Schwab Market Update

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U.S. equities finished out another choppy week with modest gains, while mixed on a weekly basis. Investors continued to focus on signs of rising inflation pressures and what that could hold for the timing of the Fed to begin tapering its asset purchases. The S&P 500 was able to notch a fresh record high for the second-straight day, and Information Technology issues continued to regain some footing to help the Nasdaq register a solid weekly advance. However, weakness in Health Care stocks is what kept the indices in a tight range. The economic calendar closed out the week on a light note, offering a lone report that showed June consumer sentiment improved more than expected, getting a boost from the expectations component, while also noting that inflation expectations moderated. In equity news, shares of Vertex Pharmaceuticals tumbled after it ended its pursuit to develop a therapy for liver disease, and Snowflake's longer-term financial targets garnered some scrutiny from analysts. Treasuries were lower to pare some of the week's decline in yields and the U.S. dollar gained solid ground, while gold fell and crude oil prices finished higher. Europe closed out the week with broad gains, while markets in Asia were mixed.

The Dow Jones Industrial Average rose 13 points to 34,480, the S&P 500 Index advanced 8 points (0.2%) to 4,247 and the Nasdaq Composite increased 49 points (0.4%) to 14,069. In moderate volume, 825 million shares were traded on the NYSE and 4.1 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.62 to $70.91 per barrel. Elsewhere, the Bloomberg gold spot price tumbled $21.57 to $1,876.94 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 0.5% to 90.53. Markets were mixed for the week, as the DJIA lost 0.8%, the S&P 500 gained 0.4%, and the Nasdaq Composite rose 1.9%.

Shares of Vertex Pharmaceuticals Incorporated (VRTX $193) tumbled after the company announced that it has ended its pursuit to develop a therapy for liver disease following disappointing results from a mid-stage trial of its experimental treatment. 

Shares of Snowflake Inc. (SNOW $241) saw some pressure as the cloud computing company's long-term financial targets for revenue and operating margins released at its investor day after the market closed yesterday seemed to garner scrutiny. Bloomberg noted that analysts view the margin target as disappointing, but some suggested it could be conservative and they also remain cautious given the company's valuation. 

Schwab's Chief Investment Strategist Liz Ann Sonders offers her 2021 Mid-Year Outlook: U.S. Stocks and Economy. Liz Ann notes that looking ahead to the second half of 2021, we think there are some notable market risks associated with the combination of peak economic/earnings growth rates, higher inflation, Fed policy and some stretched sentiment conditions.

Amid this backdrop Liz Ann notes that for the stock-pickers out there, we suggest a "hybrid" approach—with an eye toward sustainable growth, but at reasonable valuations—as well as quality factors, like balance sheet strength. And for the asset allocators out there, we suggest this is a time for discipline; including around diversification (across and within asset classes) and periodic rebalancing. As a reminder, just as panic is not an investing strategy, neither is fear-of-missing out (FOMO).

Check out all our market commentary including our mid-year outlooks on the fixed income and global markets at our Market Insights page on www.schwab.com and follow us on Twitter at @SchwabResearch.

Treasury yields higher, June read on consumer sentiment tops forecasts

The June preliminary University of Michigan Consumer Sentiment Index (chart) rose to 86.4 versus the Bloomberg estimate calling for an increase to 84.2 from May's 82.9 reading. The index improved more than expected as the current conditions portion rose slightly but the expectations component of the index grew solidly. The report noted that stronger growth in the national economy was anticipated, with an all-time record number of consumers anticipating a net decline in unemployment. Additionally, the report said rising inflation remained a top concern of consumers, although the expected rate of inflation declined in early June. The 1-year inflation forecast fell to 4.0% from May's 4.6% rate, and the 5-10 year inflation forecast declined to 2.8% from the prior month's 3.0% level.

Treasuries were lower, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.15%, while the yield on the 10-year note gained 3 bps to 1.46%, and the 30-year bond rate rose 2 bps to 2.15%.

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.  

Europe higher to close out the week, Asia finishes mixed     

European equities finished higher, with most sectors in the region closing out the week in positive fashion. The global markets appeared to shrug off signs of rising inflation pressures after the S&P 500 registered a fresh record high yesterday despite another hotter-than-expected read on U.S. consumer price inflation. Moreover, the markets continued to digest yesterday's unchanged monetary policy stance from the European Central Bank (ECB), which included increased inflation and economic growth outlooks and a reiterated pledge to continue to accelerate its bond-buying activity to solidify the economic recovery.

In economic news in the region, U.K. industrial/manufacturing output surprisingly declined in April and the region's April GDP growth was slightly below estimates. The euro and the British pound were lower versus the U.S. dollar and bond yields in the Eurozone and the U.K. finished to the downside. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his 2021 Mid-Year Outlook: Global Stocks and Economy, noting how the recovery is now over and a new global economic expansion has begun. He discusses how the new economic cycle has seen stock market leadership pass from the U.S. to Europe.

The U.K. FTSE 100 Index was up 0.7%, France's CAC-40 Index, Germany's DAX Index and Spain's IBEX 35 Index all gained 0.8%, while Switzerland's Swiss Market Index and Italy's FTSE MIB Index advanced 0.3%.

Stocks in Asia finished mixed as the markets remain choppy against the backdrop of festering inflation and monetary policy uncertainty, along with economic recovery optimism. Continued signs of rising inflation pressures out of the U.S. yesterday was in focus, but the U.S. markets shrugged off the data as the S&P 500 posted a fresh record high. Moreover, the global markets digested yesterday's monetary policy decision out of Europe where the ECB held its stance unchanged and maintained its plan to accelerate asset purchases in the coming months even as the central bank raised its inflation and economic outlooks. Schwab's Jeffrey Kleintop offers his article, Signs Inflation's Surge Is Transitory, noting while it's very early to say the rise in inflation has passed, there are signs that the fastest part of the rebound in inflation might soon be over. Jeff adds that raw material prices have pulled back from the highs of early May and supply chains for intermediate goods like semiconductors may be starting to improve. He concludes by noting that if these early signs continue to signal a deceleration of the upsurge in price pressures, market worries over inflation could begin to lessen.

In economic news in the region, China's aggregate financing—a measure of total credit issued—reported late yesterday likely garnered some attention as it came in at a pace that was below forecasts, but its new yuan loans unexpectedly accelerated for May. After the markets closed, India reported a stronger-than-expected surge in industrial production for April, with output jumping over 134% year-over-year after March's 24.1% gain and versus estimates of a 121.1% rise. Japan's Nikkei 225 Index finished little changed with the yen holding onto yesterday's gain, and China's Shanghai Composite Index declined 0.6%. The Hong Kong Hang Seng Index rose 0.4% and India's S&P BSE Sensex 30 Index advanced 0.3% after touching a fresh record high during the session. South Korea's Kospi Index increased 0.8% and Australia's S&P/ASX 200 Index ticked 0.1% higher.

Stocks mixed on the week as inflation and counterintuitive decline in yields grab attention 

U.S. stocks finished mixed in another choppy week as the markets continued to grapple with the uncertainty regarding what the implications will be of continued signs of rising inflation pressures. However, the markets showed some counterintuitive reactions to a May consumer price inflation report that came in above expectations with the headline rate 5.0% above 2020's depressed levels. The S&P 500 posted a fresh record high on the day the inflation data came out and Treasury yields finished the week lower. Renewed demand for Treasuries that applied downside pressure on yields suggested inflation concerns and economic recovery optimism may have peaked for the time being, while the recent softness in commodities may have also helped cool inflation concerns. Moreover, demand for Treasuries from foreign buyers and institutions showed up to help bolster auctions this week of 10-year notes and 30-year bonds and lift the U.S. dollar. Signs of potential short covering in the bond markets also seemed to underpin fixed income prices. Outside the inflation data, some leading indicators of employment continued to improve and help soothe the sting from the prior two months of disappointing nonfarm payroll growth. Weekly initial jobless claims continued to decelerate to post new pandemic lows and job openings jumped to a new record north of 9 million.   

The drawdown in bond yields paved the way for growth sectors—Information Technology and Communications Services—to regain some footing and helped the Nasdaq outperform the other major indexes. However, the Health Care sector led to the upside, bolstered by a surge in shares of Biogen Inc. (BIIB $401) after its Alzheimer's disease drug received approval by the U.S. Food & Drug Administration. The approval marked the first medication cleared by regulators to slow the cognitive decline of the disease, and the first treatment for the illness in nearly twenty years. The decline in interest rates and some signs of recovery in department store traffic seemed to also boost Real Estate stocks and the sector was one of the best performers on the week. Reopening stocks that have outperformed thus far this year, underperformed with Financials, Materials and Industrials sectors registering solid declines. The best performer for the year—Energy—finished little changed despite a continued charge higher in crude oil prices. 

Amid this backdrop, next week's economic calendar is poised to garner heavy scrutiny. More May inflation data will come in the form of the Producer Price Index (PPI) and the Import Price Index, while the May retail sales report will deliver a read on the health of the all-important U.S. consumer. Other reports that are due out and worth noting include; June regional manufacturing reports, the Fed's May industrial production report, the June NAHB Housing Market Index, May housing starts and building permits, jobless claims for the week ended June 12, and the May Leading Index. However, the headlining event will likely be Wednesday's conclusion of the Fed's two-day monetary policy meeting, which will bring updated economic projections and the customary press conference from Chairman Jerome Powell. Volatility has persisted as the markets have been fascinated with the timing of when they will begin to discuss tapering its monthly asset purchases amid the rising inflation pressures and heating up of the economy. As such, every word of the Fed's statement and from Powell is likely to garner heavy scrutiny.

Next week's international economic calendar is also chock full of events and data that could also foster some market reactions, notably; Australia—employment change and the minutes from the Reserve Bank Australia's June meeting. China—retail sales, industrial production, and fixed asset investment. India—inflation statistics and trade balance. Japan—Bank of Japan monetary policy decision, inflation statistics, core machine orders and trade balance. Eurozone—industrial production, consumer price inflation data, and the trade balance. U.K.—inflation data, employment change, retail sales and the Bank of England's inflation forecast.

As noted in our latest Schwab Market Perspective: Beneath the Surface, although the U.S. economic growth rate may be peaking, economic growth itself likely isn't. Similarly, while it's natural to wonder how global central banks will manage rising inflation, investors may want to focus on what China’s government is doing to rein in commodity prices. Even in the Treasury bond market, recent calm may be hiding risk below the surface.

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