Markets Mixed but Post Second Week of Gains

U.S. equities finished the session mixed in a volatile day, but the major indexes were able to post a second-straight week of gains. The moves came as continued uncertainty around the ongoing war in Ukraine, rising energy and commodity prices, and anxiety over how aggressive the Fed will be in combatting the elevated inflation pressures remained in focus. Investors also digested some disappointing economic news, that showed pending home sales declined more than expected, and consumer sentiment deteriorated. As Western allies continue the effort to reduce Europe’s dependence on Russian energy, the U.S. and the European Commission are creating a task force to diversify supplies and reduce the demand for natural gas. Treasuries were sharply lower, with yields spiking, and the U.S. dollar was little changed, while crude oil prices were higher, and gold fell. Markets in Europe were mostly higher amid some disappointing economic data in the region, while Asian stocks were mixed amid the flurry of headwinds.

The Dow Jones Industrial Average rose 153 points (0.4%) to 34,861 and the S&P 500 Index gained 23 points (0.5%) to 4,543, while the Nasdaq Composite decreased 23 points (0.2%) to 14,169. In moderate volume, 4.2 billion shares of NYSE-listed stocks were traded, and 5.4 billion shares changed hands on the Nasdaq. WTI crude oil advanced $1.56 to $113.90 per barrel. Elsewhere, the gold spot price traded $7.00 lower to $1,955.20 per ounce, and the Dollar Index was flat at 98.19. Markets were higher for a second week, as the DJIA was up 0.3%, the S&P 500 gained 1.8%, and the Nasdaq Composite increased 2.0%.

With little in the way of corporate headlines today, the equity markets remained focused on the ongoing concerns surrounding the war in Ukraine and continued negotiations that are yet to reveal progress. Today the United States and the European Commission announced a task force to reduce Europe's dependence on Russian fossil fuels. The task force will target two primary objectives of diversifying liquefied natural gas (LNG) supplies in alignment with climate objectives and reducing the demand for natural gas. As part of these efforts, the U.S. will strive to supply additional 15 billion cubic meters (bcm) of LNG to European countries by the end of 2022. The European Commission will also work with EU member states to ensure demand for 50 bcm of additional U.S. LNG until at least 2030.

As well, the markets continued to grapple with the implications of the Fed's commencement of its monetary policy tightening campaign, along with uncertainty regarding how aggressive the central bank may be following hawkish comments from Fed Chairman Jerome Powell this week.

Amid this backdrop Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Recession Blues: Unfounded Fear?, how even if a recession is not imminent, the playbook deserves a dusting off as rising inflation, tighter monetary policy, and the war in Ukraine all crimp economic growth prospects.

Additionally, we recently changed all our sector calls to "neutral" until there's more clarity on how the Russia-Ukraine war will affect the global economy as discussed in our latest Schwab Sector Views: War Clouds Our Outlook.

Amid the volatility in the markets, you can find all our market commentary on our Market Insights page, and you can follow us on Twitter at @SchwabResearch.

Economic reports disappoint and Treasury yields spike

The March final University of Michigan Consumer Sentiment Index (chart) was unexpectedly revised lower to 59.4, from the preliminary 59.7 figure, where it was expected to remain. The downward revision came as the expectations and current conditions components of the survey were adjusted lower. The overall index was below February’s 62.8 level as both current conditions and expectations deteriorated m/m. The 1-year inflation forecast increased to 5.4% compared to the prior month's 4.9% rate, while the 5-10 year inflation forecast remained at February's 3.0% level.

Pending home sales unexpectedly fell by 4.1% month-over-month (m/m) in February, versus estimates of a 1.0% rise, and following January’s downwardly-revised 5.8% drop. Sales tumbled 5.4% year-over-year (y/y), versus forecasts of a 2.2% decrease, on the heels of January’s negatively-adjusted 9.2% decline. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales.

Treasuries were sharply lower, with yields jumping, adding to a rally this week amid increased expectations of a more aggressive Fed monetary policy tightening cycle as it tries to combat the surge in inflation. Federal Reserve Chairman Jerome Powell offered a more hawkish tone this week to foster the move. The Chairman vowed strong action on inflation, reiterating that rate increases will continue until the rise in prices is under control, conceding that Fed officials "widely underestimated" how long pricing pressures would last. He also added that the rate hikes could be even higher, if necessary, with a move larger than a 25-basis point (bp) increase not off the table.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her commentary, Liftoff: Fed Hikes Rates, Signals More to Come, the key message from the Fed is that it is focused on fighting inflation and is prepared to hike short-term interest rates steadily and reduce its balance sheet until it reaches its goals. We have no reason to doubt the Fed’s intentions, but we see a risk that it may be over-correcting after having missed the inflation surge since late last year. Investors should be prepared for a bumpy ride.

The yield on the 2-year note rallied 16 bps to 2.29%, the yield on the 10-year note gained 14 bps to 2.48%, and the 30-year bond rate was up 8 bps to 2.59%.

Europe mostly higher despite disappointing data, Asia mixed

European equities finished mostly higher, as the markets continued to focus on the ongoing war in Ukraine and its economic impact. Most major sectors saw gains, while industrials issues were under pressure. Ongoing peace talks between the two sides have made little to no progress, and markets remain focused on the implications of severe global economic sanctions on Russia. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the latest financial sanctions on Russia in his article Russia-Ukraine: Hit to Russia’s Financial Systems, and what the potential implications could be in his latest commentary War in Ukraine: Recession in Europe?. Jeff suggests the odds of a recession in Europe are above average and rising but still below 50%. He notes that the European economy was strengthening and recovering in February from the omicron-driven slowdown, and real-time indicators across Europe are still showing solid demand and activity even following Russia's invasion. Jeff says that signs of stability could support European stocks, but on the other hand, a weakening picture could also mean more volatility.

In an effort to reduce reliance on Russian energy, the U.S. and the European Commission announced a task force that will target two primary objectives of diversifying liquefied natural gas (LNG) supplies in alignment with climate objectives and reducing the demand for natural gas. To achieve these objectives, the U.S. will strive to supply an additional 15 billion cubic meters (bcm) of LNG to European countries by the end of 2022.

Economic data out of the region was mostly disappointing, as U.K. retail sales for February missed expectations, registering a 0.3% decline m/m versus the 0.6% increase expected, while y/y sales rose 7.0% compared to the 7.8% increase expected, and down from the 9.1% gain reported in the month prior. Spanish Q4 GDP surprised to upside, registering growth of 2.2% quarter-over-quarter (q/q) and 5.5% y/y, compared to analysts’ expectations of 2.0% and 5.2% respectively. Meanwhile, German business confidence deteriorated in the wake of the ongoing war in Ukraine and soaring energy prices, with the IFO Business Climate Index for March falling to a level of 90.8, below the expected 94.2 and February’s downwardly revised 98.5, as both the current conditions and expectations portions of the index deteriorated. The euro lost ground versus the U.S. dollar and the British pound was little changed against the greenback, while bond yields in the Eurozone were mixed and yields in the U.K. traded higher.

The U.K. FTSE 100 Index and Germany's DAX Index were up 0.2%, France's CAC-40 Index was nearly unchanged, Spain's IBEX 35 Index gained 0.3%, Italy's FTSE MIB Index moved 0.6% higher, while Switzerland's Swiss Market Index ticked 0.1% to the downside.

Stocks in Asia finished mixed, as the markets faced a flurry of headwinds that are led by the ongoing war in Eastern Europe and increasing energy and other commodity prices. Uncertainty remains that Russia and Ukraine can come to a diplomatic resolution, as talks have yet to result in any source of optimism. Schwab's Jeffrey Kleintop, Liz Ann Sonders, and Kathy Jones note in our latest Schwab Market Perspective: Fog of War, how the Russian invasion of Ukraine overturned a lot of assumptions about the near-term direction of the global economy. "Black swan" events like this don't happen often, but we're in the middle of one now, and the situation is changing daily. In economic news, Japan's March Tokyo CPI increased 1.3% y/y, above the 1.2% expected by analysts and compared to the 1.0% rise in the previous month. The surge in inflation was driven by higher energy prices, as consumer prices excluding fresh food grew 0.8% y/y, while prices excluding fresh food and energy declined 0.4% y/y.

Japan's Nikkei 225 Index rose 0.1%, with the yen strengthening following its recent tumble. China's Shanghai Composite Index declined 1.2%, and Hong Kong's Hang Seng Index decreased 2.5%. Australia's S&P/ASX 200 Index ticked 0.3% higher, and South Korea's Kospi Index was little changed, while India's S&P BSE Sensex 30 Index declined 0.4%.

Stocks higher for second-straight week

U.S. stocks pushed higher for a second week in a row, with the S&P 500 extending a bounce off its early March low. However, uncertainty remained regarding whether the markets have bottomed after the dismal Q1 performance to start the year or if this is a counter-trend rally. The uncertainty continued to be driven by the ongoing war in Ukraine that has seen ceasefire talks fail to provide hope, while the U.S. and other global allies continue to pour sanctions on Russia. Moreover, the markets appeared to continue to take in stride intensified expectations that the Fed is set to get heavily-aggressive with its monetary policy tightening campaign, bolstered by this week's hawkish commentary from Chairman Jerome Powell. Economic data was light, but a host of preliminary global manufacturing and services reports came in above expectations, headlined by an unexpected acceleration in manufacturing growth out of the U.S. Another positive data point was a larger-than-expected moderation in weekly initial jobless claims, which fell to the lowest level since 1969. Housing data was a bit disappointing as the recent spike in interest rates seems to be hampering activity, with new and pendinghome sales both surprisingly declining, and mortgage applications falling. Earnings data was also on the lighter side ahead the ramp-up of earnings season in a couple weeks, but Dow member NIKE Inc. (NKE $132) was a standout after exceeding quarterly estimates on strong digital and direct sales, along with North American strength.

The Energy sector continued to outperform by a wide margin as crude oil prices rebounded from last week's drop, with supply concerns festering and being exacerbated by the war in Eastern Europe. Materials issues were also among the best performers amid the broad-based commodity price rally, along with the defensively-natured Utilities sector, while Real Estate stocks underperformed. The Information Technology, Communications Services, and Consumer Discretionary sectors all chipped in to help lift the markets after being among the biggest drags on the indexes this year. Treasury prices continued to tumble to extend the decisive jump in yields, and the U.S. dollar moved higher but held in its range after an early-March breakout.

Next week's economic calendar could command some heightened attention amid the uncertainty regarding if the economy is strong enough to hold up to the expected aggressive Fed tightening. The week will begin slowly with first half reports worth mentioning including the Conference Board's Consumer Confidence report and the job openings and labor turnover survey(JOLTS). However, the second half of the week seems poised to deliver data points that will likely garner the most scrutiny. Thursday's February personal incomeand spending report and jobless claims for the week ended March 26 will get ball rolling, while the docket will culminate with Friday's March releases of the ISM Manufacturing Index and nonfarm payrolls. The markets could also pay attention to a few speeches from Fed officials given the hyper-sensitivity to comments out of the Central Bank.

Next week's international economic calendar may also come into focus with releases of note including: China—Manufacturing and Non-manufacturing PMIs, along with industrial profits. Japan—retail sales, preliminary industrial production, and the Q1 Tankan Large Manufacturing Index. Eurozone—economic confidence and the region's preliminary March consumer price inflation data, as well as German retail sales and unemployment change.

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