Stocks Flip Midday to Finish with Solid Gains

U.S. equities bounced off their lows of the day to finish off a volatile week higher, as investors weighed an early sign of a recovery in the struggling leisure and hospitality sector that led to stronger-than-expected February employment growth. The spike in Treasury yields that has pressured growth and momentum stocks, notably Information Technology issues, cooled a bit in the wake of the upbeat labor report, while the U.S. dollar added to a recent rebound to a two-month high. Gold was slightly higher in choppy trading and crude oil prices continued to rally, bolstered by yesterday's surprise OPEC+ decision to hold production unchanged for April. On the equity front, Costco Wholesale missed earnings forecasts on COVID-19 wage increase expenses, Broadcom offered upbeat results and guidance, and Gap provided a favorable outlook for the second half of 2021. Europe finished lower, as an early boost from the favorable U.S. employment report was trumped by uneasiness over the continued rise in interest rates, while market in Asia were lower.

The Dow Jones Industrial Average rose 572 points (1.9%) to 31,496, the S&P 500 Index gained 73 points (2.0%) to 3,842, and the Nasdaq Composite was up 197 points (1.6%) at 12,920. In heavy volume, 1.4 billion shares were traded on the NYSE and 7.6 billion shares changed hands on the Nasdaq. WTI crude oil jumped $2.26 to $66.09 per barrel. Elsewhere, the Bloomberg gold spot price inched $0.88 higher to $1,698.40 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.3% to 91.92. Markets were mixed for the week, as the DJIA gained 1.8%, the S&P 500 added 0.8%, while the Nasdaq Composite fell 2.1%.

Costco Wholesale Corporation (COST $317) reported fiscal Q2 earnings-per-share (EPS) of $2.14, for the period ended February 14, including $0.41 in costs primarily related to COVID-19 premium wages, versus the $2.45 FactSet estimate. Revenues grew 14.6% year-over-year (y/y) to $44.8 billion topping the Street's forecast of $43.8 billion. Q2 same-store sales increased 13.0% y/y, above the anticipated 10.8% gain. COST added that its same-store sales were up 13.8% for the period ended February 28. Shares were lower.

Broadcom Inc. (AVGO $450) reported fiscal Q1 EPS of $6.61 ex-items, compared to the anticipated $6.56, as revenues rose 14.0% y/y to $6.7 billion, just above the projected $6.6 billion. Including costs associated with accounting effects on inventory, amortization of acquisition-related intangible assets, stock-based compensation, restructuring charges, and acquisition expenses, the company reported EPS of $3.05. The chipmaker's revenues grew 17.0% y/y in its semiconductor solutions segment—accounting for about 74% of total sales—and its infrastructure software revenues were 5.0% higher versus the prior year. AVGO issued full-year revenue and operating earnings guidance that exceeded forecasts. On the conference call with analysts, the company said about 90% of its 2021 supply has already been ordered by customers, as it "sees customers accelerating the bookings for early deliveries and attempting to build buffers and creating the demand-supply imbalance you all hear out there." Shares were higher.

Gap Inc. (GPS $27) reported Q4 EPS of $0.61, including a non-recurring tax benefit of $0.45 per share and a $0.12 per share impairment charge related to its strategic review of its Intermix business, which make it unclear if the figure compares to the expectation calling for the company to post earnings of $0.19 per share. Revenues declined 5.0% y/y to $4.4 billion, south of the forecasted $4.7 billion, with same-store sales flat y/y compared to expectations of a 3.1% gain. However, the company said although it expects COVID-19 impacts persisting in the first half of 2021, it is forecasting a return to a more normalized, pre-pandemic level of net sales in the second half of 2021. Shares traded higher.

The equity markets continue to grapple with the implications of the recent jump in bond yields that has led to a drawdown as of late and continues to foster choppiness in its wake as discussed in our commentary, Market Volatility: Schwab's Quick Take, by the Schwab Center for Financial Research (SCFR).

The SCFR provides the takeaway for long-term investors, including making sure your portfolio, and each account, is consistent with your goals, risk tolerance, and preferences. If you're uncomfortable with market volatility and have short-term goals, make sure you don't have too much invested in risk assets, and that you have a plan to meet cash-flow needs. Revisit your goals and objectives. If you don’t have a plan, or if it hasn't been updated in a while, now would be good time to develop one. Don't try to time the market. It rarely works, and it's especially difficult to try to time the market around unexpected geopolitical events, like COVID-19.

Meanwhile, the credit markets remain one key in signaling that financial conditions may be tightening, which could lead to exacerbated action, but so far credit conditions remain relatively calm. However, Schwab's Fixed Income Strategist with the SCFR, Collin Martin, CFA, offers his latest article, Corporate Bond Market: Is a "Zombie Apocalypse Coming?, noting that with interest rates rising, "zombie companies" may have to refinance debt at higher rates, which could cause problems.

Keep up with our latest views on the volatility in the markets on our Market Insights page on www.schwab.com and follow us on Twitter @SchwabResearch.

February employment growth tops forecasts, trade deficit widens, consumer credit falls

Nonfarm payrolls (chart) rose by 379,000 jobs month-over-month (m/m) in February, compared to the Bloomberg consensus estimate of a 200,000 increase, and following January's upwardly adjusted gain of 166,000. Excluding government hiring and firing, private sector payrolls increased by 465,000, versus the forecasted rise of 200,000 after rising by an unrevised 6,000 in January. The labor force participation rateremained at January's 61.4% rate, matching forecasts.

The U.S. Department of Labor's report showed most of the job gains occurred in leisure and hospitality, with smaller gains in temporary help services, health care and social assistance, retail trade, and manufacturing. However, employment declined in state and local government education, construction, and mining.

The unemployment rate dipped to 6.2% from January's 6.3% rate, where it was expected to remain. 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—remained at the prior month's 11.1% rate. Average hourly earnings rose 0.2% m/m, in line with projections and versus January's downwardly revised 0.1% increase. Y/Y, wages were 5.3% higher, matching estimates. Finally, average weekly hours declined to 34.6 from January's downwardly revised 34.9 rate, where it was expected to remain.

The trade balance (chart) showed that the January deficit widened more than anticipated, coming in at $68.2 billion, compared to forecasts of $67.5 billion, after December's upwardly revised deficit of $67.0 billion. Exports rose 1.0% m/m, and imports increased 1.2%.

Consumer credit, released in the final hour of trading, showed consumer borrowing declined by $1.3 billion during January, well short of the $12.0 billion increase that was forecasted of economists polled by Bloomberg, while December’s figure was adjusted downward to an expansion of $8.8 billion from the originally reported $9.7 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose by $8.5 billion, a 3.2% y/y rise, while revolving debt, which includes credit cards, declined by $9.8 billion, a 12.2% y/y fall.

Treasuries were mixed following the employment data as the choppiness in the market remained, with the rate on the 2-year note little changed at 0.15%, while the yield on the 10-year note ticked 1 basis point (bp) higher to 1.57%, and the 30-year bond rate declined 2 bps to 2.29%.

Treasury yields moved noticeably higher yesterday in the wake of Fed Chairman Jerome Powell's comments in a virtual event with the Wall Street Journal. Powell acknowledged the recent rise in rates and noted short-term inflation pressures will remain due to base effects on the heels of the year ago drop in prices amid the pandemic. However, he appeared to unnerve some by not offering plans on how the Central Bank will combat the rising rate and increasing inflation expectation environment. He reiterated that that the economy is a long way from its employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.

As the markets continue to grapple with the implications of the recent spike in interest rates Schwab's Chief Fixed Income Strategist Kathy Jones offers her latest article, Message from the Recent Bond Market Turmoil. Kathy notes how the surge in yields was driven more by prospects for stronger real economic growth than inflation worries. She also discusses how the moves suggest the market is pricing in the risk the Federal Reserve will be hiking rates sooner than the Central Bank's projections.

Kathy concludes by noting that we expect bouts of volatility ahead as markets reprice for a different environment in 2021 and beyond. "Over the long run, high yields driven by stronger economic growth are positive, but the process can be volatile. We suggest fixed income investors continue to keep the average duration in their portfolios low and consider strategies like bond ladders that can help manage portfolios in a rising-interest-rate environment."

Europe lower as yields continue to rise, Asia lower

European equities finished lower, with the persistent rise in global bond yields, which has pressured growth and momentum stocks, continuing to unnerve the markets. The skittish sentiment was amplified by U.S. Fed Chairman Jerome Powell remaining dovish in the face of the rise in rates and increasing inflation expectations. However, Energy issues continued to rally as crude oil prices extended yesterday's sharp rise after OPEC and its allies, known as OPEC+, surprised the markets by leaving production unchanged amid heightened expectations of an announced hike for April. In economic news in the region, German factory orders rose more than expected in January, though Italian retail sales fell more than anticipated for the first month of 2021. The euro and British pound were lower as the U.S. dollar extended a rebound to a two-month high, while bond yields in the Eurozone and the U.K. gained ground.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, has noted for some time that an interest rate/currency shock is one of the Top Five Global Investment Risks In 2021. Jeff points out how international stocks outperformed during the recent volatility in the wake of the spike in bond yields due to a higher weight to financial stocks, which tend to benefit from higher rates. He adds that international markets tend to be more cyclical in nature and are likely to outperform as global economies recover and inflation rises. International stocks have not experienced the same degree of speculation that U.S. stocks have, and have a lower overall valuation than U.S. stocks. A higher dividend yield and less exposure to aggressive growth names relative to U.S. stocks also helped.

Amid this backdrop, Jeffrey Kleintop offers his article, Your Portfolio May Be Less Diversified Than You Think. He points out how investors with a large home bias may not be nearly as diversified across sectors as they believe and risk missing their financial goals as longer-term trends tend to shift with the start of a new global economic cycle. Jeff urges investors to consider rebalancing portfolios back toward international stocks as years of U.S. stock outperformance may have caused a drift away from longer-term asset allocation targets. He adds that fortunately, obtaining global diversification has never been easier or less expensive.

The U.K. FTSE 100 Index was down 0.3%, Germany's DAX Index declined 1.0%, France's CAC-40 Index and Spain's IBEX 35 Index fell 0.8%, Italy's FTSE MIB Index moved 0.6% to the downside, and Switzerland's Swiss Market Index dropped 1.3%.

Stocks in Asia finished lower to close out the week, with the global markets continuing to be skittish regarding the recent spike in global bond yields that has weighed on growth and momentum issues, exacerbated by yesterday's continued dovish tone from the head of the Central Bank in the U.S. The recent rebound in the U.S. dollar also likely contributed to the lack of bullish conviction. The uneasiness continued to counter optimism regarding an expected ramped-up economic recovery as COVID-19 vaccines get rolled out at faster paces in the U.S. and Europe. Moreover, the markets digested a slower-than-expected pace of growth at over 6.0% out of China as the nation's parliament conducts its annual meeting—typically when economic targets are set and will include its next five-year plan. Also, the recent strength in the U.S. dollar seemed to garner some attention. Japan's Nikkei 225 Index declined 0.2%, with the yen extending yesterday's softness, and China's Shanghai Composite overcame early losses to finish little changed. The Hong Kong Hang Seng Index decreased 0.5%, South Korea's Kospi Index traded 0.6% lower, Australia's S&P/ASX 200 Index fell 0.7% and India's S&P BSE Sensex 30 Index dropped 0.9%.

Schwab's Jeffrey Kleintop notes in his article, Year of the Ox: Bullish for China?, how China's growth for 2021 appears strong, but February holds key developments that could impact this outlook, while noting in his latest article, Have EM Stocks Lost Their Immunity to Rising Rates?, how Emerging Market (EM) stocks have taken the rise in yields the worst among major equity asset classes, and offering five reasons why EM stocks can likely still perform well as rates climb this year.

Stocks mixed for the week as growth issues continued to be shunned

U.S. stocks registered another volatile week mixed as the persistent spike in Treasury yields, and global interest rates, continued to stymie conviction and threaten the lofty valuations in growth and momentum stocks that had carried the markets to all-time highs earlier this year. The Consumer Discretionary sector led to the downside as Tesla Inc. (TSLA $566) and Amazon.com Inc. (AMZN $2,914), which constitute nearly half of the sector's total market cap, fell sharply. Technology issues were not far behind, leading the Nasdaq near correction territory. The spike in yields—the yield on the 10-year note has jumped to pre-pandemic levels—has come courtesy of optimism of a robust second-half 2021 economic recovery and rising inflation expectations. Meanwhile, the rise was intensified by what was likely the final remarks from Federal Reserve Chairman Jerome Powell before the Central Bank's monetary policy decision on March 17. Powell seemed to fuel concerns that the Fed has lost control of the yield curve as he held off on suggesting the Fed stands ready to act to cool the spike in rates. He opted instead to reiterate that the moves were a sign of economic optimism and that the Fed remains adamant about ensuring the recovery to maximum employment—the Central Bank's other side of its dual mandate opposite price stability—both of which he said remain far from reaching its goals. A continued rebound in the U.S. Dollar Index to two-month highs also likely drained bullish conviction and weighed on gold prices despite the precious metal's historic allure amid rising inflation expectations.

However, the Dow outperformed the major indices on the continued rotation into value and cyclically-natured sectors—Financials and Energy—that benefit from rising interest rates and the early stages of an economic recovery. Energy issues continued to soar as crude oil prices remain in rally mode, jumping to highs not seen since the fall of 2018, bolstered by a surprising decision from OPEC+ to hold off on announcing highly anticipated production hikes for next month. The optimism of the economic recovery was buoyed by continued signs of strength in global manufacturing data, headlined by the ISM Manufacturing Index hitting the highest level since early 2018, though cost pressures continued to climb. Moreover, factory orders rose for the ninth-straight month and weekly initial jobless claims were lower than expected.

Next week, with Fedspeak going dormant during the week preceding its monetary policy decision and earnings season mostly in the books, the action in the bond markets will likely remain on the main stage with the economic calendar providing backup vocals. Given the heightened inflation focus, the releases of the Consumer Price Index (CPI) and Producer Price Index (PPI) are poised to garner heavy attention, along with the inflation component of the preliminary March University of Michigan Consumer Sentiment Index. The other side of the Fed's dual mandate—employment—could garner further scrutiny, courtesy of hiring plans of the NFIB's Small Business Optimism Index, separations and hiring rates of the JOLTS Jobs Openings report, and the timely read of initial jobless claims for the week ended March 6.

The international economic calendar next week is also chock full of reports that could foster market reactions: China—trade data, lending statistics, CPI and PPI. Japan—household spending, labor earnings, Q4 GDP and machine tool orders. Eurozone—the European Central Bank Monetary policy decision, investor confidence, industrial production and Q4 GDP, along with the German trade balance and industrial production. U.K.—industrial/manufacturing production, trade balance and the Bank of England's inflation forecast.

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 Flip Midday to Finish with Solid Gains

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