Schwab Market Update

Stocks Continue to Chip Away at Weekly Losses

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U.S. equities are higher in afternoon trading, as the markets try to recover from the heavy losses suffered earlier in the week, with Information Technology and other growth-related issues leading the way. Stocks fell solidly in the first half of the week as further signs of inflation pressures exacerbated uncertainty regarding the timing of the tapering of asset purchases from the Federal Reserve. The rebound comes despite a negative reaction to Dow member Walt Disney's earnings report, a miss in April retail sales, and an unexpected decline in the May preliminary University of Michigan Consumer Sentiment Index, which was bogged down by inflation worries. However, DoorDash and Airbnb are moving nicely higher in the wake of their earnings releases. Treasuries are gaining modest ground to apply slight downside pressure on yields and the U.S. dollar is falling, while gold and crude oil prices are higher. Europe closed out the wild week with widespread gains.

At 12:50 p.m. ET, the Dow Jones Industrial Average is up 0.9%, the S&P 500 Index is gaining 1.4%, and the Nasdaq Composite is rising 2.0%. WTI crude oil is increasing $1.38 to $65.20 per barrel, Brent crude oil is advancing $1.42 to $68.47 per barrel. The Bloomberg gold spot price is advancing $11.21 to $1,837.93 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is dropping 0.4% to 90.36.

Dow member Walt Disney Company (DIS $174) reported adjusted fiscal Q2 earnings-per-share (EPS) of $0.79, compared to the $0.26 FactSet estimate, with revenues falling 13.0% year-over-year (y/y) to $15.6 billion, but coming in below the Street's forecast of $15.9 billion. DIS' total streaming subscribers came in just shy of estimates as stronger-than-expected ESPN+ subscribers was met with softer-than-anticipated subscribers for its Disney+ service. Revenues out of its Disney Media and Entertainment Distribution unit fell short of forecasts, more than offsetting better-than-projected revenues out of its Disney Parks, Experiences and Products segment.

However, the company said it is pleased to see more encouraging signs of recovery across its businesses and it remains focused on ramping up its operations while also fueling long-term growth. DIS said this is clearly reflected in the reopening of its theme parks and resorts, increased production at its studios, the continued success of it streaming services, and the expansion of its portfolio of multiyear sports rights deals for ESPN and ESPN+. Shares are trading lower.  

DoorDash Inc. (DASH $145) reported adjusted Q1 earnings before interest, taxes, depreciation and amortization (EBITDA) of $43 million, topping the Street's expectation of $28 million. Revenues jumped 198% y/y to $1.1 billion, above the estimated $994 million, as the food delivery service's total orders grew 219% y/y in Q1. DASH raised its full-year EBITDA guidance, noting that its outlook anticipates the successful rollout of COVID-19 vaccines and an associated increase in in-store dining rates, as well as a seasonal decline in order rates associated with the warmer summer months. The company added that while it observed encouraging trends in Q1, it cautions investors that the outlook for 2021 remains highly uncertain as consumer behavior could deviate from the expectations included in its guidance. Shares are rallying over 20%. 

Airbnb Inc. (ABNB $140) reported an adjusted Q1 EBITDA loss of $59 million, much smaller than the $355 million shortfall that analysts had anticipated. Revenues grew 5.0% y/y to $887 million, topping the expected $721 million, as gross booking value came in well above estimates. The company said for nights and experiences booked, it expects Q2 will be significantly higher than the highly depressed levels of Q2 2020, but below that of Q2 2019. Shares are rising.

As the markets are set to close out a volatile week, the Schwab Center for Financial Research (SCFR) offers the latest commentary, Market Volatility: Schwab's Quick Take, noting how market volatility is unsettling, but historically not unusual. The SCFR adds that if you've built an appropriately diversified portfolio that matches your time horizon and risk tolerance, it's likely the recent market drop will be a mere blip in your long-term investing plan. However, it can be hard to do nothing when markets are rough, and given what has been happening recently, the SCFR provides a few of our investing principles to consider.  

For more on our view on the market volatility as of late check out our Market Insights page on www.schwab.com, where you can also find our latest Schwab Sector Views: Upgrading Energy, for analysis of our upgrade of the Energy sector to outperform, joining our continued outperform ratings for the Financials and Health Care sectors. You can also follow us on Twitter at @SchwabResearch.

Retail sales miss but prior month revised favorably, May read on consumer sentiment disappoints

Advance retail sales (chart) for April came in flat month-over-month (m/m), versus the Bloomberg consensus forecast of a 1.0% increase but March's figure was adjusted higher to a 10.7% jump. Last month's sales ex-autos declined 0.8% m/m, compared to expectations of a 0.6% increase and March's figure was favorably revised to a 9.0% rise. Sales ex-autos and gas were also down 0.8% m/m, compared to estimates of a 0.3% gain, and March's reading was adjusted higher to an 8.9% increase. The control group, a figure used to calculate GDP, fell 1.5% m/m, versus projections of a 0.2% decline and March's upwardly adjusted 7.6% rise.

The May preliminary University of Michigan Consumer Sentiment Index (chart) surprisingly fell to 82.8 versus estimates of a slight increase to 90.0 from April's 88.3 reading. The index unexpectedly declined as the current conditions and the expectations components of the index both surprisingly deteriorated. The report noted that consumer confidence in early May tumbled due to higher inflation—the highest expected year-ahead inflation rate as well as the highest long-term inflation rate in the past decade. Also, the release added that rising inflation also meant that real income expectations were the weakest in five years. The 1-year inflation forecast jumped to 4.6% from April's 3.4% rate, and the 5-10 year inflation forecast rose to 3.1% from the prior month's 2.7% level.

The Import Price Index (chart) rose 0.7% m/m for April, versus expectations of a 0.6% gain, and compared to March's upwardly revised 1.4% increase. Versus last year, prices were up by 10.6%, compared to forecasts of a 10.2% increase and March's upwardly adjusted 7.0% gain.

The Federal Reserve's report on industrial production (chart) showed a 0.7% m/m gain in April, below estimates of a 0.9% increase, and versus March's upwardly revised 2.4% rise. Manufacturing and mining output both nudged higher, but utilities production rose solidly. Capacity utilization increased to 74.9% versus forecasts calling for a gain to 75.0% from the prior month's unrevised 74.4% rate. Capacity utilization is 4.7 percentage points below its long-run average.

Business inventories (chart) rose 0.3% m/m in March, matching forecasts following February's upwardly revised 0.6% gain.

Treasuries are mostly higher, with the yield on the 2-year note flat at 0.15%, while the yields on the 10-year note and the 30-year bond are declining 2 basis points to 1.64% and 2.36%, respectively.

Rising inflation concerns, exacerbated by this week's hotter-than-expected inflation data, fostered some volatility in the markets and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, Is 1970s-Style Inflation Coming Back?, that although we expect higher prices over the next few years, a return to that level of inflation is unlikely.

Also, Schwab's Managing Director and Fixed Income Strategist Collin Martin, CFA, along with Senior Fixed Income Research Analyst, Christina Shaffer, note how the pace of inflation—from below 2% to greater than 4%—has a big impact on the performance of various asset classes in their article, Rising Inflation: What It Means for TIPS and Other Investments.

Europe broadly higher in final session of wild week  

European equities finished out a volatile week with widespread gains, paring some of the losses seen earlier in the week amid some hotter-than-expected inflation reports in the U.S. that fostered uncertainty regarding whether the Federal Reserve may need to rein in its asset purchases sooner than expected. Financials and Industrials led the broad-based advance, while Information Technology and growth-related sectors, which saw the most pressure from the inflation implications, also contributed. The euro and British pound were higher versus the U.S. dollar, which came under pressure and added to losses following a softer-than-expected U.S. April retail sales report. Bond yields in the Eurozone were mixed and rates in the U.K. were lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Is Stagflation Back?, noting how the constraint on global growth this year has evolved from the supply of vaccines to the supply of nearly everything else. Jeff adds that the shortage of supplies indicates risk of economic weakness coupled with rising prices. Yet, he points out that these forces of stagflation may be offset through prompting central banks to continue stimulus, lawmakers to rollout additional fiscal stimulus in the U.S. and Europe, and business leaders to invest in a wave of capital spending, accompanied by a sharp rebound in output by the service sector.

The U.K. FTSE 100 Index was up 1.2%, France's CAC-40 Index rose 1.5%, Germany's DAX Index advanced 1.4%, Italy's FTSE MIB Index gained 1.1%, Spain's IBEX 35 Index increased 2.0%, and Switzerland's Swiss Market Index traded 0.8% higher.

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