Stocks Rally Off Lows Following President's Remarks

 

U.S. equities rallied in the final hour of trading to finish mixed after President Donald Trump's press conference appeared to be less ominous than what market participants may have expected leading up to the event, with tensions intensifying between the world's two largest economies as of late. A virtual discussion with Federal Reserve Chairman Jerome Powell also garnered attention, as the Chairman indicated the Main Street lending facility is within days of making its first loans. Economic data continued to illustrate the severe impact of the COVID-19 pandemic, as personal spending fell more than expected in April, the final read on consumer sentiment for May from the University of Michigan was revised lower and Chicago manufacturing activity hit lows not seen since the early 1980s. Treasury yields finished lower following Trump's comments as bond prices moved higher, the U.S. dollar was little changed and crude oil prices reversed to the upside, while gold also gained ground. In equity news, Salesforce.com issued disappointing guidance and Costco posted mixed results, while Williams-Sonoma topped sales estimates despite store closures for more than half the quarter. Europe finished solidly lower and markets in Asia were mixed.

 

The Dow Jones Industrial Average dipped 17 points (0.1%) to 25,383, while the S&P 500 Index rose 15 points (0.5%) to 3,044 and the Nasdaq Composite jumped 121 points (1.3%) to 9,490. In heavy volume, 2.4 billion shares were traded on the NYSE and 4.6 billion shares changed hands on the NASDAQ. WTI crude oil rose $1.78 to $35.49 per barrel and wholesale gasoline gained $0.05 to $1.08 per gallon. Elsewhere, the Bloomberg gold spot price advanced $13.19 to $1,731.52 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 98.34. Markets were higher for the week, as the DJIA rose 3.8%, the S&P 500 gained 3.0%, and the Nasdaq Composite increased 1.8%.

 

Salesforce.com Inc. (CRM $175) reported Q1 earnings-per-share (EPS) of $0.11, or $0.70 ex-items, versus $0.93 a year ago, and compared to the $0.69 FactSet estimate. Revenues grew 30.2% year-over-year (y/y) to $4.9 billion, roughly in line with expectations. The company's subscription and support revenues rose solidly, along with its professional services and other revenues. The company said the pandemic showed it that digital is an imperative for every company, and it is confident Salesforce will continue to accelerate as it brings its customers into the new normal. However, CRM issued Q2 guidance that was below the Street's expectations, while it lowered its full-year outlook. Shares were solidly lower.

 

Costco Wholesale Corporation (COST $308) posted fiscal Q3 earnings of $1.89 per share, compared to the $2.05 a year ago, and versus the Street's forecast of $1.92. Revenues rose 7.3% y/y to $37.3 billion, above the projected $37.0 billion. Q3 same-store sales, including the impact of changes in gasoline prices and foreign exchange, increased 4.8% y/y, which was roughly in line with estimates. The company said its earnings were negatively impacted by incremental wage and sanitation costs related to COVID-19. Shares traded lower.

  

Williams-Sonoma Inc. (WSM $83) announced Q1 EPS of $0.45, or $0.74 ex-items, compared to the $0.81 a year ago, and versus the expected $0.04. Revenues were mostly flat y/y at $1.2 billion, above the projected $1.1 billion. Q1 same-store sales rose 2.6% y/y, including a 31.2% jump in e-commerce activity and despite having all of its 616 stores closed for more than half of the quarter, compared to the expected drop of 13.9%. The company said given the dynamic nature of the COVID-19 crisis and the continuing macroeconomic uncertainty that could impact performance, it is not providing guidance for fiscal year 2020. Shares rallied.

    

Social media companies were in focus after President Donald Trump signed an executive order aimed at reviewing a law that currently allows these companies to not be held liable for content that users post on their sites. Also, in an afternoon a press conference, President Trump announced that the U.S. will take measures to eliminate special treatment for Hong Kong as a result of what the President called China's "broken word" over the province's autonomy from the Asian nation. However, he did not indicate that the U.S. would pull out of the Phase-1 trade agreement reached earlier this year with China, appearing to ease investors' concerns for now. As well, Trump said the U.S. will terminate its relationship with the World Health Organization (WHO) amid events surrounding its handling of the COVID-19 pandemic.

 

For timely news and analysis follow Schwab experts from the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and investors can stay up-to-date on all the content that Schwab offers on the unparalleled market action at www.schwab.com/volatility.

 

Personal income and spending data mixed, May consumer sentiment revised lower 

 

Personal income (chart) jumped by 10.5% month-over-month (m/m) in April, versus the Bloomberg forecast of a 5.9% drop, and compared to March's downwardly-revised 2.2% decline. The Bureau of Economic Analysis (BEA) said the rise in personal income primarily reflected an increase in government social benefits to persons as payments were made to individuals from federal economic recovery programs in response to the COVID-19 pandemic. However, the BEA's report showed personal spending dropped 13.6%, more than the forecasted 12.8% tumble and the prior month's favorably-adjusted 6.9% decrease. The April savings rate as a percentage of disposable income was 33.0%. The PCE Deflator was down 0.5% m/m, versus expectations of a 0.6% decline and versus the prior month's positively-revised 0.2% decrease. Compared to last year, the deflator was 0.5% higher, in line with estimates and compared to March's unadjusted 1.3% rise. Excluding food and energy, the PCE Core Index declined 0.4% m/m, compared to expectations of a 0.3% decrease and versus March's upwardly-revised flat reading. The index was 1.0% higher y/y, versus estimates of a 1.1% gain and compared to March's unadjusted 1.7% increase.

 

The May final University of Michigan Consumer Sentiment Index (chart) was revised lower to 72.3, versus expectations for an upward adjustment to 74.0 from the preliminary 73.7 reading. However, the index did improve modestly from April's record monthly drop to 71.8 level, as the current conditions component of the survey bounced solidly to more than offset a drop for the expectations portion. The 1-year inflation forecast jumped to 3.2% from April's 2.1% rate, and the 5-10 year inflation forecast ticked higher to 2.7% from the prior month's 2.5% pace.

 

The Chicago PMI unexpectedly fell further into a level depicting contraction (a reading below 50), dropping to 32.3 in May from April's 35.4 level, and versus forecasts calling for an increase to 40.0. The index hit the lowest level since the early 1980s as contractions in new orders and production both accelerated, while employment fell at a slower pace and inventories reversed direction to signal expansion.

 

The advance goods trade balance showed that the April deficit widened, coming in at $69.7 billion, versus estimates calling for it to match March's deficit of $65.0 billion.

 

Preliminary wholesale inventories rose 0.4% month-over-month (m/m) for April, compared to expectations of a 0.7% decrease, and versus March's downwardly-revised 1.0% decline.

 

A virtual discussion with Federal Reserve Chairman Jerome Powell and former Vice Chairman Alan Blinder garnered some attention, addressing various issues that have come up during the coronavirus pandemic. Powell indicated that the Fed was just "days away from making our first loans in Main Street", referring to the Main Street lending facility—the central bank's long-awaited lending program for small- and medium-sized businesses affected by the economic shutdown as a result of the pandemic. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, Stimulus = Inflation? Why It May Be Different This Time, how despite massive fiscal and monetary stimulus, we believe there's little risk of inflation in the next few years. Finally, Schwab's Chief Investment Strategist Liz Ann Sonders provides her article, Every Picture Tells a Story: "Chartbook" Look at Economy/Market, offering a visual look at the latest trends and statistics across the spectrum of the economy, policy and the stock market.

 

Treasuries were higher, as the yield on the 2-year note dipped 1 basis point (bp) to 0.16%, while the yields on the 10-year note and the 30-year bond declined 5 bps to 0.65% and 1.42%, respectively.

  

Europe lower as U.S.-China tensions in focus, Asia mixed

 

European equities finished out the week lower, as the markets kept an eye on the intensifying tensions between the U.S. and China ahead of today's press conference on China by U.S. President Donald Trump. The markets trimmed a solid weekly advance that has come from rising optimism regarding the reopening of the world's largest economy in the U.S., while key regions in Asia and Europe continue down the path to relative normalcy. The euro rose versus the U.S. dollar, but the British pound lost ground, while bond yields in core Eurozone regions and the U.K. traded lower. In economic news, core Eurozone consumer price inflation came in a tick hotter than expected for May, while German retail sales fell in April, but by a smaller amount than anticipated and compared to March's drop. Moreover, France's Q1 GDP was revised to a smaller-than-initially reported contraction, coming in at a 5.0% y/y decline, versus the expected drop of 5.4%. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers his latest article, What's Wrong With the Rebound?, noting how the unusual market leadership could mean the market is sending one of two worrisome messages: we haven't seen the low yet or the recovery is likely to be very weak.

 

The U.K. FTSE 100 Index dropped 2.3%, Germany's DAX Index fell 1.7%, France's CAC-40 Index was down 1.6%, Spain's IBEX 35 Index decreased 1.8%, Italy's FTSE MIB Index traded 0.8% lower, and Switzerland's Swiss Market Index declined 1.0%.

 

Stocks in Asia finished mixed in the final session of May, with the markets likely trading a bit cautiously ahead of today's press conference from U.S. President Donald Trump in response to China's approval of new national security law on Hong Kong this week, which has intensified tensions between the world's two largest economies. Also, the markets continued to digest recent economic data that, although showing some improvement from April to May, has remained dismal amid the severe disruption of the COVID-19 pandemic. Japan's April industrial production and retail sales both fell more than expected, but Tokyo's May consumer price inflation showed prices rose more than expected. Late in the day, India reported a much stronger-than-expected pace of expansion in Q1 GDP, which grew 3.1% y/y, versus the expected rise of 1.6%, but a deceleration from the 4.7% growth in Q4. 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. Japan's Nikkei 225 Index declined 0.2%, with the yen rising solidly late in the session, while India's S&P BSE Sensex 30 Index gained 0.7%. China's Shanghai Composite Index advanced 0.2%, though the Hong Kong Hang Seng Index fell 0.7%. Australia's S&P/ASX 200 Index dropped 1.6% and South Korea's Kospi Index ticked 0.1% higher.

 

Stocks rally on the week to put positive touches on May

 

U.S. equities posted another weekly gain to solidify a strong advance for May, with the global markets finding support from optimism as the U.S. took steps to further reopen the world's largest economy, following the lead of key regions in Asia and Europe. Conviction continued to be buoyed by the massive amounts of monetary and fiscal policy stimulus measures and further developments out of the Health Care sector on finding a potential answer to the COVID-19 pandemic. The optimism eased concerns about the duration of the plunge in economic activity, helping overshadow simmering U.S.-China tensions. Economic and earnings data continued to illustrate the unprecedented disruption of the pandemic, but May reports and corporate commentary appeared to suggest that the late-March and April periods may have seen the trough in economic activity. Sector performance this week saw value and cyclical stocks lead the way, with financials the best performer, along with industrials and materials, while the defensively-natured utilities, real estate and consumer staples issues also posted solid positive figures. Technology issues lagged behind on the intensified U.S.-China tensions and the communications services sector was the worst performer amid a flare-up in regulatory crackdown concerns. Energy issues took a breather from a surge off the March lows as crude oil prices paused from a recent sharp recovery. The Treasury yield curve steepened slightly, the U.S. dollar fell for a second-straight week, and gold retreated from multi-year highs reached early last week.

    

This sets the stage for next week, in which the economic calendar will be robust and shed further light on how the economy is doing as the reopening process continues. The Institute for Supply Management and Markit will deliver May reads on manufacturing

and services sector activity in the first half of the week, while the second half will bring the April trade balance and weekly initial jobless claims for the week ended May 30th. However, the headlining event on the docket will likely be Friday's May nonfarm payroll report, projected to show 8.0 million jobs were lost and the unemployment rate jumped to 19.5%, but average hourly earnings rose 1.0% m/m and were up 8.9% y/y. 

 

The international economic calendar also has the potential to provide some market moving data points as the global markets assess the progress of returns to relative normalcy in Asia and Europe. China will lead a host of global May manufacturing and services sector reports, Australia will deliver its monetary policy decision, and Japan will announce April household spending figures. Eurozone retail sales for April and the European Central Bank monetary policy decision are expected to draw attention, along with German factory orders for April and May employment data.

 

Our latest Schwab Market Perspective: Riding the Liquidity Wave, discusses the several reasons for the sharp gains for the stock markets in April and May, including the massive injection of liquidity from both the Federal Reserve and Congress, the historically common trait of stocks rebounding in advance of the trough in economic activity and as the globe gets past the peak in lockdowns. 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. And for a look at the current highly uncertain environment in the stock markets, check out our latest Schwab Sector Views: On the Field Without a Playbook.

 

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