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Bulls Charge Again, but Fall Short on Erasing Weekly Losses

The U.S. equity markets capped off a volatile week with a second-straight day of solid gains, helping to somewhat recover from the heavy losses suffered earlier in the week. The snapback came despite a negative reaction to Dow member Walt Disney's earnings report, a miss in April retail sales, and an unexpected decline in May consumer sentiment. Information Technology and other growth-related issues led the way after falling sharply in the first half of the week, as heating up inflation pressures exacerbated uncertainty surrounding the timing of the tapering of asset purchases from the Federal Reserve. In other earnings news, DoorDash and Airbnb finished higher in the wake of their respective releases. Treasuries gained modest ground, applying slight downside pressure on yields and the U.S. dollar fell, while gold and crude oil prices were higher. Overseas, markets in Europe and Asia closed out the wild week with widespread gains.

The Dow Jones Industrial Average rose 361 points (1.1%) to 34,382, the S&P 500 Index increased 61 points (1.5%) to 4,174, and the Nasdaq Composite rallied 305 points (2.3%) to 13,430. In moderate volume, 852 million shares were traded on the NYSE and 4.0 billion shares changed hands on the Nasdaq. WTI crude oil advanced $1.55 to $65.37 per barrel. Elsewhere, the Bloomberg gold spot price gained $16.58 to $1,843.30 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.5% to 90.31. Markets were lower for the week, as the DJIA fell 1.1%, the S&P 500 shed 1.4%, and the Nasdaq Composite tumbled 2.3%.

Dow member Walt Disney Company (DIS $174) reported adjusted fiscal Q2 earnings-per-share (EPS) of $0.79, compared to the $0.26 FactSet estimate, with revenues falling 13.0% year-over-year (y/y) to $15.6 billion, but coming in below the Street's forecast of $15.9 billion. DIS' total streaming subscribers came in just shy of estimates as stronger-than-expected ESPN+ subscribers was met with softer-than-anticipated subscribers for its Disney+ service. Revenues out of its Disney Media and Entertainment Distribution unit fell short of forecasts, more than offsetting better-than-projected revenues out of its Disney Parks, Experiences and Products segment.

However, the company said it is pleased to see more encouraging signs of recovery across its businesses and it remains focused on ramping up its operations while also fueling long-term growth. DIS said this is clearly reflected in the reopening of its theme parks and resorts, increased production at its studios, the continued success of it streaming services, and the expansion of its portfolio of multiyear sports rights deals for ESPN and ESPN+. Shares finished lower.

DoorDash Inc. (DASH $141) reported adjusted Q1 earnings before interest, taxes, depreciation and amortization (EBITDA) of $43 million, topping the Street's expectation of $28 million. Revenues jumped 198% y/y to $1.1 billion, above the estimated $994 million, as the food delivery service's total orders grew 219% y/y in Q1. DASH raised its full-year EBITDA guidance, noting that its outlook anticipates the successful rollout of COVID-19 vaccines and an associated increase in in-store dining rates, as well as a seasonal decline in order rates associated with the warmer summer months. The company added that while it observed encouraging trends in Q1, it cautions investors that the outlook for 2021 remains highly uncertain as consumer behavior could deviate from the expectations included in its guidance. Shares rallied over 20%.

Airbnb Inc. (ABNB $141) reported an adjusted Q1 EBITDA loss of $59 million, much smaller than the $355 million shortfall that analysts had anticipated. Revenues grew 5.0% y/y to $887 million, topping the expected $721 million, as gross booking value came in well above estimates. The company said for nights and experiences booked, it expects Q2 will be significantly higher than the highly depressed levels of Q2 2020, but below that of Q2 2019. Shares were higher.

As the markets closed out a volatile week, the Schwab Center for Financial Research (SCFR) offers the latest commentary, Market Volatility: Schwab's Quick Take, noting how market volatility is unsettling, but historically not unusual. The SCFR adds that if you've built an appropriately diversified portfolio that matches your time horizon and risk tolerance, it's likely the recent market drop will be a mere blip in your long-term investing plan. However, it can be hard to do nothing when markets are rough, and given what has been happening recently, the SCFR provides a few of our investing principles to consider.

For more on our view on the market volatility as of late check out our Market Insights page on, where you can also find our latest Schwab Sector Views: Upgrading Energy, for analysis of our upgrade of the Energy sector to outperform, joining our continued outperform ratings for the Financials and Health Care sectors. You can also follow us on Twitter at @SchwabResearch.

Retail sales miss but prior month revised favorably, May read on consumer sentiment disappoints

Advance retail sales (chart) for April came in flat month-over-month (m/m), versus the Bloomberg consensus forecast of a 1.0% increase but March's figure was adjusted higher to a 10.7% jump. Last month's sales ex-autos declined 0.8% m/m, compared to expectations of a 0.6% increase and March's figure was favorably revised to a 9.0% rise. Sales ex-autos and gas were also down 0.8% m/m, compared to estimates of a 0.3% gain, and March's reading was adjusted higher to an 8.9% increase. The control group, a figure used to calculate GDP, fell 1.5% m/m, versus projections of a 0.2% decline and March's upwardly adjusted 7.6% rise.

The May preliminary University of Michigan Consumer Sentiment Index (chart) surprisingly fell to 82.8 versus estimates of a slight increase to 90.0 from April's 88.3 reading. The index unexpectedly declined as the current conditions and the expectations components of the index both surprisingly deteriorated. The report noted that consumer confidence in early May tumbled due to higher inflation—the highest expected year-ahead inflation rate as well as the highest long-term inflation rate in the past decade. Also, the release added that rising inflation also meant that real income expectations were the weakest in five years. The 1-year inflation forecast jumped to 4.6% from April's 3.4% rate, and the 5-10 year inflation forecast rose to 3.1% from the prior month's 2.7% level.

The Import Price Index (chart) rose 0.7% m/m for April, versus expectations of a 0.6% gain, and compared to March's upwardly revised 1.4% increase. Versus last year, prices were up by 10.6%, compared to forecasts of a 10.2% increase and March's upwardly adjusted 7.0% gain.

The Federal Reserve's report on industrial production(chart) showed a 0.7% m/m gain in April, below estimates of a 0.9% increase, and versus March's upwardly revised 2.4% rise. Manufacturing and mining output both nudged higher, but utilities production rose solidly. Capacity utilization increased to 74.9% versus forecasts calling for a gain to 75.0% from the prior month's unrevised 74.4% rate. Capacity utilization is 4.7 percentage points below its long-run average.

Business inventories (chart) rose 0.3% m/m in March, matching forecasts following February's upwardly revised 0.6% gain.

Treasuries were mostly higher, as the yield on the 2-year note was flat at 0.15%, while the yields on the 10-year note and the 30-year bond declined 3 basis points to 1.63% and 2.35%, respectively.

Rising inflation concerns, exacerbated by this week's hotter-than-expected inflation data, fostered some volatility in the markets and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, Is 1970s-Style Inflation Coming Back?, that although we expect higher prices over the next few years, a return to that level of inflation is unlikely.

Also, Schwab's Managing Director and Fixed Income Strategist Collin Martin, CFA, along with Senior Fixed Income Research Analyst, Christina Shaffer, note how the pace of inflation—from below 2% to greater than 4%—has a big impact on the performance of various asset classes in their article, Rising Inflation: What It Means for TIPS and Other Investments.

Europe and Asia broadly higher in final session of wild week

European equities finished out a volatile week with widespread gains, paring some of the losses seen earlier in the week amid some hotter-than-expected inflation reports in the U.S. that fostered uncertainty regarding whether the Federal Reserve may need to rein in its asset purchases sooner than expected. Financials and Industrials led the broad-based advance, while Information Technology and growth-related sectors, which saw the most pressure from the inflation implications, also contributed. The euro and British pound were higher versus the U.S. dollar, which came under pressure and added to losses following a softer-than-expected U.S. April retail sales report. Bond yields in the Eurozone were mixed and rates in the U.K. were lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Is Stagflation Back?, noting how the constraint on global growth this year has evolved from the supply of vaccines to the supply of nearly everything else. Jeff adds that the shortage of supplies indicates risk of economic weakness coupled with rising prices. Yet, he points out that these forces of stagflation may be offset through prompting central banks to continue stimulus, lawmakers to rollout additional fiscal stimulus in the U.S. and Europe, and business leaders to invest in a wave of capital spending, accompanied by a sharp rebound in output by the service sector.

The U.K. FTSE 100 Index was up 1.2%, France's CAC-40 Index rose 1.5%, Germany's DAX Index advanced 1.4%, Italy's FTSE MIB Index gained 1.1%, Spain's IBEX 35 Index increased 2.0%, and Switzerland's Swiss Market Index traded 0.8% higher.

Stocks in Asia rebounded solidly from the recent pullback that has come from signs of increasing inflation pressures that has brought into question regarding whether this will prompt sooner-than-expected changes in extremely accommodative global monetary policies. The rising inflation concerns and monetary policy uncertainty has weighed on the Information Technology and other growth-related sectors. Schwab's Chief Investment Strategist Liz Ann Sonders addresses in her commentary the question of Will Rising Federal Debt Slow Economic Growth?, and Schwab's Jeffrey Kleintop offers his article, Stimulus Payback: 2023. The markets seemed to shrug off yesterday's disappointing earnings report from Chinese eCommerce company Alibaba Group Holding Ltd. (BABA $208), which posted an operating loss for the first time as a public company, but its revenues topped expectations and it issued stronger-than-expected revenue guidance. Japan's Nikkei 225 Index rose 2.3%, even as the yen firmed a bit, while China's Shanghai Composite Index advanced 1.8% to extend a weekly gain that bucked the trend this week. The Hong Kong Hang Seng Index moved 1.1% to the upside, South Korea's Kospi Index increased 1.0% and Australia's S&P/ASX 200 Index traded 0.5% higher. Markets in India returned to action following yesterday's holiday break, nudging 0.1% to the upside.

Late week push for the bulls unable to undue early week selloff

U.S. stocks rallied in the second half of the week, showing some resiliency in the face of some softer-than-expected data on retail sales, consumer sentiment and subscriber figures from Dow component Walt Disney, as well as another hotter-than-anticipated read on wholesale price inflation. The rebound came as optimism remained intact regarding strong global economic recoveries in 2021 as COVID-19 vaccine rollouts continue to gain steam in the U.S. and Europe. Information Technology and other growth-related sectors rebounded solidly to lead the late week charge. However, the damage was done in the first half of the week as the Consumer Price Index came in much hotter than anticipated, joining the Producer Price Index, which had already been running hot. Inflation worries seemed to hit the Tech sector and growth-oriented equities the most as the markets seemed to adjust valuation estimates amid the backdrop of increasing inflation expectations. Moreover, volatility ramped-up as the markets grappled with whether the increasing pricing pressures were transitory or structural and what the implications this could mean for the Federal Reserve's extremely accommodative monetary policy. As such, uneasiness flared back up regarding whether this could force the Federal Reserve to begin reining in its extremely accommodative monetary policy sooner than expected by first tapering its monthly asset purchases that it starting to combat the severe disruption of the pandemic.

As the dust settled on the wild week, most major sectors finished in the red, led by Consumer Discretionary, Information Technology, and Communications Services, while Financials, Materials and Consumer Staples managed to finish in the green. The U.S. dollar moved higher amid the uneasiness, but Treasury yields gained ground as bond prices fell on the inflation worries. Gold finished little changed in choppy trading and crude oil prices rose, with the move amplified by the cybersecurity attack late last week that shut down a key energy pipeline.

Next week, although earnings season is mostly in the rearview mirror, the season will culminate in typical fashion with the retail sector putting on the finishing touches, headlined by Dow members Walmart Inc. (WMT $140) and Home Depot Inc. (HD $323). The economic calendar is also likely to remain in focus, with a host of housing reports, courtesy of April existing home sales and housing starts and building permits releases, as well as the May NAHB Housing Market Index. May reads on manufacturing activity in New York and Philadelphia could also garner some attention, along with Markit's May Manufacturing and Services PMIs, the April Leading Index and initial jobless claims for the week ended May 15. Given the skittishness surrounding inflation, next week's host of Fedspeak and the minutes from the Fed's April policy meeting could also potentially move the markets.

Next week's international economic calendar will be dominated by a plethora of global May Manufacturing and Services PMIs but will also feature some other reports that are worth mentioning including: Australia—employment change and retail sales. China—industrial production, retail sales and loan prime rate decisions. India—wholesale price inflation. Japan—Q1 GDP, the trade balance and core machine orders. Eurozone—trade balance, Q1 GDP, consumer price inflation, and consumer confidence. U.K.—employment change, inflation figures and retail sales.

As noted in our latest Schwab Market Perspective: Will the Economy Overheat?, a boom in spending has stirred fears of economic overheating, which has coincided with a surge in commodity prices and a lift in traditional inflation metrics. Europe’s economy is finally turning the corner, leaving its double-dip recession behind. Meanwhile, interest rates have been in a holding pattern over the past month despite inflation fears, suggesting the bond market has already discounted much of the rebound in the economy since last year.

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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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