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Stocks Close Mixed But Decline For The Week

U.S stocks closed mixed on the day and rounded out the first full week of the quarter with a weekly decline. Uneasiness and trepidation appeared to drive a relatively quiet session as investors continued to weigh the potential implications of a highly aggressive Fed monetary policy tightening cycle. Meanwhile, the ongoing war in Ukraine still hung over the markets, after this week brought about fresh sanctions on Russia by the U.S. and European Union. The Treasury yield curve continued to be a key theme for investors after this week's steepening that reversed an inversion of a key portion of the curve that sparked recession chatter. Treasury yields rose again today as Treasuries extended losses. The U.S. dollar added to a solid weekly gain, while crude oil prices rose after seeing some recent pressure, and gold gained ground. Equity news was light ahead of next week's ramp up of Q1 earnings season, but WD-40 topped quarterly expectations after yesterday's closing bell. The economic calendar was also quiet, though wholesale inventories continued to climb. Asia finished higher to close out the week, and Europe rebounded from yesterday's downside reversal, as Thursday's afternoon resiliency in the U.S. appeared to provide a positive lead in.

The Dow Jones Industrial Average rose 138 points (0.4%) to 34,721, the S&P 500 Index lost 12 points (0.3%) to 4,488, and the Nasdaq Composite decreased 186 points (1.3%) to 13,711. In moderate volume, 4.0 billion shares of NYSE-listed stocks were traded, and 4.4 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.23 to $98.26 per barrel. Elsewhere, the gold spot price traded $7.80 higher to $1,945.60 per ounce, and the Dollar Index was 0.1% higher at 99.84. Markets were lower for the week, as the DJIA was down 0.3%, the S&P 500 lost 1.3%, and the Nasdaq Composite decreased 3.9%.

The equity markets remained choppy this week, giving back some of a recent rally off of the March 8 lows that took the S&P 500 out of traditional correction territory—at a 10% drop from a recent high—and rescued the Nasdaq from a bear market—at least a 20% drawdown from a recent high. The markets continued to contend with the ongoing war between Russia and Ukraine, and expectations that the Fed is set to get aggressive with its monetary policy tightening campaign to try to tame elevated inflation pressures. The markets were defensive this week, with strength in the Health Care, Consumer Staples, and Utilities sectors being more than offset by weakness in heavyweight growth sectors, led by Information Technology, Consumer Discretionary, and Communications Services.

The Financials sector also saw pressure despite the noticeable rise in Treasury yields as the markets seemed to contemplate the implications of an expected highly aggressive Fed monetary policy campaign. The sector will likely come into intensified focus next week as the heavyweights from the group will kick off Q1 earnings season. Scrutiny will be on lending growth as consumers face the hot inflation backdrop and reduced support from fiscal stimulus, along with trading revenues amid the volatility in the markets seen during the quarter. Other areas of attention could be on how the flattening of the yield curve impacted results, along with cooled off M&A and IPO activity, and if the headwinds facing the consumer changed their outlook for loan loss reserves. For Q1 FactSet is estimating year-over-year (y/y) earnings growth near 5.0%, which would mark the lowest pace of growth since Q4 2020.

Schwab's Chief Investment Strategist Liz Ann Sonders discusses the market action in equities in her latest article, No Quarter (For Consistency), noting how stocks have enjoyed a relief rally of late, but conviction is lacking as the rebound has disproportionately favored low-quality segments of the market. She points out how historically, lower-quality segments of the stock market—including non-profitable companies—have launched into leadership positions when there is an expectation of accelerating economic growth, which she says is not a safe bet in the current environment.

At the industry level, Liz Ann adds, economically sensitive areas have not held up as well as the broader S&P 500 Index. Moreover, she says given the brutal start for the bond market this year, selling there has been a key source of buying pressure for equities. However, Liz Ann concludes, earnings will start to matter again.

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.

Ahead of the ramp-up of Q1 earnings season, WD-40 Company (WDFC $187) reported fiscal Q2 earnings-per-share (EPS) of $1.41, topping the $1.24 FactSet estimate, with revenues rising 16.0% y/y to $130 million, above the expected $127 million. The lubricants company's gross margin fell y/y, but it said the resilience of its WD-40 brand enabled it to get off to a solid start in fiscal year 2022, with maintenance product sales up 14.0% year-to-date. The company lowered its full-year EPS guidance noting that like other companies, it is in a challenging inflationary environment, which has continued to deteriorate its gross margin. Shares rallied.

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.

Treasuries remained in focus following the week's jump in yields on Fed expectations

Treasuries were lower to extend a recent drop that has seen rates jump and the yield curve steepen. The yield curve spread has garnered heavy attention, with some portions inverting earlier this month to foster talk of the potential for a recession on the horizon. However, this week's action saw the yield curve steepen with a key portion—spread between 2-year and 10-year yields—moving out of inversion territory, with the yield on the 10-year note hitting three-year highs.

The bond markets have been driven primarily by expectations that the Fed is set to get substantially aggressive with tightening monetary policy to try to combat surging inflation. This week's Fedspeak was a key contributor to the bond market moves, headlined by Fed governor Lael Brainard—who is a nominee for vice chair—who said reducing elevated inflation is of "paramount importance." She also suggested a series of rate hikes and the beginning of reducing its balance sheet at a "rapid pace" as soon as the May meeting. Meanwhile, Wednesday's minutes from the Fed's March meeting gave details of the balance sheet reduction plan and suggested the potential for multiple rate hikes of 50 basis points (bps), which would be the first time it raised rates in excess of its traditional 25 bp incremental increases in over 20 years. The U.S. dollar jumped on the week, hitting highs not since the summer of 2020, while crude oil prices fell and gold moved higher.

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 yields on the 2-year and 10-year notes rose 5 bps to 2.52% and 2.71%, respectively, while the rate on the 30-year bond increased 3 bps to 2.73%.

February wholesale inventories (chart) grew 2.5% month-over-month (m/m), revised higher than the previously reported 2.1% m/m gain, where the Bloomberg forecast called for it to remain, and north of January's 1.2% increase. Sales rose 1.7%, compared to forecasts of a 0.8% gain, and after January's upwardly-adjusted 5.0% advance. Next week, along with the attention being paid to the start of earnings season, the economic calendar will also deliver a host of key data points that could move the markets. The March inflation picture will develop—the last comprehensive look before the Fed's May 4 monetary policy decision—courtesy of the Consumer Price Index (CPI), Producer Price Index (PPI), and the Import Price Index. The March retail sales report and the preliminary April University of Michigan Consumer Sentiment Indexcould also command focus, along with another round of Fedspeak, including comments by governor Brainard

. Please note: the U.S. equity and bond markets will be closed on Good Friday next week.

Asia trims weekly losses and Europe rises after yesterday's slide

European equities closed higher and bounced back from yesterday's downside reversal that came as the markets continued to digest this week's hawkish comments from U.S. Fed officials and the minutes from the Fed's March meeting that has continued to suggest aggressive monetary policy tightening is in the offing. Bond yields in the U.S. have moved solidly higher as of late to exacerbate the volatility in the markets and hamstring conviction. Meanwhile, the ongoing war in Ukraine remained a key source of skittishness, as ceasefire talks failed to deliver any breakthroughs, and the markets sifted through new sanctions on Russia from the European Union. The Economic calendar was relatively light but Italy's retail sales rose more than expected in February, while Spain's industrial output for February grew more than anticipated. The euro and British pound were lower versus the U.S. dollar, while bond yields in the Eurozone and the U.K. continued to gain ground.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the crisis and its implications in his latest article War: Impact on Earnings, noting how the geopolitical impact on earnings, the most important driver of stock prices, has remained modest so far and global companies appear to be on a path for earnings growth in 2022. Jeff also discusses the potential impact on the region in his 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.

The U.K. FTSE 100 Index and Spain's IBEX 35 Index were up 1.6%, France's CAC-40 Index rose 1.3%, Germany's DAX Index gained 1.5%, Italy's FTSE MIB Index rallied 2.1%, and Switzerland's Swiss Market Index increased 1.1%.

Stocks in Asia finished broadly higher to close out the week and chip away at a weekly loss, appearing to get some support from the late-day recovery in the U.S. markets yesterday. The markets continued to monitor the prospect of highly aggressive monetary policy tightening in the U.S. However, speculation of potential further monetary policy stimulus out of China, which faces new lockdowns amid the surge in COVID cases, seemed to foster the resiliency. Meanwhile, the markets continued to monitor the ongoing war in Ukraine, along with recent softer-than-expected Chinese manufacturing and services sector data. Schwab's Liz Ann Sonders, Jeffrey Kleintop, and Kathy Jones note in our latest Schwab Market Perspective: Fog of War, the Fed has been signaling tighter monetary policy for months, and if it fails to follow through, it could lose its inflation-fighting credibility. On the other hand, if it tightens policy too much or too fast, it could push the economy into a recession. Moreover, they discuss how the Russian invasion of Ukraine overturned a lot of assumptions about the near-term direction of the global economy. In economic news, the Reserve Bank of India held its monetary policy stance unchanged as expected, while Japan's March consumer confidence unexpectedly fell.

Japan's Nikkei 225 Index rose 0.4%, with the yen remaining near its recent lows following a noticeable tumble as of late. China's Shanghai Composite Index gained 0.5%, and the Hong Kong Hang Seng Index traded 0.3% higher. Australia's S&P/ASX 200 Index advanced 0.5% following this week's slightly more hawkish statement from the Reserve Bank of Australia. South Korea's Kospi Index moved 0.2% to the upside, and India's S&P BSE Sensex 30 Index increased 0.7%.

Next week's international economic calendar will also be robust, headlined by the European Central Bank monetary policy decision. Other reports due out that deserve a mention include: Australia—employment change. China—lending statistics, CPI, PPI, and trade balance. India—industrial production, CPI, and trade balance. Japan—machine tool orders, core machine orders, and PPI. Germany—CPI and investor sentiment. U.K.—monthly GDP, industrial/manufacturing production, employment change, and inflation statistics.

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