Schwab Market Update | April 22, 2021

Schwab Market Update

Stocks Give Back Some of Yesterday's Rebound on Tax Headlines

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U.S. stocks finished lower, following a flood of economic data, and as reports suggested that the Biden Administration was mulling a sizeable increase in capital gains taxes to help pay for his spending plans. It was a relatively quiet session from a headline perspective with markets continuing to wrestle with the implications of rising COVID-19 cases in pockets of the world and optimism of strong 2021 economic growth. Sector performance was broadly negative and defensive, with the Information Technology, Financials and Consumer Discretionary sectors leading to the downside, while Real Estate and Utilities outperformed. The economic calendar for the week came alive, as existing home sales declined more than expected, leading indicators topped expectations, jobless claims decelerated for a second-straight week, and manufacturing activity expanded. Earnings season continued to roll on and help preserve the optimism for the year, with the Street's digesting results from AT&T, Chipotle Mexican Grill, Southwest Airlines and Whirlpool. Treasuries ticked higher, adding slight downside pressure on yields, while the U.S. dollar moved higher after a recent soft patch. Gold was lower and crude oil prices turned modestly higher. Asia finished mostly higher and Europe rose on the heels of strong earnings results and the unchanged monetary policy stance from the European Central Bank. 

The Dow Jones Industrial Average declined 321 points (0.9%) to 33,816, the S&P 500 Index decreased 38 points (0.9%) to 4,135, and the Nasdaq Composite was down 132 points (0.9%) at 13,818. In moderate volume, 865 million shares were traded on the NYSE and 4.3 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.08 to $61.43 per barrel. Elsewhere, the Bloomberg gold spot price was $9.70 lower at $1,784.09 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—nudged 0.1% higher to 91.29.

AT&T Inc. (T $31) announced Q1 earnings-per-share (EPS) of $0.86, topping the $0.78 FactSet estimate, as revenues rose 2.7% year-over-year (y/y) to $43.9 billion, exceeding the Street's forecast of $42.7 billion. The company said its saw solid wireless, fiber and HBO Max subscriber gains with continuing strong cash flows. Shares traded higher.

Chipotle Mexican Grill Inc. (CMG $1,480) reported adjusted Q1 EPS of $5.36, above the projected $4.92, as revenues grew 23.4% y/y to $1.7 billion, compared to the expected $1.8 billion. CMG said its Q1 same-store sales rose 17.2% y/y, with digital sales jumping nearly 134%. The company said it is not providing 2021 guidance for same-store sales growth given on-going uncertainty surrounding the future impact of COVID-19 on the broader U.S. economy and any specific impact to its company. However, CMG noted that as vaccines roll out and we get closer to moving past this pandemic, it believes it is well positioned for growth. Shares of CMG came under pressure.

Southwest Airlines Co. (LUV $61) posted an adjusted Q1 loss of $1.72 per share, compared to the expected shortfall of $1.85 per share. Revenues fell 51.5% y/y to $2.1 billion, roughly in line with expectations. The company said, "While the pandemic is not over, we believe the worst is behind us, in terms of the severity of the negative impact on travel demand. Vaccinations are on the rise, and COVID-19 hospitalizations in the United States are down significantly from their peak in January 2021. As a result, we are experiencing steady weekly improvements in domestic leisure bookings, which began in mid-February 2021." Share were lower.

Whirlpool Corporation (WHR $233) reported Q1 ongoing EPS of $7.20, north of the expected $5.40, as revenues rose 23.9% y/y to $5.4 billion, above the expected $4.9 billion. WHR raised its full-year EPS and revenue guidance, due to sustained strong consumer demand and its recent cost-based pricing actions, while noting that its Q1 results demonstrate its agility and resilience in dealing with component shortages and inflationary pressure. Shares traded to the downside. 

Q1 earnings season is heating up and with 109 S&P 500 companies having reported thus far, roughly 77% have topped revenue expectations, while about 76% have exceeded earnings estimates. Although still early, sales growth is on track to be up 6.5% y/y and profit expansion is on pace to be approximately 55% above year ago levels, per data compiled by Bloomberg.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Pump it Up: Earnings Season Starts Off Strong, although earnings season has a ways to go, the results have been strong enough to significantly boost growth expectations, while also easing some valuation concerns.

Check out our assessments for all the major market sectors, as well as a look at how changes in sector leadership can create opportunities for investors to make tactical sector changes in our Schwab Sector Views: What is Sector Rotation Strategy?.

Keep up with our latest views on the market landscape at our Market Insights page on www.schwab.com, and you can follow us on Twitter @SchwabResearch.

Existing home sales fall, leading indicators beat expectations and jobless claims unexpectedly decelerate again

Existing home sales fell 3.7% month-over-month (m/m) in March to an annual rate of 6.01 million units, a seven-month low, versus expectations of a decline to 6.14 million units from February's upwardly revised 6.24 million rate. However, existing home sales were up 12.3% year-over-year (y/y).

Compared to last month, the National Association of Realtors (NAR) said buying activity in all the major regions fell, but all regions rose y/y. Sales of single-family homes and purchases of condominiums and co-ops were both down month-over-month (m/m), but higher y/y. The median existing home price jumped 17.2% from a year ago to $329,100, marking the 108th straight month of y/y gains as prices rose in every region. Unsold inventory came in at a 2.1-months pace at the current sales rate, nudging off last month's 2.0-months pace, and down sharply from the 3.3-months pace a year earlier. Existing home sales reflect contract closings instead of signings and account for a large majority of the home sales market. 

NAR Chief Economist Lawrence Yun said, " Consumers are facing much higher home prices, rising mortgage rates, and falling affordability, however, buyers are still actively in the market," adding that, "The sales for March would have been measurably higher, had there been more inventory," he added. "Days-on-market are swift, multiple offers are prevalent, and buyer confidence is rising."

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for March rose 1.3% m/m, above the Bloomberg consensus estimate calling for a 1.0% m/m increase from February's downwardly revised 0.1% decrease. The LEI was positive for the tenth-straight month after the plunges in March and April of last year, due to all ten components contributing positively, suggesting economic momentum is increasing in the near term.

The April Kansas City Fed Manufacturing Activity Index moved further into a level depicting expansion (a reading above zero). The index rose to 31 from March's 26 reading, topping analyst forecasts.

Weekly initial jobless claims (chart) came in at a level of 547,000 for the week ended April 17, compared to the Bloomberg estimate of an acceleration to 610,000 from the prior week's upwardly revised 576,000 level. The four-week moving average declined by 27,750 to 651,000, and continuing claims for the week ended April 10 decreased by 34,000 to 3,674,000, north of estimates of 3,650,000. The four-week moving average of continuing claims declined by 41,750 to 3,713,000.

Treasuries finished slightly higher in choppy trading, with the yield on the 2-year note little changed at 0.15%, while the yield on the 10-year note dipped 1 basis point (bp) to 1.54% and the rate on the 30-year bond declined 3 bps to 2.23%.

Bond yields and the U.S. dollar have given back noticeable gains seen in Q1 while economic data has been strong to preserve expectations of robust 2021 growth, and inflation expectations have gained ground. Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, How to Handle a Bond Bear Market, how it can be challenging to handle a bond bear market, a period during which investors drive bond prices down and yields—which move inversely to prices—higher. She points out that the good news is that the worst of this phase of the bond bear market may be over, and you can take steps to help mitigate the impact of increased volatility and higher interest rates.

The U.S. economic week will culminate tomorrow with the release of the preliminary Markit Manufacturing and Services PMIs for April, both forecasted to have improved to 61.0 and 61.5, respectively, with readings north of 50 denoting expansion. These reports will be followed by more March housing data, with new home sales being released, forecasted to rebound 14.2% m/m, from February's 18.2% drop.  

Asia mostly higher Europe gains, European Central Bank keeps stance unchanged

European equities closed higher as the Information Technology sector showed some strength, aided by upbeat results from SAP SE (SAP $144) as a strong earnings season continues to roll on and preserve optimism of 2021 economic prosperity. However, Energy and Financials lagged to limit the upside moves in the region. The markets digested another positive report on U.S. jobless claims and the monetary policy decision from the European Central Bank (ECB), which left its stance unchanged and reiterated that it will ramp up its asset purchases in the coming months. The customary press conference by ECB President Christine Lagarde followed the decision with the ECB President indicating expectations for a Q2 economic rebound. Recent economic data and the massive amounts of monetary and fiscal policy relief have underpinned the markets and Schwab's Liz Ann Sonders addresses in her commentary the question of Will Rising Federal Debt Slow Economic Growth?, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Stimulus Payback: 2023. The euro and the British pound saw some pressure versus the U.S. dollar. Bond yields in the Eurozone and the U.K. were little changed.

The U.K. FTSE 100 Index was up 0.6%, Germany's DAX Index rose 0.8%, France's CAC-40 Index increased 0.9%, Switzerland's Swiss Market Index moved 0.1% higher, Spain's IBEX 35 Index rallied 1.6%, and Italy's FTSE MIB Index advanced 1.0%.

Stocks in Asia rebounded from some softness seen earlier this week as the global markets cheer a strong start to earnings season and remain buoyed by optimism of robust 2021 economic growth, which appeared to outweigh festering COVID-19 concerns even as cases persistently percolate in key parts of the world, notably in Japan and India. Japan's Nikkei 225 Index recovered nicely, rising 2.4%, even as the yen held onto a recent rally. The Hong Kong Hang Seng Index gained 0.5%, South Korea's Kospi Index advanced 0.2%, and Australia's S&P/ASX 200 Index moved 0.8% to the upside. India's S&P BSE Sensex 30 Index rose 0.8% in a return to action following yesterday's holiday break, while China's Shanghai Composite Index bucked the trend, decreasing 0.2%. Schwab's Jeffrey Kleintop notes in his article Bull? Bear? How about a "Bunny" Market?, that there are a variety of clashing factors affecting the stock market this year, including worries over rising interest rates countered by the confidence seen in booming business investment, and robust M&A activity. We expect the bunny market to continue hopping around in the weeks ahead, as it reacts to these factors. Also, Jeff discusses in his latest article, The Next Bubble?, how the specific set of conditions that have historically characterized the start of an investment bubble appear to be forming.

Tomorrow's international economic calendar will be fully-loaded with April preliminary reads on manufacturing and services sector activity, notably out of Australia, Japan, the Eurozone and the U.K.

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