's drop as the blockage of the Suez Canal continues to threaten a key global trade route. Also, cyclically-natured sectors contributed to the gains in the region as the markets seemed to focus more on the prospect of a robust economic recovery in the U.S. and Europe rather than the growing potential headwinds of the recent spike in global bond yields. Information Technology issues, which have taken the brunt of the blow from the interest rate uneasiness, also led the charge, showing some resiliency in the face of rising bond yields in the U.S., U.K. and the Eurozone recently. The euro and British pound gained ground on the U.S. dollar as the greenback paused after hitting a key technical level. In economic news, German business sentiment as reported by the IFO for March improved more than expected for both the components pertaining to the current assessment and expectations, while U.K. retail sales for February rebounded solidly and came in stronger than anticipated.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article Bull? Bear? How about a "Bunny" Market?, that there are a variety of clashing factors affecting the stock market this year, including worries over rising interest rates countered by the confidence seen in booming business investment, and robust M&A activity. We expect the bunny market to continue hopping around in the weeks ahead, as it reacts to these factors.

The U.K. FTSE 100 Index and Spain's IBEX 35 Index were up 0.9%, Germany's DAX Index increased 0.8%, France's CAC-40 Index moved 0.5% to the upside, Italy's FTSE MIB Index rose 0.6%, and Switzerland's Swiss Market Index ticked 0.2% higher.

Stocks in Asia saw widespread gains with yesterday's late-session upside reversal in the U.S. appearing to provide a positive handoff to the region overnight. Optimism of strong economic and earnings growth in 2021 for the world's largest economy of the U.S. seemed to provide the sustenance, aided by the expedited rollout of COVID-19 vaccines and the newest wave of fiscal relief payments. The optimism seemed to more than offset festering concerns about the recent spike in global bond yields and the resurgence in the U.S. dollar as of late, that has likely taken some of the luster off the outlook for Emerging Markets (EM). Schwab's Jeffrey Kleintop discusses in his article, Have EM Stocks Lost Their Immunity to Rising Rates?, how EM stocks have taken the rise in yields the worst among major equity asset classes, but offering five reasons why EM stocks can likely still perform well as rates climb this year. In economic news in the region, Tokyo core consumer price inflation came in slightly above expectations for March while Hong Kong's exports in February continued to snapback more than anticipated. Japan's Nikkei 225 Index advanced 1.6%, with the yen extending some recent softness, while China's Shanghai Composite Index and Hong Kong's Hang Seng Index both also climbed 1.6%. South Korea's Kospi Index gained 1.1%, Australia's S&P/ASX 200 Index increased 0.5% and India's S&P BSE Sensex 30 Index traded 1.2% to the upside.

Stocks post another choppy week

U.S. stocks posted another mixed week as volatility remained amid a host of crosscurrents for the markets to contend with. The Dow and S&P 500 Indexes managed to outperform as optimism in robust 2021 economic and earnings growth continued to underpin value and cyclical sectors, while the Nasdaq lagged as the festering backdrop of the recent spike in yields and elevated inflation uneasiness remained a drag of growth-oriented sectors, notably Communications Services. Financials took a breather along with the spike in Treasury yields and the Information Technology sector found some late-week momentum to finish in the green. Energy issues managed to shrug off some wild swings in crude oil prices that stemmed from the Suez Canal blockage, riding the aforementioned economic recovery optimism to positive figures. However, the markets remained defensive amid the grappling with the plethora of headwinds and tailwinds, helping the Real Estate, Consumer Staples and Utilities sectors lead to the upside, while the U.S. Dollar Index continued its resurgence, bolstered by some uneasiness overseas as Europe reinstated some lockdown measures in parts of the region as COVID-19 cases persist.

Fedspeak was on full display, headlined by Fed Chairman Jerome Powell making three separate appearances. Powell reiterated that the Central Bank remains fully committed to bringing back employment to pre-pandemic levels but he also discussed how the Fed would begin to dial back its extraordinary measures when the time comes but stressed we remain a long way from that. Economic data started slow with softer-than-expected reads on existing and new home sales, as well as durable goods orders, but picked up with a flood of strong manufacturing reports and signs of improving services sector activity—highlighted by decisive expansion in the U.S.—while weekly initial jobless claims fell below the 700,000 level for the first time since the pandemic began.

Next week, which will be shortened by the U.S. market closure in observance of the Good Friday holiday, the economic calendar is likely to continue to garner heavy attention with earnings season completed and Fedspeak relatively quiet. March Consumer Confidence will deliver a read on the psyche of the all-important consumer, while Markit and the Institute for Supply Management (ISM) will complete the national manufacturing picture for March. Moreover, with Friday's key nonfarm payroll figures being released when the markets are on a holiday break, Wednesday's ADP private sector employment change reportand Thursday's initial jobless claims figures for the week ended March 27 could garner heavier attention.

Next week's international economic calendar will also likely attract some attention with reports worth noting including: Australia—trade balance. China—industrial profits and Manufacturing and Non-Manufacturing PMIs. Japan—retail sales and the Q1 Tankan Large Manufacturing Index. Eurozone—consumer confidence, Markit's Manufacturing PMI and CPI, along with German retail sales and unemployment change. U.K.—Q4 GDP and Markit's Manufacturing PMI.

With inflation concerns persisting, Schwab's Kathy Jones joins our WashingtonWise Investor: Episode 37 podcast to discuss how an improving economy may be the real driver behind rising rates and how the Fed plans to keep the momentum going.

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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Stocks Close Out Week in the Green After Last Minute Surge

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