Schwab Market Update

A Pause that Refreshes

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U.S. equities finished solidly higher in the wake of a spate of losses that has brought about a six-week losing streak for the S&P 500. The moves came despite a flurry of headwinds, notably the Fed's aggressive tightening campaign to combat persistently high inflation, reemphasized by Fed Chair Jerome Powell in a livestreamed interview with the Wall Street Journal. A mostly upbeat economic calendar appeared to aid sentiment, as retail sales, industrial production, capacity utilization, and business inventories all rose, but homebuilder sentiment fell to its lowest level in nearly two years amid rising prices and mortgage rates. In equity news, Dow member Home Depot moved higher after posting strong earnings, while fellow Dow component Walmart lost ground after falling short on estimates, and the ongoing Twitter saga was in focus after Elon Musk said the deal remains on hold. Treasuries were lower, pushing yields higher, and the U.S. dollar cooled somewhat after a recent run-up to 20-year highs. Crude oil prices ended lower in choppy action, while gold was little changed. Europe was higher, and Asia finished in the green following some positive real-time COVID data.

The Dow Jones Industrial Average rose 431 points (1.3%) to 32,655, the S&P 500 Index increased 81 points (2.0%) to 4,089, and the Nasdaq Composite rallied 322 points (2.8%) to 11,985. In moderate volume, 4.9 billion shares of NYSE-listed stocks were traded, and 5.0 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.80 to $112.40 per barrel. Elsewhere, the gold spot price traded $0.20 higher to $1,814.20 per ounce, and the Dollar Index was down 0.9% at 103.32.

Dow member Walmart Inc. (WMT $131) reported adjusted Q1 earnings-per-share of $1.30 compared to the $1.48 FactSet estimate. Revenues rose 2.4% year-over-year (y/y) to $141.6 billion, versus the Street's forecast of $138.8 billion. The retailer decreased is full-year EPS guidance but slightly raised its revenue guidance. The company's Walmart US segment saw same-store sales excluding fuel rise 3.0%, slightly above the FactSet estimate, while its Sam's Club segment saw same-store sales excluding fuel rise 10.2%, well above estimates. Walmart President and CEO Doug McMillon noted that bottom-line results were unexpected and reflect the current environment. He mentioned inflation, particularly in food and fuel, put more pressure than expected on the company's margin and operating costs. Shares fell over 10%.

Dow member Home Depot Inc. (HD $301) reported adjusted Q1 EPS of $4.09 compared to the $3.69 FactSet estimate. Revenues rose 3.8% y/y to $38.9 billion, versus the Street's forecast of $36.7 billion. Same-store sales rose 2.2%, despite estimates calling for a 3.0% decline. Transactions were down 8.2% but were partially offset by an 11.4% increase in the average ticket and a 2.7% increase in sales per square foot. The home improvement retailer raised its full-year guidance. Shares were higher.

Twitter Inc. (TWTR $38) is once again making headlines after a recent tweet by potential acquirer Elon Musk stating that the deal is on hold until he has more clarity on the number of fake and spam accounts. The company's SEC filings estimate that fewer than 5% of its monetizable daily active users are bots, but Musk suggested the number is closer to 20%. TWTR was higher.

The markets remained choppy as they grapple with the ultimate implications of persisting inflation pressures and expectations of an aggressive Fed monetary policy tightening campaign. Schwab's Chief Investment Strategist Liz Ann Sonders, along with Chief Fixed Income Strategist, Kathy Jones, and Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discuss the volatile market action in our latest Schwab Market Perspective: Downshifting.

They note how the markets have become more volatile as economic growth slows and investors worry that the Federal Reserve will overshoot in its effort to control inflation, potentially raising interest rates sharply enough to tip the economy into recession. If the Fed sticks to the plan its officials have been suggesting, it will be one of the most aggressive rate-hiking cycles in recent history. Meanwhile, international stocks outperformed U.S. stocks as yields climbed and investors sought out stocks with more immediate cash flows, which tend to be more prevalent overseas. You can follow Liz Ann, Kathy and Jeff on Twitter: @LizAnnSonders, @KathyJones, and @JeffreyKleintop.

Read all our market commentary, including our latest article, Stock Market Volatility: Schwab's Quick Take, on our Market Insights page, and you can follow us on Twitter at @SchwabResearch.

Homebuilder sentiment falls to lowest level since June 2020

Advance retail sales (chart) for April rose by 0.9% month-over-month (m/m), versus the Bloomberg consensus forecast of a 1.0% rise, and compared to March's upwardly-adjusted 1.4% increase. Last month's sales ex-autos grew 0.6% m/m, compared to expectations of a 0.4% gain and as March's figure was revised higher to a 2.1% increase. Sales ex-autos and gas were up 1.0% m/m, above estimates of a 0.7% rise, while March's reading was adjusted upward to a 1.2% increase. The control group, a figure used to calculate GDP, increased 1.0% m/m, versus projections of a 0.7% increase, and following March's favorably-revised 1.1% rise.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment in May slid to 69 from April's unrevised 77 level, its lowest level since June 2020 and below the consensus Bloomberg estimate of 75. The NAHB said, "The housing market is facing growing challenges. Building material costs are up 19% from a year ago, in less than three months mortgage rates have surged to a 12-year high, and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family." The report added that entry-level and first-time home buyers are being hit hardest from the rapid rise in mortgage rates.

The Federal Reserve's report on industrial production (chart) showed a 1.1% m/m increase in April, matching estimates, and compared to March's unrevised 0.9% increase. The Fed said manufacturing output, mining production, and utilities all rose. Capacity utilization nudged higher to 79.0% from the prior month's downwardly-adjusted 78.2% rate, versus forecasts of an increase to 78.6%.

Business inventories (chart) rose 2.0% m/m in March, above forecasts of a 1.9% increase, after February's upwardly-revised increase of 1.8%.

Treasuries were lower and yields have been choppy as of late following a recent spike as markets anticipate tighter Fed monetary policy following the early May 50 basis point (bp) rate hike, which Schwab's Liz Ann Sonders discusses in her article, 50 Ways to Leave Your Mark.

As the Fed launches a series of rate hikes to try to cool off inflation, check out the latest offering from Schwab's Director of Fixed Income Collin Martin and Director of Fixed Income Strategy Cooper Howard titled 8 Questions on the Bond Market and Rate Hikes, where they provide their insight into some of the most frequently asked questions they have received this year.

The yields on the 2-year and 10-year Treasury notes were up 11 bps to 2.70% and 2.98% respectively, and the 30-year bond rate increased 10 bps to 3.18%.

More housing data is in store for tomorrow's economic calendar, including the MBA Mortgage Applications Index for the week ended May 13, as well as housing starts and building permits for April. Starts are forecasted to have declined 1.9% m/m to an annual rate of 1,759,000 units, and permits are estimated have decreased 2.7% m/m to annual rate of 1,820,000 units.

Europe rises despite ongoing headwinds

European equities were higher, easing some of the recent pressure seen amid a number of headwinds that have stymied conviction. Monetary policy remained in focus after recent rate increases from the U.S. and the U.K, while a recent run-up in the U.S. dollar along with signs of slowing economic activity have exacerbated fears of a possible recession. Ongoing inflation pressures continued to be a concern and have been amplified by the war in Ukraine. Schwab's Jeffrey Kleintop offers his latest commentary, Hedging Stocks Against Rising Rates. Jeff notes how investors should consider hedging the possible risk of higher interest rates with the addition of short duration stocks, a potential way to manage risk while remaining invested in the markets. In economic news, the unemployment rate in both the U.K. and France ticked 0.1% lower, and Spain's trade deficit widened in March. Meanwhile, the final read on Italian inflation cooled slightly in April, and Eurozone GDP preliminarily ticked 0.1% higher on both a q/q and y/y basis in Q1. Both the British pound and the euro were solidly higher versus the U.S. dollar. Bond yields rose in the U.K. and across Europe.

The U.K. FTSE 100 Index was up 0.7%, France's CAC-40 Index rose 1.3%, Germany's DAX Index increased 1.6%, Italy's FTSE MIB Index was 1.1% higher, Spain's IBEX 35 Index gained 1.5%, and Switzerland's Swiss Market Index traded 2.0% to the upside.

Asia higher as tech shares jump

higher to provide investors some reprieve from recent volatility caused by a flurry of headwinds including tighter monetary policy across the globe, signs of slowing economic growth, a recent rally in the U.S. dollar, and the ongoing war in Ukraine. Technology shares led the way in the region, and investors are still grappling with the implications of China's strict zero-COVID policy, although Shanghai achieved three consecutive days of no new cases outside quarantine zones. Schwab's Jeffrey Kleintop discusses in his latest article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output. In economic news, Indian wholesale prices rose more than expected at a rate of 15.1% y/y, but Japan's Tertiary Industry Index rose 1.3% in March, above the forecasted 1.1% rise and compared to February's 1.3% decline.

Japan's Nikkei 225 Index rose 0.4%, with the yen losing a little ground versus the U.S. dollar. China's Shanghai Composite Index increased 0.7%, the Hong Kong Hang Seng Index jumped 3.3%, Australia's S&P/ASX 200 Index was up 0.3%, India's S&P BSE Sensex 30 Index was 2.5% higher, and South Korea's Kospi Index traded 0.9% to the upside.

The international economic calendar for tomorrow will contain industrial production from Japan, CPI, PPI and the Retail Price Index from the U.K., as well as CPI from the Eurozone.

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