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Dismal Labor Report Unable to Shake Bulls


U.S. equities finished solidly in the green, with the markets posting weekly gains across the board, as investors appeared to shrug off an expectedly dismal April labor report that showed a plunge in April employment and an historic spike in the unemployment rate, opting to focus on the optimism of progress in economic reopening in some U.S. states and key regions in Europe, along with recent signs of recovery in China. On the earnings front, Uber Technologies continued a recent theme of potential April stabilization from the severe impact of the COVID-19 pandemic, though Bookings Holdings showed the virus' impact on the travel industry that is likely to remain for some time. Treasury yields finished higher, as bond prices declined, and the U.S. dollar was lower, while crude oil prices were higher and gold lost modest ground in choppy trading. Markets in Europe and Asia also finished with widespread gains amid the optimism.

The Dow Jones Industrial Average jumped 455 points (1.9%) to 24,331, the S&P 500 Index increased 49 points (1.7%) to 2,930, and the Nasdaq Composite moved 142 points (1.6%) higher to 9,121. In moderately heavy volume, 909 million shares were traded on the NYSE and 3.8 billion shares changed hands on the NASDAQ. WTI crude oil gained $1.19 to $24.74 per barrel and wholesale gasoline added $0.02 to $0.95 per gallon. Elsewhere, the Bloomberg gold spot price was $10.57 lower at $1,705.49 per ounce, while the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.1% lower to 99.77. Markets were higher for the week, as the DJIA gained 2.6%, the S&P 500 advanced 3.5%, and the Nasdaq Composite rallied 6.0%.

Uber Technologies Inc. (UBER $33) reported a Q1 loss of $1.70 per share, compared to the $2.26 per share shortfall seen a year ago, and versus the FactSet estimate calling for a $0.84 per share loss. Revenues grew 14.0% year-over-year (y/y) to $3.5 billion, roughly in line with the Street's expectations. UBER's ridership declined 3.0% y/y during the quarter but its Uber Eats service surged 54.0%. The company said its rides business has been hit hard by the ongoing COVID-19 pandemic and it has taken quick action to preserve the strength of its balance sheet, focus additional resources on Uber Eats, and prepare it for any recovery scenario. UBER added that along with the surge in food delivery, it is encouraged by the early signs it is seeing in markets that are beginning to open back up. Shares were higher.

Macy's Inc. (M $5) announced that it will delay its Q1 earnings report to July 1st, due to the significant business disruption caused by the COVID-19 pandemic, and the subsequent impact on the financial statement preparation and reporting process. The department store said, "These are unprecedented times for the country, the retail landscape and Macy's, Inc. To date, we've taken a number of successful actions to protect and improve our financial flexibility, including significantly reducing expenses, furloughing the majority of our colleagues and drawing down our $1.5 billion credit facility." Shares traded higher.

Bookings Holdings Inc. (BKNG $1,431) reported a Q1 loss of $17.01 per share, or earnings-per-share (EPS) of $3.77 ex-items, compared to the profit of $11.17 per share posted a year ago and versus the Street's $5.61 EPS expectation. Revenues declined 19.0% y/y to $2.3 billion, above the estimated $2.2 billion, and travel services booked—net of cancellations—fell 50%. The parent of Booking.com, KAYAK and Priceline said the COVID-19 pandemic has profoundly impacted the company and the entire travel industry, and it has taken immediate steps to stabilize the company by reducing costs and bolstering its liquidity position. The company added that it believes travel will bounce back but it will likely be years, not quarters, before it sees a full recovery of global travel demand. Shares were lower.

The majority of earnings season is in the books, and while showing the severe impact of COVID-19 and fostering heightened uncertainty moving forward, the stock markets continue to move further north of the March 23rd lows. Of the 433 S&P 500 companies that have reported Q1 results thus far, nearly 60% have topped revenue estimates and roughly 68% have exceeded profit projections, per data compiled by Bloomberg. Additionally, Bloomberg is projecting that revenue growth is at 0.9% y/y and earnings growth is tracking to be down 7.2%.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, High Speed: Bear and Bull Both Running at Full Speed, how both the bear market and subsequent rally have occurred at warp speed; yet the economic recovery may be disappointing to what the market's now "priced in." Liz Ann adds in her article, Loss, Strain & Butterflies: Earnings Plunging, Stocks Ignoring, that stocks and earnings don't always travel in the same direction. However, she points out that net earnings revisions do tend to track more consistently with how stocks are performing; and her best guess is that there are more downward earnings revisions to come. Liz Ann concludes that perhaps she is being naïve, but she would think the ride will remain quite bumpy—at least throughout the remainder of earnings season.

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.

April employment falls sharply

Nonfarm payrolls (chart) tumbled by 20,500,000 jobs month-over-month (m/m) in April, compared to the Bloomberg forecast of a 22,000,000 drop, and following March's downwardly-adjusted fall of 870,000. Excluding government hiring and firing, private sector payrolls plunged by 19,520,000, versus the forecasted decline of 22,000,000 after falling by a negatively-revised 842,000 in March. The Department of Labor (DoL) said the changes in these measures reflect the effects of the coronavirus and efforts to contain it as employment fell sharply in all major industry sectors, with particularly heavy job losses in leisure and hospitality. The labor force participation rate fell to 60.2% from March's 62.7% rate.

The unemployment rate jumped from 4.4% in March to 14.7%—the highest rate and m/m increase in the history of the series—versus forecasts of a rise to 16.0%. The DoL noted that if the workers who were recorded as employed but absent from work due to "other reasons" had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported. Average hourly earnings were up 4.7% m/m, north of projections of a 0.4% rise and compared to March's upwardly-revised 0.5% gain. Y/Y, wage gains were 7.9% higher, above estimates of a 3.3% increase. The DoL said the increases in earnings largely reflect the substantial job loss among lower-paid workers. Finally, average weekly hours ticked higher to 34.2 from March's downwardly-revised 34.0, and versus forecasts of a decline to 33.5.

Temporary layoffs increased about ten-fold to 18.1 million and this is likely an area of focus as economists look to how much of these workers the trillions of dollars in monetary and fiscal stimulus measures can be brought back and help bring down the historic surge in the unemployment rate. Another key to deciphering the timing of when the bleak employment picture is starting to improve will be the weekly releases of initial jobless claims on Thursdays. Finally, the DoL added that data collection was affected by the pandemic as personal interviews of households that it usually does were not conducted for the safety of interviewers and respondents, while the survey of businesses may have been hampered by closures of its regional data collection centers, and the response to collect data remotely.

March wholesale inventories (chart) were revised favorably to a 0.8% m/m decline, versus expectations to remain at the preliminary estimate of a 1.0% decrease, and compared to February's negatively-revised 0.7% drop. Sales fell 5.2%, following February's positively-revised 0.7% decrease.

Treasuries finished lower, as the yield on the 2-year note rose 2 basis points (bps) to 0.15%, the yield on the 10-year note was up 5 bps at 0.68% and the 30-year bond rate gained 7 bps to 1.39%.

Schwab's Chief Fixed Income Strategist Kathy Jones offers insight into how to invest in the bond markets during this unprecedented time in 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 the heightened focus on the municipal bond markets in his 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 higher as reopening optimism overshadows dire U.S. employment report

European equities finished out the trading week higher, amid lingering global optimism regarding the progress on reopening of economies in some U.S. states and key regions in Europe, which helped the markets stomach the severe drop in employment in the U.S. for April. Also, recent earnings reports suggested potential signs of stabilization from the severe impact of the COVID-19 pandemic and resurfaced U.S./China tensions appeared to cool a bit. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, provides a look at monitoring the progress of global economic reopenings in his latest commentary, Dashboards: Measuring Recovery In Real Time, discussing how the key for the markets is assessing the pace and success of a recovery. Jeff is tracking weekly data for each major country in Asia and Europe on key elements of a recovery: rush hour commuting for how quickly people are returning to work, air pollution for manufacturing activity, retail foot traffic for brick and mortar shopping, weekend box office receipts for how quickly people are willing to come together in groups for entertainment, and new virus cases to see if the reopenings could lead to another shutdown. You can also get weekly updates of the dashboard data under the Twitter handle: @jeffreykleintop. In economic data in the region, German exports fell much more than expected in March, while U.K. consumer confidence for April was revised higher but remained at decisively negative levels. The euro and British pound gained ground on the U.S. dollar and bond yields in the region were mixed. The U.K. markets were closed for a holiday.

France's CAC-40 Index and Italy's FTSE MIB Index were up 1.1%, Germany's DAX Index advanced 1.4%, Spain's IBEX 35 Index gained 0.8%, and Switzerland's Swiss Market Index increased 0.5%.

Stocks in Asia finished higher to end the week, with the global markets eyeing the continued reopening efforts of some states in the U.S. and key regions in Europe, with recent earnings reports suggesting that there may be some signs of stabilization of the severe COVID-19 pandemic impact. Also, yesterday's stronger-than-expected Chinese trade data for April appeared to buoy sentiment, though the markets awaited the U.S. nonfarm payroll report, which was expected to show a massive amount of job losses. Japan's Nikkei 225 Index led the way, rising 2.6%, even as the yen held onto yesterday's rise, while Japan reported a smaller-than-expected drop in March household spending. China's Shanghai Composite Index rose 0.8% and the Hong Kong Hang Seng Index gained 1.0%. Australia's S&P/ASX 200 Index advanced 0.5%, shrugging off a dire warning from the Reserve Bank of Australia regarding first-half 2020 GDP. South Korea's Kospi Index moved 0.9% higher and India's S&P BSE Sensex 30 Index traded 0.6% to the upside. China's recent economic data has been mostly positive and Schwab's Jeffrey Kleintop, notes in his commentary, What Will The Recovery Look Like?, how early signs in Asia of a V-shaped rebound are encouraging, but may instead look more like a square root, flattening out as weaker global growth saps Asian economic momentum in the second quarter. Jeff concludes with noting that emerging markets, led by China and South Korea, are leading the recovery in the economy and markets as they did during the global recessions of 2000-02 and 2008-09.

Stocks continue to shrug off dismal data, further distancing from March 23rd lows

U.S. stocks posted a solid weekly gain, extending the dramatic bounce off of the March 23rd lows, with the trillions of dollars of monetary and fiscal policy support continuing to pave the way upward. Moreover, optimism of progress on economic reopenings in parts of the U.S. and key regions in Europe, and the nascent signs of recovery in China, added another layer of optimism, along with continued positive developments on the war against the COVID-19 pandemic from the biotech sector. Another contribution came in the form of cooled tensions between the U.S. and China that had flared back up late last week. Earnings season continued to feed uncertainty regarding how the corporate profit picture will develop going forward, but a small dose of signs of potential stabilization in the severe pandemic's disruption in the current quarter seemed to underpin the bullish sentiment. Stocks showed some resiliency in the face of more economic data illustrating the unfolding severe economic downturn, with all the major global services PMIs depicting contraction, U.S. jobless claims remaining historically elevated, and culminating with Friday's historic plunge in April employment.

The energy sector led the way as crude oil prices continued to rebound from the record low posted a couple weeks ago. For a look at the energy sector, check out Managing Director and Senior Investment Strategist with Charles Schwab Investment Advisory, Inc., David Kastner's, CFA, latest Schwab Sector Views: Energy Sector Blues. Technology issues also posted strong weekly gains, bolstered by the aforementioned optimism and as the group continued to show signs of benefitting from the new stay-at-home standard of living. All the other major sectors gained ground, except for defensively-natured utilities. The U.S. dollar continued to find support and the Treasury yield curve steepened noticeably on the long-end as the markets appeared to consider the possibility the Fed may need to explore negative rates. Gold traded higher.

Next week, as earnings season winds down, the economic calendar will pick up the slack, with April reads on small business optimism, inflation, industrial production and retail sales likely showing the severe impact of the pandemic. However, more timely reports for May could garner the heaviest scrutiny, with the University of Michigan delivering its Consumer Sentiment Index, jobless claims being reported for the week ended May 9th, and regional manufacturing data out of New York hitting the tape.

Our latest Schwab Market Perspective: Waiting for the Coronavirus Peak, notes the prospective shape of the post-virus recovery—whether it looks like a V, U, W or any other letter—has been a topic of debate among economists and investors. We think the most apt letter may be a Y, given that parts of the economy were already weak before the crisis, including manufacturing and business investment. As businesses start to reopen, the initial resumption in activity may cause a short-term surge in growth, but it might be difficult to sustain over the long term (hence the Y shape). Regardless of the shape of any potential recovery, the shape of the virus curve is the most important. A flattening in the number of new cases and deaths is the key to determining when the economy can reopen. Longer term, developing an effective vaccine and/or treatment is paramount. 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 calendar is also poised to carry some weight in the markets as focus remains on the progress of the recovery in China and the reopenings that have begun in Europe. Reports due out that deserve a mention include: Australia—May consumer confidence and April employment change. China—April lending statistics, inflation figures, industrial production, fixed asset investment and retail sales. India—April consumer price inflation and trade balance. Japan—April machine tool orders. Eurozone—Q1 GDP, March trade balance and industrial production. U.K.—April same-store sales and home prices, as well as March manufacturing/industrial production, and Q1 GDP.

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