Markets Mixed to End Bumpy Week, but with Weekly Gains

U.S. equities finished out a volatile week mixed, but posted solid weekly gains, that saw the Dow and S&P 500 return to record high territory. Continued optimism of an economic recovery remained the main catalyst, bolstering a rotation into value and cyclically-natured sectors, notably Financials and Energy. However, although the Nasdaq participated this week, it remained below all-time levels as the Information Technology and other growth sectors continued to be hampered by the recent spike in interest rates. Treasury yields and the U.S. dollar bounced back today to revive some uneasiness in the markets, while gold ended higher in choppy trading and crude oil prices were lower. Meanwhile, the economic calendar showed consumer sentiment jumped amid post-pandemic optimism and wholesale price inflation continued to rise. In equity news, progress on the COVID-19 front continued as Novavax offered strong efficacy results of its vaccine candidate, while Ulta Beauty came under pressure following some lackluster guidance and its CEO succession plan. Markets in Europe and Asia also finished mixed.

The Dow Jones Industrial Average rose 293 points (0.9%) to 32,779, the S&P 500 Index inched 4 points (0.1%) higher to 3,943, while the Nasdaq Composite was down 79 points (0.6%) at 13,320. In heavy volume, 947 million shares were traded on the NYSE and 5.4 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.41 to $65.61 per barrel. Elsewhere, the Bloomberg gold spot price inched $1.72 higher to $1,724.32 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.2% to 91.62. Markets were firmly higher for the week, as the DJIA jumped 4.1%, the S&P 500 rose 2.6%, and the Nasdaq Composite gained 3.1%.

The markets wrapped up another volatile week, but a positive one, as the handoff continued from growth issues to value stocks and those that stand to benefit from the expected robust economic expansion as the economy progresses to a post-pandemic environment. The moves have come amid the recent spike in bond yields, ramped-up COVID-19 vaccine rollouts and further progress on the vaccine/therapy fronts, as well as President Joe Biden signing a fresh $1.9 trillion fiscal relief package and expectations that a large infrastructure spending bill could be on the horizon.

Schwab's Chief Investment Strategist Liz Ann Sonders offers a look at the environment in her latest articles, Is the Stock Market Disconnected From the Economy? and Red Flag Day: Bond Yield Spike Denting Euphoric Sentiment.

Liz Ann notes that perhaps the stock market disconnected from the economy, but less so lately, and pointing out that looking under the hood of performance trends over the past year reveals a more nuanced relationship. She adds that investor sentiment measures recently hit historic extremes of optimism and speculative excess; but until recently, strong market breadth served as an offset. She points out that the fundamental catalyst for what has been a volatile "reset" of some valuation extremes was the recent spike in bond yields.

She concludes with adding that how especially during times of heightened speculation—particularly in segments of the market with either extremely stretched valuations or questionable fundamentals—it behooves investors to be mindful of the tried-and-true disciplines of diversification (across and within asset classes) and periodic rebalancing. With regard to the latter, she notes that we continue to recommend that investors consider portfolio/volatility-based rebalancing vs. calendar-based rebalancing. This allows investors to "stay in gear" during a volatile market environment by adding low and trimming high; which is likely to be a more successful strategy than trying to anticipate which indexes, sectors, factors or "stories" will drive leadership over the short-term.

In equity news, shares of Novavax Inc. (NVAX $203) rose after the company announced that its COVID-19 vaccine candidate reported advanced-stage trial results that showed it was 96.4% effective against the original virus strain and nearly 86% effective versus the U.K. variant. The company added that a previously reported initial analysis from the study through 60 days indicated that prior infection with the original COVID-19 strain might not completely protect against subsequent infection by the variant predominantly circulating in South Africa. However, the complete analysis of the South Africa trial indicates that there may be a late protective effect of prior exposure with the original COVID-19 strain. NVAX said it expects the data to serve as the basis for submission for authorization to various regulatory agencies worldwide.

Ulta Beauty Inc. (ULTA $318) reported Q4 earnings-per-share (EPS) of $3.41 ex-items, above the $2.34 FactSet estimate, as revenues declined 4.6% year-over-year (y/y) to $2.2 billion, north of the Street's forecast of $2.1 billion. Including long-lived asset impairment and restructuring related costs, primarily related to the suspension of its Canadian expansion and employee severance costs, it posted Q4 EPS of $3.03. Q4 same-store sales declined 4.8% y/y, compared to the forecasted 11.2% drop, noting that transactions declined 12.2% and average ticket gained 8.3%, citing the impact of COVID-19. ULTA issued current year guidance that was mostly below analysts' expectations.

Separately, the company announced that President Dave Kimbell, will succeed Marty Dillon as its Chief Executive Officer (CEO), after a thorough succession planning process, effective in June, when Dillion will transition to the role of Executive Chairman of the Board. Shares fell.

Keep up with our latest views on the changing market landscape at our Market Insights page on www.schwab.com and follow us on Twitter @SchwabResearch, where you can listen to our latest podcast, Trend Spotting: What Investors Need to Watch, for a discussion on the trends investors should be watching for as the markets and the country adjust to a post-pandemic world.

Preliminary March consumer sentiment jumps, wholesale inflation up, yields continue to rise

The March preliminary University of Michigan Consumer Sentiment Index (chart) rose to 83.0 versus the Bloomberg consensus estimate of an increase to 78.5 from February's 76.8 reading. The index hit the highest level since March 2020 as both the current conditions and the expectations portions of the index improved more than expected. The report noted the improvement was due to the growing number of vaccinations as well as the widely anticipated passage of President Biden's relief measures. Also, the report pointed out that the gains were widespread across all socioeconomic subgroups and all regions, although the largest monthly gains were concentrated among households in the bottom third of the income distribution as well as those aged 55 or older. The 1-year inflation forecast dipped to 3.1% from February's 3.3% rate, and the 5-10 year inflation forecast remained at February's 2.7% level.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in February rose 0.5% month-over-month (m/m), matching estimates, and following January's unrevised 1.3% jump. The core rate, which excludes food and energy, rose 0.2% m/m, in line with estimates and compared to the prior month's unadjusted 1.2% increase. Y/Y, the headline rate was 2.8% higher, above projections of a 2.7% gain, and versus the prior month's unadjusted 1.7% rise. The core PPI increased 2.5% y/y last month, below estimates of a 2.6% increase, but above January's unrevised 2.0% rise.

Treasuries were lower, as the yield on the 2-year note ticked 2 basis points (bps) higher to 0.15%, while the yield on the 10-year note gained 10 bps to 1.63%, and the 30-year bond rate rose 11 bps to 2.39%.

Bond yields are regaining some upward momentum and the U.S. dollar is trimming a recent rollover from a bounce as of late to multi-month highs, keeping rates and currency markets in focus. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, Message from the Recent Bond Market Turmoil, how the surge in yields was driven more by prospects for stronger real economic growth than inflation worries. She also discusses how the moves suggest the market is pricing in the risk the Federal Reserve will be hiking rates sooner than the Central Bank's projections.

Kathy concludes by noting that we expect bouts of volatility ahead as markets reprice for a different environment in 2021 and beyond. "Over the long run, high yields driven by stronger economic growth are positive, but the process can be volatile. We suggest fixed income investors continue to keep the average duration in their portfolios low and consider strategies like bond ladders that can help manage portfolios in a rising-interest-rate environment."

Europe and Asia mixed to close out volatile week

European equities finished mixed, but were able to post solid weekly gains, as the Information Technology sector saw some renewed selling pressure amid a resumed upward move in global bond yields, and as China extended a regulatory crackdown on a key company in the sector. However, Financials saw positive figures as bond yields in the Eurozone and the U.K. moved higher despite yesterday's decision from the European Central Bank to accelerate bond purchases in the coming months to avoid tightening financial conditions. Economic news in the region was mixed, with U.K.

industrial/manufacturing production falling more than expected but the region's GDP contraction coming in smaller than anticipated, while Eurozone industrial production rose more than forecasted. The euro and British pound were lower as the U.S. dollar is resuming a recent bounce that was preserved by another sign of rising wholesale price inflation. In equity news, shares Burberry Group PLC. (BURBY $30) rallied after the luxury retailer offered upbeat Q4 sales guidance.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, has noted for some time that an interest rate/currency shock is one of the Top Five Global Investment Risks In 2021. Jeff points out how international stocks outperformed during the recent volatility in the wake of the spike in bond yields due to a higher weight to financial stocks, which tend to benefit from higher rates. He adds that international markets tend to be more cyclical in nature and are likely to outperform as global economies recover and inflation rises. International stocks have not experienced the same degree of speculation that U.S. stocks have and have a lower overall valuation than U.S. stocks. A higher dividend yield and less exposure to aggressive growth names relative to U.S. stocks also helped.

Amid this backdrop, Jeffrey Kleintop offers his article, Your Portfolio May Be Less Diversified Than You Think. He points out how investors with a large home bias may not be nearly as diversified across sectors as they believe and risk missing their financial goals as longer-term trends tend to shift with the start of a new global economic cycle. Jeff urges investors to consider rebalancing portfolios back toward international stocks as years of U.S. stock outperformance may have caused a drift away from longer-term asset allocation targets. He adds that fortunately, obtaining global diversification has never been easier or less expensive.

The U.K. FTSE 100 Index was up 0.4%, France's CAC-40 Index was 0.2% higher and Spain's IBEX 35 Index gained 0.6%, while Italy's FTSE MIB Index was little changed, Switzerland's Swiss Market Index moved 0.4% lower and Germany's DAX Index declined 0.5%.

Stocks in Asia finished mixed with optimism of accelerated economic reopenings in the U.S. and Europe continuing to bolster sentiment as COVID-19 vaccine/therapy progress continues, new U.S. fiscal relief measures were passed, and the European Central Bank took action to cool rising interest rates. This week's reprieve from the recent bounces in global bond yields and the U.S. dollar also likely helped most regions move higher.

However, Hong Kong markets were bogged down by a sharp drop in shares of Tencent Holdings Ltd. (TCEHY $82) on news that Beijing is expanding its regulatory crackdown on the company. Japan's Nikkei 225 Index rose 1.7%, with the yen softening late in the session, while South Korea's Kospi Index advanced 1.4%. China's Shanghai Composite Index increased 0.5% and Australia's S&P/ASX 200 Index moved 0.8% higher. Hong Kong's Hang Seng Index fell 2.2% and India's S&P BSE Sensex 30 Index dropped 1.0% in a return to action following yesterday's holiday break.

For a look at the moves in the region, Schwab's Jeffrey Kleintop offers his article, Year of the Ox: Bullish for China?, noting how China's growth for 2021 appears strong, but February holds key developments that could impact this outlook. Jeff adds in his latest article, Have EM Stocks Lost Their Immunity to Rising Rates?, how Emerging Market (EM) stocks have taken the rise in yields the worst among major equity asset classes, and offering five reasons why EM stocks can likely still perform well as rates climb this year.

Stocks post solid weekly gain on economic optimism and brief rate/dollar reprieve

U.S. stocks moved higher on the week as bullish sentiment regarding robust post-pandemic economic activity remained as COVID-19 inoculation campaigns continued to ramp-up, accompanied by a host of favorable news on further vaccine/therapy fronts. Moreover, a highly-expected new wave of fiscal relief came to fruition, courtesy of President Joe Biden signing a $1.9 trillion package on Thursday. As such, the rotation into value and cyclically-natured sectors that has boosted Energy and Financials as of late persisted, fostering fresh record highs for the Dow and the S&P 500.

Stocks saw a broad-based advance among the major market sectors amid an early-week reprieve of the recent spike in interest rates and the U.S. dollar, along with a subdued read on consumer price inflation, which seemed to somewhat ease rising inflation concerns, despite the continued heating up of pricing pressures at the wholesale level. This resulted in a rebound in the recently battered Information Technology and other growth sectors, which helped lift the Nasdaq to a respectable weekly advance. The economic calendar also showed the struggling employment front may be turning a corner, with the trend in the painfully high level of weekly initial jobless claims improving and job openings unexpectedly increased. Treasury yields bounced back late in the week, with the rate on the 10-year note hitting pre-pandemic highs, while the U.S. dollar finished the week lower despite Friday's recovery. Crude oil prices dipped from multi-year highs and gold rebounded slightly from a noticeable drawdown as of late.

Next week, the economic front is likely to continue to share the stage with the action in the bond and currency markets, headlined by Wednesday's Federal Open Market Committee (FOMC) monetary policy decision, which will be accompanied by updated economic projections and Fed Chairman Jerome Powell's customary press conference. The recent dovish tone from the Fed has fostered some skittishness in the markets regarding the Central Bank possibly losing control of the Treasury yield curve, while other central banks have taken action recently to combat the spike in global interest rates, notably the European Central Bank and the Reserve Bank of Australia.

Other reports due out next week that could command market attention include; March regional manufacturing reports, February retail sales, the Fed's industrial production and capacity utilization report for last month, the March NAHB Housing Market Index, housing starts and building permits data for February, initial jobless claims for the week ended March 13, and the February Leading Index.

On the international front, next week's monetary policy decisions from the Bank of Japan and the Bank of England are likely to garner the most attention. However, there will be other reports that could move the markets including: Australia—remarks from Reserve Bank of Australia Governor Lowe and employment figures. China—new home prices, industrial production and retail sales. India—trade figures. Japan—core machine orders, industrial production, trade statistics and consumer price inflation figures. Eurozone—consumer price inflation and trade balance, along with German investor confidence.

As noted in our latest Schwab Market Perspective: Moving, With Bottlenecks, U.S. economic growth is accelerating as vaccinations rise and social-distancing measures ease, but hopes for a long-lasting spending boom may hit a couple of speed bumps. Vaccine rollouts in major countries are proceeding at different speeds, but stock market performance contradicts what vaccination data would seem to imply for investors.

Meanwhile, inflation-adjusted longer-term Treasury yields have risen on signs that the economy is bouncing back from the depths of the downturn last year.

Important Disclosures

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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Markets Mixed to End Bumpy Week, but with Weekly Gains

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