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Stocks Post Gains Heading Into Holiday Weekend

U.S. equities finished higher heading into the long holiday weekend, posting gains for a second-straight time on a weekly basis. Information Technology stocks led the way amid a decline in Treasury yields despite a stronger-than-expected June nonfarm payroll report that appeared to keep Fed taper timing concerns at bay. The U.S. dollar fell and gold gained modest ground, while crude oil prices ended nearly unchanged in choppy trading as an agreement on oil production among OPEC and its allies, known as OPEC+, remained elusive with the United Arab Emirates continuing to object to a deal on the table. News on the equity front was in short supply, but Dow member Johnson & Johnson announced positive data regarding its efficacy of its single-shot COVID-19 vaccine against the Delta variant, and Tesla posted Q2 deliveries that were mostly in line with forecasts. In other economic news, the trade deficit widened by a slightly smaller amount than estimated, and factory orders came in slightly stronger than expected. Markets in Europe and Asia finished out the week mixed.

The Dow Jones Industrial Average rose 153 points (0.4%) to 34,786, the S&P 500 Index increased 32 points (0.8%) to 4,352, while the Nasdaq Composite gained 117 points (0.8%) to 14,639. In light-to-moderate volume, 694 million shares were traded on the NYSE and 3.7 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.07 lower to $75.16 per barrel. Elsewhere, the Bloomberg gold spot price increased $10.89 to $1,787.73 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.4% to 92.25. Markets were higher for a second-straight week, as the DJIA rose 1.0%, the S&P 500 advanced 1.7%, and the Nasdaq Composite moved 1.9% to the upside.

Dow member Johnson & Johnson (JNJ $169) is in focus after it announced data that demonstrated its single-shot COVID-19 vaccine generated strong, persistent activity against the rapidly spreading Delta variant and other highly prevalent viral variants. In addition, the company said the data showed that the durability of the immune response lasted through at least eight months, the length of time evaluated to date. JNJ finished higher.

Tesla Inc. (TSLA $679) reported that it delivered 201,250 vehicles in Q2, mostly in line with the 201,820 FactSet estimate, as Model 3/Y cars topped forecasts while its Model S/X deliveries missed. Shares were little changed.

Schwab's Chief Investment Strategist Liz Ann Sonders delivers her latest articles, Pressure Drop: Easing Inflation Pressures Ahead? and Will Rising Federal Debt Slow Economic Growth. She notes that we likely won't see a rapid reversal in secular forces, which should keep the inflation genie in the bottle. She adds that isn't to say that prices will come crashing back down in a disinflationary spiral, but the ingredients necessary for a return to hyperinflation are simply too few and not strong enough.

Liz Ann also points out that while rising government debt and weaker economic activity work in tandem, the cause and effect of this relationship is not clear cut and is often debated. To address the persistent concern that the rising debt may be inflationary, she notes that historical data suggests that rising debt has moved the inflation lower, not higher, while discussing the ways that the government can reduce the debt burden. She also discusses how as the debt ratio has increased, each additional dollar of debt has generated less that a dollar’s worth of growth, concluding that in the long run, more debt is unlikely to generate greater economic growth.

Check out all our market commentary, including out latest podcast, On Your Mind: Investors' Top Mid-Year Questions, on our Market Insights page at and follow us on Twitter at @SchwabResearch.

June nonfarm payroll report tops forecasts, trade deficit widens slightly less than anticipated

Nonfarm payrolls (chart) rose by 850,000 jobs month-over-month (m/m) in June, compared to the Bloomberg consensus estimate of a 720,000 rise, and following May's upwardly-adjusted increase of 583,000. Excluding government hiring and firing, private sector payrolls increased by 662,000, versus the forecasted rise of 615,000 after rising by an upwardly-revised 516,000 in May. The labor force participation rate remained at May's 61.6% rate, compared to the forecasted 61.7% rate. The Department of Labor said notable job gains occurred in leisure and hospitality, public and private education, professional and business services, retail trade, and other services.

The unemployment rate rose to 5.9% from May's 5.8% rate, compared to expectations of a decrease to 5.6%. 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—declined to 9.8% from the prior month's 10.2% rate. The number of permanent job losers was nearly unchanged at 3.2 million, but is 1.9 million higher than in February 2020. The number of long-term unemployed—those jobless for 27 weeks or more—increased by 233,000 to 4.0 million, a measure that is 2.9 million higher than in February 2020.

Average hourly earnings gained 0.3% m/m, matching projections, and compared to May's downwardly-adjusted 0.4% increase. Y/Y, wages were 3.6% higher, in line with estimates, and above May's downwardly-adjusted 1.9% rise. Finally, average weekly hours dipped to 34.7 from May's downwardly-revised 34.8 rate, and versus estimates of a rise to 34.9 hours.

The trade balance (chart) showed that the May deficit widened by a slightly smaller amount than anticipated, increasing to $71.2 billion, from April's upwardly-revised deficit of $69.1 billion, and compared to forecasts of $71.3 billion. Exports increased 0.6% m/m, and imports grew 1.3%.

Factory orders (chart) rose 1.7% m/m in May, versus estimates of a 1.6% gain, and compared to April's favorably-revised 0.1% decrease. Durable goods orders—preliminarily reported last week—were unrevised at a 2.3% increase for May, and excluding transportation, orders were unadjusted at a 0.3% increase. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—were revised higher from a 0.1% dip to a 0.1% gain.

Schwab's Liz Ann Sonders offers in her article, Is the Stock Market Disconnected From the Economy?, a look under the hood of the stock market's behavior over the past 15 months that has showed a bit more of a connection than is generally perceived. However, Liz Ann notes that a lot of prospective good economic news is now priced into the market, and that much as the stock market tends to anticipate coming economic strength, it also tends to anticipate when economic strength is peaking. She adds that in other words, the discounting nature of the stock market works both ways. She concludes by stressing that this bears watching as we move further into the year, given that (for now) the final and most recent round of fiscal aid is behind us and we may be experiencing peak growth rates in some economic data. Liz Ann adds that that differs from a peak in the overall level of growth and doesn't suggest the expansion is ending; but does tend to bring on a higher level of market volatility.

Treasuries rose following the jobs data, as the yields on the 2-year note and the 30-year bond were down 2 basis points (bps) at 0.24% and 2.04%, respectively, while the yield on the 10-year note fell 3 bps to 1.42%.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her 2021 Mid-Year Outlook: Fixed Income, how we see the recent plateau in yields as a pause before the next wave higher given the economic and inflation risks we see for the second half of the year. Kathy also discusses in her 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.

With inflation garnering high scrutiny and fostering some volatility in the markets, Schwab Center for Financial Research Fixed Income Director Collin Martin, CFA, discusses Treasury Inflation-Protected Securities: FAQs about TIPS. He points out that they can be a buffer against long-term inflation, but TIPS investing isn't always straightforward.

Please note: all U.S. markets will be closed on Monday in observance of the Independence Day holiday.

Europe and Asia mixed to close out the week

European equities finished mixed and nearly where they began, with Financials seeing some pressure as bond yields dipped following the June U.S. labor report that showed job growth was stronger than expected but seemingly not enough to stoke monetary policy concerns. Moreover, the Energy sector lagged as the markets awaited a potential announcement on oil production levels from OPEC and its allies, known as OPEC+, which delayed yesterday's expected decision due to a disagreement among Saudi Arabia and the United Arab Emirates. However, the Information Technology sector held onto solid gains to keep the downside pressure in check, likely aided by the U.S. job report and coinciding decline in yields. Also, news that Johnson & Johnson'ssingle-shot COVID-19 vaccine showed strong persistent activity against the spreading Delta variant may have lent some support as the variant's spread in the region and in parts of Asia has caused some uneasiness regarding the implications on the economic recovery. The euro dipped versus the U.S. dollar and the British pound was higher.

Schwab Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Is Good Data Now Bad News?, discussing how it is possible that good data could be interpreted as bad news for the U.S. stock market at least in the near-term as strong economic data, especially on jobs, could prompt the Fed to unwind earlier. In contrast, good news may remain good news for international stocks, because the rise in inflation has not been seen globally and central bankers in Europe and Japan are not under pressure to communicate tighter policy.

The U.K. FTSE 100 Index, France's CAC-40 Index, and Italy's FTSE MIB Index were all little changed, Spain's IBEX 35 Index declined 0.3%, and Switzerland's Swiss Market Index ticked 0.1% lower, while Germany's DAX Index gained 0.2%.

Stocks in Asia finished mixed to close out the week, with the markets awaiting key June employment data out of the world's largest economy of the U.S. amid intense focus on the timing of when the Fed may begin to taper its monthly asset purchases. U.S. markets have notched a string of record highs amid eased concerns about a policy mistake leading up to the data and following recent signs of solid economic output in the U.S. and Europe. Chinese and Hong Kong markets were noticeably lower following a return to action in the latter after a holiday break and in the wake of yesterday's Communist Party 100-year anniversary festivities in China. China's Shanghai Composite Index fell 2.0% and the Hong Kong Hang Seng Index dropped 1.8%. However, Japanese stocks finished out the week with a gain amid the positive global economic data and as the yen held onto yesterday's decline. Japan's Nikkei 225 Index traded 0.3% higher. Elsewhere, South Korea's Kospi Index finished little changed, while Australia's S&P/ASX 200 Index gained 0.6% and India's S&P BSE Sensex 30 Index traded 0.3% higher. With the markets remaining choppy, check out our article, How Traders Can Take Advantage of Volatile Markets, in which we offer four steps to consider, which implemented with a disciplined approach can help you learn to manage volatility for your benefit—while helping you minimize risks.

Stocks post back-to-back weekly gain as Tech leads the way

U.S. stocks finished higher for a second-straight week, with the Information Technology sector continuing to carry the load again, helping the S&P 500 and Nasdaq notch fresh record highs and solidify double-digit gains for the major indices for the first half of the year as we transitioned from Q2 to Q3 this week. Treasuries remained calm and yields slipped, suggesting the markets are becoming less skittish regarding inflation and the possibility that the Fed may be making a policy mistake. Signs of solid economic growth continued with June manufacturing activity in the U.S. and Europe, as reported by the ISM and Markit, remaining comfortably in expansion territory but cost pressures continuing to be palpable. Also, weekly initial jobless claims continued to decelerate, hitting a pandemic low. Health Care and Communications Services issues also led to the downside, while Energy stocks fell despite crude oil prices extending a weekly winning streak to six and to multi-year highs. Financials gave back some of last week's decline amid the slip in Treasury yields and even after some major banks announced plans to return capital to shareholders in the form of increased dividends and share buybacks following last week's successful stress test of the sector by the Fed.

Next week will be shortened by the Independence Day holiday, but Q2 earnings season will continue to be primed by a smattering of reports before the major banks unofficially kick things off in the subsequent week. Next week's economic calendar will be relatively light but offer some key reads on June services sector activityfrom Markit and the ISM. Moreover, the employment front will remain center stage with jobless claims for the week ended July 3 being preceded by the Job Openings and Labor Turnover Survey (JOLTS). However, although Fedspeak will be quiet the Central Bank could still have an influence on the markets as we will get the minutes from the Fed's monetary policy meeting which roiled the markets two weeks ago as it suggested a potential sooner-than-expected rate liftoff after increased inflation and economic forecasts.

Schwab's Liz Ann Sonders discusses the Fed's decision in her latest article, Fed Still Hasn't Found What it's Looking For, noting that investors will likely remain uber-focused on inflation over the next couple of months. She adds that at least a portion of the upside pressure—the base effects relative to last year’s pandemic-related deflation—should begin to fade quickly, while supply chain disruptions and bottlenecks could take a bit longer and will vary from product to product and industry to industry.

Liz Ann points out that longer term, inflation's trajectory will be largely dependent on the labor market and whether wage growth becomes persistent and pervasive—possibly leading to a "wage-price spiral" type of inflation. She discusses how we sit in the transitory camp and while we wait to see how this fleshes out, it's important to point out that inflation can't be viewed in a vacuum. She concludes by saying that it's too soon to judge whether the Fed's firm belief that inflation will be "transitory" comes to fruition; but other factors need to be considered in the meantime, including economic (and productivity) growth and further healing in the labor market.

Next week's international economic calendar will bring a host of services sector reports to put a bow on June business activity data, headlined by releases from Australia, China, India, Japan, the Eurozone and the U.K. Other reports due out that deserve a mention include; Australia—the Reserve Bank of Australia monetary policy decision. China—inflation statistics and lending figures. Japan—employment earnings and household spending. Eurozone—retail sales, along with Germanfactory orders, investor confidence, industrial production and the trade balance. U.K.—industrial/manufacturing production, monthly GDP, and the trade balance.

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