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Progress in War Against COVID-19 Boosts Optimism

U.S. equities finished higher, posting a second-straight week of gains, as new developments in the forward progress in the war against the coronavirus pandemic boosted sentiment and overshadowed a record monthly drop in Leading Indicators. Yesterday evening, a report from STAT News said Gilead Sciences' potential COVID-19 treatment, known as Remdesivir, saw "rapid" recoveries in a study of patients, President Donald Trump unveiled guidelines on reopening the world's largest economy and Dow member Boeing said it plans to restart commercial-plane production. In earnings news, Dow component Procter & Gamble posted mixed quarterly results and guidance. Treasury yields were higher as bond prices fell, while the U.S. dollar lost modest ground, and gold and crude oil prices tumbled. Europe and Asia both also finished with widespread gains.

The Dow Jones Industrial Average jumped 705 points (3.0%) to 24,242, the S&P 500 Index increased 75 points (2.7%) to 2,875 and the Nasdaq Composite advanced 118 points (1.4%) to 8,650. In heavy volume, 1.4 billion shares were traded on the NYSE and 4.3 billion shares changed hands on the NASDAQ. WTI crude oil fell $1.60 to $18.27 per barrel and wholesale gasoline was unchanged at $0.71 per gallon. Elsewhere, the Bloomberg gold spot price was $33.99 lower at $1,683.71 per ounce, while the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.3% to 99.78. Markets were higher for the week, as the DJIA gained 2.2%, the S&P 500 rose 3.0% and the Nasdaq Composite increased 6.1%.

U.S. stocks continued to widen the gap from the March 23rd lows amid a host of positive developments on the fight against the COVID-19 (coronavirus) pandemic. A STAT News article late-yesterday reported that a Chicago hospital has been conducting a study of Gilead Sciences Inc's (GILD $84) treatment for the coronavirus, known as Remdesivir, which has seen "rapid" recoveries in fever and respiratory symptoms in patients receiving the treatment. The report also notes that most of the patients have already been discharged, but Bloomberg is reporting that University of Chicago spokesperson, Lorna Wong, warned that "drawing any conclusions at this point is premature and scientifically unsound." GILD also stressed that anecdotal reports are not enough to determine yet whether the treatment will be an effective one, per CNBC. The results still need to be confirmed in a formal clinical trial with data expected to be released in the next couple weeks. GILD traded higher.

Moreover, Dow component Boeing Company(BA $154) announced plans to resume commercial-plane production at its Puget Sound-region facilities next week, after suspending operations last month in response to the COVID-19 pandemic. BA rallied.

Adding another layer of optimism regarding the fight against the coronavirus, President Donald Trump unveiled yesterday evening a plan for phased economic reopening guidelines, opening pathways for restaurants, gyms, movie theaters and large sporting venues. President Trump left the decisions to state governors and contingent on meeting benchmarks regarding case numbers and testing.

The relative optimism comes amid the backdrop of the trillions of dollars being deployed from monetary and fiscal policy standpoints, aimed at keeping the financial markets functioning properly and combating the recent severe spike in unemployment claims.

In earnings news, Dow component Procter & Gamble Company (PG $125) reported Q1 earnings-per-share (EPS) of $1.12, or $1.17 ex-items, compared to the $1.06 FactSet estimate, with revenues rising 5.0% year-over-year (y/y) to $17.2 billion, compared to the forecasted $17.3 billion. The household product company said its organic sales—excluding the impact of acquisitions, divestitures and foreign exchange—rose 6.0%, driven primarily by an increase in shipment volume. PG lowered its 2020 revenue outlook and reaffirmed its core earnings forecast. Shares were higher.

The Schwab Center for Financial Research (SCFR) offers a look at How the U.S. Economic Stimulus Package May Affect Investors, with Schwab's Chief Investment Strategist Liz Ann Sonders noting that fiscal stimulus at this stage is really a rescue or triage mission but it is unlikely to actually stimulate growth, at least until the country is no longer shut down. Liz Ann adds that rather, it is meant to cushion the economic blow from the virus-containment policies, though it was important for the federal government to act quickly and decisively. In her latest article, Box of Letters: What Shape Will the Recession/Recovery Take?, Liz Ann notes that COVID-19-relevant leading indicators are painting a bleak economic picture and the murkiness in the outlook has resulted in an incredibly wide (and dour) outlook for second quarter real GDP. She concludes that most importantly, the hope is we begin to see a "bending of the curve" in the virus itself; so we can not only get back to some semblance of normalcy, but start to put the heartbreak of the past couple of months behind us.

Amid the heightened volatility in the markets, for timely news and analysis follow Schwab experts from the SCFR on Twitter at @SchwabResearch, and for helpful insight and information on the current market environment, check out our Q&A With Schwab Experts on Recent Market Volatility. Finally, investors can stay up-to-date on all the content that Schwab offers on the unparalleled market action at www.schwab.com/volatility.

Leading Indicators fall by a record but at smaller pace than expected, Treasury yields dipping

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for March fell 6.7% month-over-month (m/m), above the Bloomberg projection of a 7.2% drop, while February's figure was revised slightly lower to a 0.2% decrease. This was the biggest monthly drop on record as the severe spike in jobless claims weighed on the index, along with a solid drag of stock prices, while building permits, average workweek, and consumer expectations also declined.

Treasuries were lower, as the yield on the 2-year note was flat at 0.20%, while the yield on the 10-year note gained 4 basis points (bps) to 0.65%, and the 30-year bond rate was 5 bps higher at 1.27%. With the unprecedented market action changing the landscape of the bond markets, Schwab's Chief Fixed Income Strategist Kathy Jones offers her Q2 Bond Market Outlook: Looking Beyond the Coronavirus Crisis, in which she notes that while the COVID-19 crisis is far from over, we expect central bank and government policies to be key to performance in the second quarter. Moreover, Schwab's Fixed Income Director, Cooper Howard, CFA, discusses in his latest article, Coronavirus and the Municipal Bond Market: Questions and Answers, while Fixed Income Strategist, Collin Martin, CFA, delivers a look at What Happens When a Corporate Bond is Downgraded?

Europe and Asia higher amid optimism regarding the war on COVID-19

European equities finished out the week with widespread gains, as optimism out of the U.S. regarding the fight against the coronavirus buoyed the global markets. The optimism came after Gilead Sciences reportedly has seen premature progress on the treatment of patients with the coronavirus, U.S. President Donald Trump unveiled guidelines to reopen the world's largest economy, and Boeing said it plans to restart commercial-plane production at some facilities in the state of Washington. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his commentary, What Will The Recovery Look Like?, noting that this recession is the result of a shock, not the natural end result of a slow build-up of excesses. Jeff adds that this may mean the recession and bear market could be deeper, but also that the duration may be shorter. In economic news in the region, EU27 new car registrations tumbled in March, while last month's Eurozone consumer price inflation remained subdued and February Eurozone construction output declined. The euro and British pound rose versus the U.S. dollar, while bond yields in the region were mostly lower.

The U.K. FTSE 100 Index was up 2.8%, France's CAC-40 Index rallied 3.4%, Germany's DAX Index gained 3.2%, and Switzerland's Swiss Market Index increased 1.8%, while Italy's FTSE MIB Index and Spain's IBEX 35 Index advanced 1.7%.

Stocks in Asia finished broadly higher, on the heels of the late-session resiliency in the U.S. markets, which was followed by corporate news and guidance for reopening the U.S. markets from President Donald Trump that boosted optimism regarding the war on the coronavirus. The markets also digested a flurry of Chinese economic data that showed March industrial production fell by a smaller amount than expected but last month's retail sales dropped more than anticipated. The data culminated with the nation's Q1 GDP report that showed a 6.8% y/y contraction, the first drop in output since 1992. Global Q1 economic activity was severely impacted by the coronavirus disruption and Schwab's Jeffrey Kleintop, discusses in his commentary, What Can Investors Expect From GDP Reports?, noting that GDP is the most commonly used measure of growth and recession. Jeff adds that reports for the first quarter may not fully reflect the economic free fall that began late in the first quarter for countries other than China and second quarter GDP reports may benefit from any return of economic activity and the boost from fiscal and monetary stimulus. He concludes that because the economic freefall resulting from the shutdowns to contain the spread of COVID-19 straddled the first and second quarters, it's possible neither first nor second quarter GDP reports will fully capture the sudden shock to the economy that the markets reacted to in February and March.

Other economic data in the region showed February Japanese industrial production and capacity utilization declined. China's Shanghai Composite Index advanced 0.7% and the Hong Kong Hang Seng Index increased 1.6%. Japan's Nikkei 225 Index rallied 3.2%, even as the yen firmed late in the day, while South Korea's Kospi Index rose 3.1%. India's S&P BSE Sensex 30 Index jumped 3.2% and Australia's S&P/ASX 200 Index moved 1.3% higher.

Stocks post back-to-back weekly gain as virus optimism counters data

U.S. stocks added to last week's historic rally with consumer discretionary, healthcare, information technology and communications services sectors leading the way. The power of positive headlines regarding the war on the coronavirus was on display as the markets were boosted by the continued flattening of the curve in the key hot spot of New York, which led to discussions regarding the timing of a reopening of the world's largest economy and culminated with President Trump's guidance on plans to get back to relative normalcy. The boost was super-charged by commentary and reports suggesting treatment for the virus may be in the offing, notably by today's news on Gilead, while Abbot Laboratories(ABT $96) said it recently launched three COVID-19 tests, which included molecular tests—to detect whether someone has the virus—and antibody tests—to determine if someone was previously infected. Moreover, Dow member Johnson & Johnson (JNJ $152) offered upbeat guidance on its leading coronavirus vaccine candidate, while intense rival vaccine companies, GlaxoSmithKline PLC. (GSK $42) and Sanofi (SNY $48), announced they will team up to leverage their competitive advantages to fight the coronavirus.

However, the markets remained volatile and were jolted at points during the week as U.S. economic data started to show the severity of the COVID-19 disruption. March retail sales posted the largest monthly drop on record, industrial production for last month fell by the most since the 1940s, April New York and Philadelphia manufacturing reports registered historic plunges, weekly initial jobless claims spiked again—bringing the four-week total north of 22 million—and the Beige Book for the first time in years did not indicate a moderate or modest pace of economic activity, but rather that the economy showed a deep decline amid the coronavirus impact. Also, Q1 earnings season unofficially kicked off with results from banking sector heavyweights, which set a negative tone by announcing billions of dollars in provisions for loan losses, which was partly offset by trading activity amid the extreme volatility that began in February. Treasury yields fell, with the rate on the two-year note dropping to lows not seen since 2011, crude oil prices continued to fall to near two-decade lows, the U.S. dollar nudged higher, and gold rallied to 2012 levels. As such, financials and real estate fell solidly and were the worst performing sectors on the week, along with energy and materials issues.

Next week, Q1 earnings season will ramp up and likely garner heavy scrutiny as results outside the financial sector come into focus. Moreover, the economic calendar is poised to deliver several March and April data points to shed some more light on the coronavirus disruption. Existing and new home sales for March will hit the tape, joined by the preliminary durable goods orders report for last month, while we will get April reads on manufacturing and services sector activity from Markit and the University of Michigan will announce its April revision of its Consumer Sentiment Index. The two more timely reads will come in the form of weekly initial jobless claims for the week ended April 18th and mortgage applications for the week ended April 17th.

As noted in our latest Schwab Market Perspective: Waiting for the Coronavirus Peak, the COVID-19 pandemic has severely affected the U.S. economy, with containment efforts leading to widespread business closings and surging unemployment—and stock market volatility. The key questions now are when can the economy reopen, and what happens when it does? Market volatility underscores the importance of having a portfolio that contains a variety of asset classes, including stocks and bonds, balanced in a way that reflects your risk tolerance and investment timeline. It's also a good idea to rebalance your portfolio periodically to bring it back to your original asset allocation targets.

Next week's international economic docket will also likely contend for attention, as a plethora of global April manufacturing and services PMIs will be accompanied by several data points worthy of a mention including: China—one-year and five-year loan prime rate decisions. Japan—trade balance, department store sales and national consumer price inflation figures. Eurozone—trade balance and consumer confidence, along with German business and investor sentiment reports. U.K.—employment change, inflation figures and retail sales.

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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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