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Heightened Uncertainty Keeps Selloff Intact

U.S. equities finished lower and posted another weekly loss amid elevated uncertainty regarding whether the Fed can orchestrate a soft economic landing after ramping up its monetary policy tightening campaign on Wednesday. Meanwhile, the global markets continued to wrestle with a number of headwinds, including slowing economic growth, the recent rise in interest rates and the U.S. dollar, COVID-induced lockdowns in China, and persistent inflation pressures. Investors also sifted through the April nonfarm payroll report, which showed job growth topped forecasts, but the labor force participation rate unexpectedly declined, as well as surge in consumer credit. Treasuries were mixed, and the U.S. dollar was slightly lower, while crude oil prices and gold traded higher. Earnings season continued to head down the home stretch, with Under Armour posting an unexpected loss, and Zillow Group issuing much softer-than-expected revenue guidance. Europe came under pressure amid the monetary policy tightening backdrop and following some disappointing economic data. Asia finished mixed with Japan bucking the trend and moving higher though Chinese and Hong Kong markets fell as China's government reiterated its support for lockdowns.

The Dow Jones Industrial Average fell 99 points (0.3%) to 32,899, the S&P 500 Index declined 24 points (0.6%) to 4,123, and the Nasdaq Composite decreased 173 points (1.4%) to 12,145. In moderate volume, 5.0 billion shares of NYSE-listed stocks were traded, and 5.2 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.51 to $109.77 per barrel. Elsewhere, the gold spot price traded $8.70 higher to $1,884.40 per ounce, and the Dollar Index was 0.2% lower at 103.57. Markets were lower for another week, as the DJIA and the S&P 500 lost 0.2%, while the Nasdaq Composite dropped 1.5%.

Under Armour Inc. (UAA $11) reported an adjusted loss of $0.01 per share for the quarter ended March 31, compared to the FactSet estimate calling for a profit of $0.04 per share. Revenues rose 3.0% year-over-year (y/y) to $1.3 billion, roughly in line with expectations. UAA's wholesale revenue increased and its direct-to-consumer sales ticked higher y/y, with its North American revenue rising 4.0% and international sales growing 1.0%. However, the company's gross margin fell 350 basis points (bps). The company cited headwinds from ongoing supply chain challenges, emergent COVID impacts in China, inflationary pressures on freight and product costs, and foreign currency. UAA issued current year earnings per share (EPS) guidance that came in below expectations. On the conference call with analysts, the company said it expects current quarter revenues to be flat to down slightly y/y, including a 10% headwind from proactive reductions and cancellations to the order book due to COVID-related supply constraints. Shares fell over 20%.

Zillow Group Inc. (ZG $37) posted adjusted Q1 operating earnings of $220 million, above the forecasted $152 million, with revenues jumping 250% y/y to $4.3 billion, exceeding the forecasted $3.4 billion. The housing e-commerce company approved an additional $1 billion in share repurchases, but issued Q2 revenue guidance of between $903 million to $1.0 billion, which fell well short of the Street's projection of $1.8 billion. ZG said the housing market is softening amid the continued plummet of inventory levels. The disappointing outlook comes a rising interest rates and home prices have dragged down housing affordability. Shares traded solidly lower.

Q1 earnings season remained in full force and of the 436 S&P 500 companies that have reported thus far, roughly 67% have topped sales expectations and about 78% have bested profit projections, per data compiled by Bloomberg. So far, y/y sales growth is tracking to be up 14.2%, and earnings growth is on track to be 7.8% higher.

Schwab's Chief Investment Strategist Liz Ann Sonders discusses the volatile market action during April in her latest article, When the Levee Breaks, Panic Is Not a Strategy. She notes that April was the worst month for the S&P 500 since March 2020, and that it's been a mixed-to-weaker bag in terms of macro drivers and we expect significant bouts of volatility to persist. She concludes that this is not a time for investors to take on risk outside the parameters of their strategic asset allocations. It is a time for investors to employ traditional disciplines around diversification (across and within asset classes), to focus on quality in terms of stocks' fundamentals, and to stay in gear via periodic rebalancing. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary on our Market Insightspage, and you can follow us on Twitter at @SchwabResearch.

April employment report showed job growth tops forecasts, though participation dips

Nonfarm payrolls (chart) rose by 428,000 jobs month-over-month (m/m) in April, compared to the Bloomberg consensus estimate of a 380,000 rise, while March's figure was adjusted lower to an increase of 428,000 from the initial reading of a 431,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 406,000, versus the forecasted rise of 390,000, after increasing by 424,000, revised down from the preliminarily reported 426,000 gain in March. The labor force participation rate unexpectedly dipped to 62.2% from March's unrevised 62.4% figure, compared to forecasts of an increase to 62.5%. The Bureau of Labor Statistics said job growth was widespread, led by gains in leisure and hospitality, in manufacturing, and in transportation and warehousing.

The unemployment rate remained at 3.6%, with forecasts calling for it to dip to 3.5%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—rose to 7.0% from the prior month's 6.9% rate. Average hourly earnings were up 0.3% m/m, below projections of a 0.4% increase, and compared to March's upwardly-revised 0.5% rise. Compared to last year, wages were 5.5% higher, in line with forecasts. Finally, average weekly hours held at March's unrevised 34.6, versus the expected rise to 34.7.

Consumer credit, released in the final hour of trading, showed consumer borrowing surged by $52.4 billion during March, more than double the $25.0 billion forecast of economists polled by Bloomberg, while February's figure was adjusted downward to an increase of $37.7 billion from the originally reported $41.8 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, was $21.0 billion, a 7.4% increase year-over-year (y/y), while revolving debt, which includes credit cards, came in at $31.4 billion, a y/y jump of 35.3%.

The markets continued to digest the Federal Open Market Committee's (FOMC) decision on Wednesday to raise the target for the Fed funds rate by 50 bps, its biggest increase since 2000, as well as its statement and remarks from Chairman Jerome Powell. The Committee noted that while job gains have been robust, the unemployment rate has declined substantially, and household spending and business fixed investments continue to be strong, "Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures". However, even as Powell mentioned that 50-bp increases should be on the table for the next two meetings, he quashed fears of more aggressive action in the Q&A session by saying that 75-bp increases are not something the Fed is actively considering. Get more insight on the Fed's decision from Schwab's Liz Ann Sonders in her latest article, 50 Ways to Leave Your Mark.

As well, check out the latest offering from Schwab's Director of Fixed Income Collin Martin and Director of Fixed Income Strategy Cooper Howard titled 8 Questions on the Bond Market and Rate Hikes, where they provide their insight into some of the most frequently asked questions they have received this year.

Treasuries were mixed, as the yield on the 2-year note declined 2 bps to 2.70%, while the yields on the 10-year note and the 30-year bond increased 1 bp to 3.12% and 3.21%, respectively.

Europe sees pressure following data and monetary policy tightening

European equities finished lower, with the markets continuing to grapple with monetary policy tightening implications after this week the Fed raised rates by the highest amount in over 20 years and the Bank of England (BoE) brought its benchmark rate to the highest level in thirteen years. Persisting inflation has been the main driver of the moves, even as the global economy faces challenges such as the war in Eastern Europe, and COVID lockdowns in China, which come as economic activity appears to have peaked and is starting to slow. Interest rates have climbed as of late amid this backdrop and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest commentary, Hedging Stocks Against Rising Rates. Jeff notes how investors should consider hedging the possible risk of higher interest rates with the addition of short duration stocks, a potential way to manage risk while remaining invested in the markets. You can follow Jeff on Twitter: @JeffreyKleintop. In economic news, German industrial production fell more than expected in March, as did Spanish industrial production for that month. The euro traded to the upside versus the U.S. dollar, and the British pound was lower. Bond yields in the Eurozone gained ground, though rates in the U.K. were mixed.

The U.K. FTSE 100 Index was down 1.5%, France's CAC-40 Index dropped 1.7%, Germany's DAX Index declined 1.6%, Italy's FTSE MIB Index and Switzerland's Swiss Market Index were 1.2% lower, and Spain's IBEX 35 Index decreased 1.3%.

Asia mixed to close out the week

Stocks in Asia were mixed as Japanese markets rose in a return to action following a holiday, appearing to get a boost from the country's government plan to ease border restrictions. However, most other markets in the region fell following yesterday's sharp selloff in the U.S. that came as the markets continued to digest this week's 50-bp rate hike by the Fed. Uncertainty remains regarding if the U.S. central bank can engineer a soft landing amid an aggressive monetary policy tightening cycle. Additionally, Chinese and Hong Kong markets led to the downside as the Chinese government reiterated its support for lockdowns due to the COVID spread. In economic news, Hong Kong retail sales fell more than expected in March, though India's Services PMI showed growth in the sector accelerated solidly for last month. Inflation remains a key focal point for central banks and the Reserve Bank of Australia raised its outlook for pricing pressures after increasing its benchmark interest rate earlier this week, while consumer price inflation in Tokyo came in hotter than expected. In our latest Schwab Market Perspective: Inflation's Shadow, Schwab's Liz Ann Sonders, Jeffrey Kleintop, and Kathy Jones note how rising prices and slowing demand have cast shadows on this year's economic outlook, especially as the Federal Reserve begins tightening monetary policy. Whether the situation will lead to a recession remains to be seen. Globally, there are signs that stretched supply chains are beginning to ease, potentially slowing the pace of inflation—which would be welcome news for investors and central bankers.

Japan's Nikkei 225 Index advanced 0.7%, with the yen continuing to soften versus the U.S. dollar. China's Shanghai Composite Index fell 2.2%, and Hong Kong's Hang Seng Index dropped 3.8%. Australia's S&P/ASX 200 Index decreased 2.2%, South Korea's Kospi Index traded 1.2% lower after yesterday's holiday break, and India's S&P BSE Sensex 30 Index declined 1.6%.

Volatility persists amid a flurry of headwinds

U.S. stocks finished the week in choppy fashion as the markets wrestled with a plethora of headwinds, chief among them being uncertainty regarding if the Fed has gotten too far behind the war against inflation to engineer a soft landing. The markets initially rallied on the Fed's announcement that it will increase its fed funds target rate by 50 bps, a move that hasn't been seen in over 20 years, and begin to reduce its balance sheet. However, concerns about the Central Bank's ability to navigate its tightening cycle and avoid a recession re-emerged and stocks quickly gave back the midweek jump. Volatility remained as accompanying the Fed uncertainty, the global markets remained stymied by other festering obstacles. Slowing economic growth due to the continued supply chain disruptions, which have been exacerbated by the war is Eastern Europe and the COVID-induced lockdowns in China, weighed on sentiment, while the jump in global interest rates and recent rally in the U.S. dollar amplified the uneasiness. Earnings season continued to roll on and results have been mostly better than expected, but commentary and guidance painted a cautious tone due to the aforementioned impediments.

The Energy sector continued its decisive outperformance as crude oil prices rose for a second-straight week and remained uneasily elevated above $100 per barrel, and Communications Services also contributed to the upside, rebounding from some recent weakness despite a rise in Treasury yields to highs not seen since late 2018. The rise in interest rates weighed on the Real Estate sector and economic growth concerns pressured the Consumer Discretionary sector. The U.S. dollar continued its ascent to multi-year highs, due to strength against the yen and euro as the Fed's monetary policies outpace those in Japan and the Eurozone, while overall market uneasiness amplifies the appeal of the safe-haven greenback.

Next week, earnings season will continue to gallop down the home stretch, but the economic calendar may take top billing as the April inflation picture will develop, courtesy of the Consumer Price Index (CPI), Producer Price Index (PPI), and Import Price Index. We will also get a read on sentiment among small businesses with the NFIB Small Business Optimism Index, and a timely read on consumer psyche in the form of the May preliminary University of Michigan Consumer Sentiment Index. Other reports that are due out next week that deserve a mention include, jobless claims for the week ended May 7, and wholesale inventories. Finally, we will get more FedSpeak with a host of officials slated to comment in the wake of this week's policy decision.

Next week's international economic calendar will also offer some potential data points that could grab attention including: China—lending statistics, trade balance, PPI and CPI. India—industrial production, CPI, and trade balance. Japan—labor cash earnings and Leading Index. Eurozone—investor confidence, as well as Germaninvestor confidence. U.K.—Q1 GDP, industrial/manufacturing production, and trade balance.

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