Equities Tumble and Post Another Losing Week

U.S. stocks plummeted and closed the final session of April solidly lower. The losses wiped out yesterday’s sharp rally and contributed to yet another weekly decline. The equity markets came under pressure as an abundance of headwinds remained, most notably expectations of an aggressive Fed tightening cycle, lockdowns in China, persisting inflation concerns, rising interest rates, and the recent jump in the U.S. dollar. Earnings season plowed ahead and brought a round of somewhat disappointing results, headlined by a sharp loss from Amazon, strong quarterly results but cautious guidance from Dow member Apple, and lackluster guidance from Dow component Intel. The Energy sector was also in focus after Dow member Chevron and Exxon Mobil posted mixed results but sharp growth in revenues. The economic calendar showed personal income and spending came in stronger than expected, and inflation pressures remained elevated with the Q1 Employment Cost Index rising more than expected. In other economic news, consumer sentiment was revised lower but improved compared to the prior month, and Chicago manufacturing growth decelerated more than expected. Treasuries were lower to lift yields, and the U.S. dollar pulled back from a recent rally to multi-year highs. Crude oil prices reversed lower and gold prices traded higher. Asia finished mostly to the upside as the Tech sector boosted Chinese and Hong Kong markets, and Europe gained ground on solid earnings reports and mixed economic data.

The Dow Jones Industrial Average fell 939 points (2.8%) to 32,977, the S&P 500 Index declined 156 points (3.6%) to 4,132, and the Nasdaq Composite decreased 537 points (4.2%) to 12,335. In heavy volume, 5.0 billion shares of NYSE-listed stocks were traded, and 4.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.67 to $104.69 per barrel. Elsewhere, the gold spot price traded $20.40 higher to $1,911.70 per ounce, and the Dollar Index was 0.5% lower at 103.16. Markets were lower for another week, as the DJIA was down 2.5%, the S&P 500 lost 3.3%, and the Nasdaq Composite dropped 3.9%.

Dow member Apple Inc. (AAPL $158) reported fiscal Q2 earnings-per-share (EPS) of $1.52, above the $1.42 FactSet estimate, as revenues rose 9.0% year-over-year (y/y) to $97.3 billion, north of the $94.0 billion that the Street had expected. The company said it saw a record March quarter, setting all-time revenue records for services and the iPhone and Mac, along with wearables, home and accessories. AAPL said continued strong customer demand helped it achieve an all-time high for its installed base of active devices. Additionally, the company announced a 5.0% increase of its quarterly cash dividend to $0.23 per share, as well as an authorized increase of $90 billion to its existing share repurchase program. However, the company warned that supply chain issues, exacerbated by the COVID lockdowns in China, could hurt results in the current quarter by as much as $8.0 billion. Shares dipped.

Amazon (AMZN $2,486) posted a Q1 loss of $7.56 per share, including a pre-tax valuation loss of $7.6 billion from its stock investment in Rivian Automotive Inc. (RIVN $30), making it unclear if the figure is comparable to the Street's EPS expectation of $8.35. Revenues rose 7.0% y/y to $116.4 billion, below the $116.5 billion that the Street had projected. AMZN issued Q2 earnings and revenue guidance that was below expectations.

AMZN said the pandemic and subsequent war in Ukraine have brought unusual growth and challenges. Its Amazon Web Services (AWS) grew 34% annually over the last two years, and 37% y/y, and its consumer business has grown 23.0% annually over the past two years. AMZN added that it is squarely focused on improving productivity and cost efficiencies throughout its fulfillment network and this may take some time as it works through ongoing inflationary and supply chain pressures. Shares fell sharply.

Dow component Intel Corporation (INTC $44) announced adjusted Q1 earnings of $0.87 per share, above the $0.78 projection, as revenues declined 7.0% y/y to $18.4 billion, above the $18.3 billion forecast. The chipmaker's client computing group revenue declined y/y, while its datacenter and AI group's sales gained ground, along with its network and edge group unit. INTC issued Q2 guidance that came in below forecasts, and its full-year earnings outlook missed projections, while it reaffirmed its 2022 revenue estimate. INTC traded solidly lower.

Dow member Chevron Corp. (CVX $157) reported adjusted Q1 EPS of $3.36, below the forecasted $3.41, with revenues rising 69.8% y/y to $54.4 billion, topping the expected $51.1 billion. Shares traded to the downside.

Exxon Mobil Corporation (XOM $85) reported adjusted Q1 profits of $2.07 per share, south of the expected $2.23, as revenues grew 53.0% y/y to $90.5 billion, versus the expected $82.8 billion. XOM traded modestly lower.

Q1 earnings season continued to heat up and shift into high gear. Of the 266 S&P 500 companies that have reported thus far, roughly 66% have topped sales expectations and about 81% have bested profit projections, per data compiled by Bloomberg. Thus far, y/y sales growth is tracking to be up 11.1%, and earnings growth is on track to the be 0.6% higher.

The markets remained choppy this week with the S&P 500 testing the March lows amid a lingering myriad of headwinds, including aggressive Fed tightening expectations, the ongoing war in Ukraine, China's COVID lockdowns, spiking interest rates, and the persistent rally in the U.S. dollar. Earnings season also shifted into high gear and revealed pockets of continued strength and weaknesses to add another layer of volatility and the markets oscillated in and out of positive and negative territory. The heavyweight Information Technology sector was a main focal point after giving back a weekly gain during Friday's selloff as earnings season hit its pinnacle with key reports being digested. However, the Financials sector saw some pressure—with interest rates cooling off—while the Consumer Discretionary sector also lost ground as sentiment remained skittish regarding the ultimate impact of persisting inflation pressures on the all-important U.S. consumer, which led to an unexpected contraction in Q1 GDP. The U.S. dollar continued its climb to multi-year highs, crude oil prices rebounded, and gold prices cooled off.

Schwab's Chief Investment Strategist Liz Ann Sonders discusses the market action in equities that have pulled back to threaten the March 8 lows in her article, Land of Confusion: Soft or Hard?. She talks about how recession chatter has picked up increasingly for numerous reasons, not least being the spike in oil prices, slowdown in economic growth estimates, and the Fed's transition from accommodative to tighter monetary policy. Liz Ann adds that while timing a recession is an impossible task, understanding that one is on the horizon (regardless of when it arrives) is crucial. She discusses how we think it's prudent on the part of investors to consider the items that are typically checked off leading up to—and in—recessions. You can follow Liz Ann on Twitter: @LizAnnSonders.

Amid the choppiness in the markets, you can find all our market commentary on our Market Insights page, and you can follow us on Twitter at @SchwabResearch.

Personal income and spending top forecasts, Q1 employment costs accelerate
Personal income (chart) rose 0.5% month-over-month (m/m) in March, above the Bloomberg consensus forecast of a 0.4% gain, and following February's upwardly-revised 0.7% increase. Personal spendinggrew 1.1%, north of expectations of a 0.6% increase, and compared to the prior month's upwardly-adjusted 0.6% gain. The March savings rate as a percentage of disposable income was 6.2%, down from February's negatively-revised 6.8% rate.

The PCE Deflator was up 0.9% m/m, in line with expectations, and following February's downwardly-adjusted 0.5% rise. Compared to last year, the deflator was 6.6% higher, below estimates of a 6.7% increase, and above the prior month's downwardly-adjusted 6.3% gain. Excluding food and energy, the PCE Core Price Indexrose 0.3% m/m, matching expectations and February's downwardly-revised rise. The index was 5.2% higher y/y, south of estimates calling for a match of February's downwardly-revised 5.3% rise.

The Q1 Employment Cost Index increased 1.4% quarter-over-quarter (q/q), above estimates calling for a 1.1% rise, and north of Q4's unadjusted 1.0% rise.

The April final University of Michigan Consumer Sentiment Index (chart) was unexpectedly revised lower to 65.2, from the preliminary 65.7 figure, where it was expected to remain. The downward revision came as the expectations component of the survey was adjusted lower to more than offset an upward revision to the current conditions portion. However, the overall index was above March's 59.4 level as both current conditions and expectations improved m/m with the latter rising solidly. The 1-year inflation forecast was unrevised at 5.4% and matched the prior month's rate, while the 5-10 year inflation forecast also remained at 3.0% and was unrevised m/m.

The Chicago PMI declined more than expected but remained comfortably in expansion territory (a reading above 50). The index fell to 56.4 in April from March's 62.9 reading, and versus estimates calling for a dip to 62.0. The softer-than-expected report came as growth in new orders and production decelerated, and the contraction in employment accelerated. Prices paid also accelerated to keep inflation pressures extremely elevated, but supplier deliveries rose at a slower pace to suggest supply chain challenges may begin to ease.

Treasuries were mostly lower after a recent rise that has seen yields trim gains as of late. Aggressive monetary policy tightening expectations have fostered the rise in yields, along with recent inflation data and comments from Fed officials. Fed Chairman Jerome Powell last week said a rate hike of 50 basis points (bps) was on the table for next week's monetary policy decision, which would be the first time it raised rates in excess of 25 bps in over 20 years. Meanwhile Fed officials have suggested that the beginning of its balance sheet reduction program was also set to start soon, with a ramp-up to $95 billion in securities to "mature off" the balance sheet each month.

Treasuries are mixed after a recent rise that has seen yields trim gains that have been seen as of late as the markets continue to be uneasy amid a host of potential headwinds. Aggressive monetary policy tightening expectations have fostered the rise in yields, along with recent inflation data and comments from Fed officials. Fed Chairman Jerome Powell last week said a rate hike of 50 basis points (bps) was on the table for next week's monetary policy decision, which would be the first time it raised rates in excess of 25 bps in over 20 years. Meanwhile Fed officials have suggested that the beginning of its balance sheet reduction program was also set to start soon, with a ramp-up to $95 billion in securities to "mature off" the balance sheet each month.
Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, At Last—Income in the Fixed Income Market, noting how the first quarter was brutal for fixed income investors, as bond prices fell, and yields rose. However, she notes how the steep rise in yields should mean that income investors can finally earn relatively attractive yields in the bond market, after enduring nearly three years of near-zero interest rates. Be sure to follow Kathy on Twitter: @KathyJones.

The yield on the 2-year note rose 8 bps to 2.72%, the yield on the 10-year note increased 5 bps to 2.91%, and the rate on the 30-year bond ticked 6 bps higher to 2.99%.

Next week, a ramped-up earnings season will likely contend with a robust economic docket. An important read on April manufacturing from the ISM will get the ball rolling, and will be followed by factory orders, the job openings and labor turnover survey(JOLTS), the ISM's read on services sector activity, and Q1 nonfarm productivity and unit labor costs. However, the headlining economic events next week could come in the form of the Federal Open Market Committee's (FOMC) monetary policy decision, with a 50 bp increase expected, along with the April nonfarm payroll report, projected to show 390,000 jobs were added.

Europe gains ground as earnings help buoy sentiment and overshadow headwinds
European equities closed higher as a host of earnings results on this side of the pond set a positive tone and helped overshadow the ongoing war in Ukraine and coinciding energy concerns. The prolonged war in Eastern Europe has escalated as Russia cut off gas flows to certain countries, such as Poland and Bulgaria, while President Putin offered a warning to the West if they intervene. The markets also shrugged off the continued uncertainty regarding the ultimate impact of COVID-related lockdowns in China. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers fresh commentary in his article, Hedging Stocks Against Rising Rates. Jeff says 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. You can follow Jeff on Twitter: @JeffreyKleintop. The economic calendar painted a mixed picture, as Eurozone consumer price inflation hit a record high for a sixth month in a row after rising 7.5% y/y, though Eurozone Q1 GDP growth accelerated to a 5.0% y/y pace of expansion. The euro and British pound rose versus the U.S. dollar, while bond yields in the Eurozone and the U.K. were mostly higher.

The U.K. FTSE 100 Index and Switzerland's Swiss Market Index were up 0.5%, France's CAC-40 Index gained 0.4%, Germany's DAX Index and Italy's FTSE MIB Index advanced 0.8%, and Spain's IBEX 35 Index increased 0.9%.

Asia moves mostly higher as Tech stocks lift China

Stocks in Asia finished mostly higher even as volatility in the markets remained, with a rebound in the Tech sector boosting markets in China and Hong Kong, while volume was lighter than usual as markets in Japan were closed for a holiday. The Tech sector lifted the U.S. markets yesterday to lend support, while optimism of reduced regulatory crackdowns in China and the Chinese government's pledge to deliver further stimulus measures also seemed to lift sentiment. Some signs of stabilization in currencies in Japan and China likely further aided the upward moves, though concerns remained regarding tighter monetary policies in Europe and the U.S., the ongoing war in Ukraine, and the ultimate global economic impact of the COVID-induced lockdowns in China. Schwab's Liz Ann Sonders, Jeffrey Kleintop, and Kathy Jones note in our latest Schwab Market Perspective: Inflation's Shadow, how rising prices and slowing demand have cast shadows on this year's economic outlook, especially as the Federal Reserve begins tightening monetary policy. Whether the situation will lead to a recession remains to be seen. Globally, there are signs that stretched supply chains are beginning to ease, potentially slowing the pace of inflation—which would be welcome news for investors and central bankers. In economic news, Hong Kong March exports unexpectedly fell, South Korea's industrial production surprisingly rose for last month, and Q1 producer price inflation in Australia accelerated.

China's Shanghai Composite Index rallied 2.4%, and Hong Kong's Hang Seng Index jumped 4.0%. South Korea's Kospi Index was up 1.0%, and Australia's S&P/ASX 200 Index gained 1.1%, while India's S&P BSE Sensex 30 Index bucked the trend, trading 0.8% to the downside.

Next week's international economic calendar also has the potential to garner some market attention, with reports worth mentioning including: Australia—the Reserve Bank of Australia's monetary policy decision, retail sales, and trade balance. China—Services PMI. India—Manufacturing and Services PMIs. Japan—Tokyo CPI. Eurozone—retail sales, economic confidence, and PPI, as well as German unemployment change, trade balance, factory orders, and industrial production. U.K.—Bank of England monetary policy decision.

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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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