• Charles Schwab & Co., Inc

Stocks Tally a String of Rallies to End Best Week of Year

U.S. stocks registered a string of four days of solid gains to put the finishing touches on the best week of 2019. The markets finished strong as a softer-than-expected May labor report bolstered elevated Fed rate cut expectations, while looking to see if the U.S. delays increased tariffs on Mexico, which are still set to kick in on Monday. Treasury yields extended a drop and the U.S. dollar fell. Crude oil prices added to yesterday's recovery from a recent tumble and gold extended a rally. Zoom Video and Vail Resorts were higher after their quarterly reports.

The Dow Jones Industrial Average (DJIA) rose 263 points (1.0%) to 25,984, the S&P 500 Index increased 30 points (1.1%) to 2,873, and the Nasdaq Composite gained 127 points (1.7%) to 7,742. In moderate volume, 728 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil advanced $1.40 to $53.99 per barrel and wholesale gasoline was up $0.03 at $1.74 per gallon. Elsewhere, the Bloomberg gold spot price traded $5.75 higher to $1,341.10 per ounce, and the Dollar Index— a comparison of the U.S. dollar to six major world currencies—fell 0.5% to 96.58. Markets posted the best week of 2019, as the DJIA surged 4.7%, the S&P 500 Index jumped 4.4%, and the Nasdaq Composite rallied 3.9%.

Zoom Video Communications Inc. (ZM $94) reported breakeven Q1 earnings-per-share (EPS), or a profit of $0.03 per share ex-items, compared to the $0.01 FactSet estimate, as revenues more than doubled year-over-year (y/y) to $122 million, topping the expected $112 million. The company noted strong execution and expanding adoption of its Zoom video-first unified communications platform. This was the first quarter as a public company, and it also issued Q2 and full-year guidance that exceeded estimates. Shares rallied.

Vail Resorts Inc. (MTN $237) posted fiscal Q3 EPS of $7.12, above the projected $7.08, with revenues rising 13.4% y/y to $958 million, roughly in line with forecasts. The mountain resort operator noted strong y/y growth in visitation and spending. The company increased its full-year operating earnings outlook and said season pass sales through May 29th for the upcoming 2019/2020 North American ski season increased solidly y/y, primarily driven by strong results in its destination markets. Shares finished nicely higher.

May job growth misses solidly

Nonfarm payrolls (chart) grew by 75,000 jobs month-over-month (m/m) in May, compared to the Bloomberg forecast of a 175,000 increase. The rise of 263,000 seen in April was revised to a gain of 224,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 90,000, versus the forecasted gain of 174,000, after rising by 205,000 in April, revised from the 236,000 increase that was initially reported. The Department of Labor said employment continued to trend up in professional and business services and in health care, but retail and government payrolls shrank.

The unemployment rate remained near a 50-year low of 3.6%, matching forecasts, while average hourly earnings were up 0.2% m/m, below projections of a 0.3% gain and matching April's unrevised increase. Y/Y, wage gains were 3.1% higher, south of estimates calling for it to match April's 3.2% gain. Finally, average weekly hours remained at April's 34.4 rate, compared to estimates calling for the figure to tick higher to 34.5.

Wholesale inventories (chart) were revised to a 0.8% m/m gain in April, versus expectations to remain at the preliminary 0.7% increase, and compared to March's unrevised flat reading. Sales declined 0.4%, versus the expected 0.2% dip, and following March's 1.8% gain.

Consumer credit showed consumer borrowing expanded by $17.5 billion during April, rebounding from the smallest increase in nine months with the strongest gain since November and well above the $13.0 billion forecast. March's figure was adjusted slightly upward to an increase of $11.0 billion.

Treasuries were higher, with the yields on the 2-year and 10-year notes, along with the 30-year bond, falling 4 basis points to 1.84%, 2.08% and 2.57%, respectively.

Schwab’s Chief Investment Strategist Liz Ann Sonders discusses in her latest commentary, The Age of Worry: Investor Sentiment Takes a Hit, how we are beginning to see signs of a ramping of pessimism tied to the latest market weakness and concerns about recession. She adds that it may not be enough yet to suggest a contrarian case for a near-term bottom, but it may not take much additional weakness to get there given the heightened sensitivity toward even mild pullbacks. Liz Ann concludes that longer-term though, an objective look at households' exposure to equities suggests the likelihood of the next 10 years looking as good as the past 10 years is fairly low. Liz Ann also provides analysis of the escalated trade tensions in her video, How Could the U.S. Economy Be Impacted by Tariffs?

Global markets higher on monetary policy support

European equities moved higher, with the global markets digesting the softer-than-expected U.S. May employment report, which followed German April industrial production and export figures that both missed estimate. The data comes as the European Central Bank pushed out its time frame to change in current rate levels and this week's comments from U.S. Federal Reserve Chairman Jerome Powell that suggested a rate cut was on the table. The euro and British pound extended yesterday's gains versus the U.S. dollar, and bond yields in the region saw pressure. Gains today appeared to also get support from late-yesterday's reports that the U.S. may be considering delaying the implementation of increased tariffs on Mexico, which is slated for Monday. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the global markets in his latest article, Borrowed Time: Final Rate Hikes And Stock Market Rallies. Jeff points out that stock markets around the world have rallied after the Federal Reserve's final interest rate hike of the economic cycle. He adds that history suggests that the stock market rally since the last Fed rate hike on December 19, 2018 may be on borrowed time.

Stocks in Asia finished higher on the heels of the extended rally in the U.S., which came amid reports that the U.S. may be mulling delaying increased tariffs on Mexico that are slated to start on Monday and as this week's comments from U.S. Fed Chair Powell suggested a rate cut could be in play. Also, the global markets digested yesterday's European Central Bank monetary policy decision, which included an extension of its time frame for current rates to remain. Japanese stocks rose, with the yen trimming a recent rally, while strength in materials, financials and energy helped Australian equities move higher. South Korean markets nudged to the upside and Indian stocks rebounded modestly from yesterday's drop that came on the heels of the Reserve Bank of India's rate cut decision and flare-up in corporate debt concerns. Markets in China were closed for a holiday. With heightened trade uncertainty a major contributor to the increased global market choppiness, Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, offers his latest Schwab Sector Views: Trade—Deal or No Deal, noting that our recommendations remain relatively neutral, but giving some options for those leaning one way or the other.

Stocks post best week of 2019

U.S. stocks rallied four-straight sessions to cap off the best weekly gain of the year, courtesy of conciliatory tones from Mexico and China and headlines that appeared to thaw some of the elevated trade fears. Moreover, ramped-up Fed rate cut expectations supercharged the rally, with Fed Chairman Powell's suggestion that a cut could be in play being followed by Friday's softer-than-expected May Labor Report. The markets overcame festering recession concerns that were exacerbated by disappointing manufacturing reports out of the U.S., U.K. and Eurozone. Treasury yields continued to fall, with the 10-year yield hitting lows not seen since September 2017 and the U.S. Dollar Index dropping in choppy trading. Crude oil prices looked poised to continue to drop after hitting January lows midweek following an unexpected jump in oil inventories, but rallied back to near the unchanged mark for the week amid the reprieve in trade worries and growing expectations that OPEC may extend production cuts. All the major stock market sectors rose on the week, led by a surge in materials and a jump in technology. However, communication issues severely lagged behind as gains were capped by accelerated regulatory concerns toward the group with Alphabet Inc. (GOOGL $1,069), Amazon.com Inc. (AMZN $1,804) and Facebook Inc. (FB $173) reportedly in regulators' crosshairs.

With Mexican tariffs still slated to start on Monday, trade is likely to command the lion's share of the market's direction, but next week's fully-loaded economic calendar could compete for attention, given the heightened rate cut expectations and looming June 19th Fed monetary policy decision. The JOLTS job openings report will get the ball rolling and be followed by the NFIB Small Business Optimism Index. A host of inflation figures will hit the tape, with the Producer Price Index (PPI), Consumer Price Index (CPI) and Import Price Index being released. The Fed's industrial production and capacity utilization report is poised to find scrutiny, along with some key reads on the consumer, courtesy of retail sales and the preliminary June University of Michigan Consumer Sentiment Index.

As noted in our latest Schwab Market Perspective: Schwab Market Perspective: Dangers Rising…or Potential Opportunity Emerging?, U.S. stocks suffered a 7-10% pullback throughout May as trade tensions and growth concerns heated up. The selling was disconcerting and bouts of weakness could persist, but potential opportunities may also emerge. Warning signs are increasingly flashing for economic growth, while recession probability models have been moving higher; but for now we believe the bar remains relatively high for Fed rate cuts this year—although futures have priced in a 80% likelihood by July. Elevated consumer confidence in the world's economic leaders may not be painting an accurate economic picture.

The international economic week will also be chock full of potential market-moving releases that include: Australia—employment change. China—trade balance, CPI, PPI, industrial production and retail sales. India—CPI, PPI and industrial production. Japan—Q1 GDP and core machine orders. Eurozone—investor confidence and industrial production. U.K.—April GDP, industrial/manufacturing production, trade balance and employment change.

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