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Schwab Market Update

Stocks Off Lows in Mixed Finish

U.S. stocks finished the final trading session ahead of the three-day holiday break in mixed fashion amid some continued posturing of the geopolitical landscape. Crude oil prices plunged as reports suggested that Saudi Arabia and Russia are close to a deal that would increase oil production. Treasuries advanced as yields pulled back from recent jumps. Core durable goods orders topped forecasts and consumer sentiment was unexpectedly revised lower. The U.S. dollar resumed its recent run and gold finished little changed.

The Dow Jones Industrial Average (DJIA) declined 59 points (0.2%) to 24,753, the S&P 500 Index decreased 6 points (0.2%) to 2,721, and the Nasdaq Composite ticked 9 points (0.1%) higher to 7,434. In moderately light volume, 719 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil traded $2.83 lower to $67.88 per barrel and wholesale gasoline was down $0.05 at $2.18 per gallon. Elsewhere, the Bloomberg gold spot price was $4.53 lower at $1,300.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 94.19. Markets were slightly higher for the week, as the DJIA ticked 0.2% to the upside, the S&P 500 Index added 0.3% and the Nasdaq Composite advanced 1.1%.

Gap Inc. (GPS $28) reported Q1 earnings-per-share (EPS) of $0.42, versus the $0.46 FactSet estimate, as revenues increased 10.0% year-over-year (y/y) to $3.8 billion, above the projected $3.6 billion. Q1 same-store sales rose 1.0% y/y, below the expected 1.7% gain, with sales at its Old Navy and Banana Republic positive, but sales at its Gap unit fell more than anticipated as the company noted expected challenges for this segment. The company's gross margin declined y/y. GPS said despite the pressures it faced in Q1 it is affirming its full-year guidance. Shares traded decisively lower.

Ross Stores Inc. (ROST $77) posted Q1 EPS of $1.11, including one-time benefits that boosted the figure by $0.19 per share regarding recently enacted tax legislation and favorable timing of certain expenses. The one-time items may have impacted comparability with the Street's $1.07 expectation. Revenues increased 9.0% y/y to $3.6 billion, above the projected $3.5 billion, with same-store sales rising 3.0% y/y, slightly above the estimated 2.9% increase. The company noted unfavorable weather during the period and higher freight costs and wage-related investments that resulted in an operating margin that was down slightly y/y. ROST issued Q2 and full-year guidance that came in below forecasts. Shares closed solidly lower.   

Foot Locker Inc. (FL $56) jumped after announcing Q1 earnings of $1.38 per share, or $1.45 ex-items, versus the projected $1.25, as revenues rose 1.2% y/y to $2.0 billion, roughly in line with forecasts. Q1 same-store sales declined 2.8% y/y, compared to the expected 3.9% drop, and its gross margin topped forecasts. The company added that it continues to believe that it is poised to inflect positive same-store sales growth as it progresses throughout the year.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers analysis of consumer-related stocks in his latest, Schwab Sector Views: Time to Remove the Staples?, noting that the staples performance is in stark contrast to the performance of the discretionary sector, but there’s more to the story than meets the eye.

Fiat Chrysler Automobiles NV (FCAU $22) fell after the company announced it has recalled 4.8 million U.S. vehicles due to a software defect that could affect the cruise control function.  The company said it is unaware of any related injuries or accidents involving the affected vehicles.

Core durable goods orders solid, consumer sentiment revised lower

April preliminary durable goods orders (chart) fell 1.7% month-over-month (m/m), compared to the Bloomberg estimate of a 1.3% decline, though March's 2.6% increase was revised to a 2.7% rise. Ex-transportation, orders were up 0.9% m/m, above forecasts of a 0.5% rise and compared to March's upwardly revised 0.4% gain. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, jumped 1.0%, versus projections of a 0.7% increase, but the prior month's figure was revised negatively to a 0.9% decrease from the initial 0.4% decline.

The final May University of Michigan Consumer Sentiment Index (chart) was adjusted lower to 98.0, versus forecasts to be unrevised at the preliminary level and March's figure of 98.8. The downward revision came as the expectations and current conditions components of the report were both adjusted lower, with the former above and the latter below April's figures. The 1-year inflation forecast ticked higher m/m to 2.8% from 2.7% and the 5-10 year outlook remained at April's 2.5% rate.  

Treasuries were higher, with the yield on the 2-year note and the 30-year bond declining 3 basis points (bps) to 2.48% and 3.09% respectively, and the yield on the 10-year note dropping 5 bps to 2.93%. For analysis of the interest rate environment, check out our article, Eye on the Indicators: What Does the Yield Curve Tell Us?.

Treasury yields continue to pull back, with the 10-year note back below the 3.00% mark, while the U.S. dollar is rebounded after yesterday's dip from a recent rally. Global trade uncertainty remains, with U.S. and China relations remaining in question, along with NAFTA negotiations, and geopolitical concerns continued to be elevated after the U.S. called off a highly-anticipated summit with North Korea that was expected to happen next month due to differences regarding denuclearization. However, North Korea did respond by saying it is still willing to meet with the U.S. Moreover, crude oil prices pulled-back from a surge as of late, pressured by this week's bearish oil inventory data and exacerbated by comments by Saudi Arabia that suggested OPEC and its partners could increase supplies later this year.

Worries about an acceleration in the Fed's rate hike campaign have been tamped down this week, while the economic and earnings fronts remain solid. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Long Train Running: Leading Indicators Show Little Risk of Recession, that investors can take comfort, when observing leading economic indicators (LEI), that there is limited recession risk at present. But she cautions that one should not extrapolate the LEI’s strength into a guarantee of continued stock market strength given the myriad other drivers of stock market behavior.

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

Europe mixed on data and global uncertainties, Asia mostly lower to close out the week

European equities finished mixed with the euro and British pound seeing pressure as the U.S. dollar resumed its recent rally after yesterday's slip, while global trade and geopolitical uneasiness remained. The markets continued to focus on yesterday's announcement that the U.S. will pull out of a highly-anticipated summit with North Korea, as well as North Korea's response that it is still willing to talk. The auto sector rebounded a bit after falling yesterday on reports that the U.S. is investigating the possibility of tariffs on auto-imports, while the extended pullback in crude oil prices on supply concerns helped cool transportation cost worries but weighed heavily on the energy sector. Travel-related issues rose on some upbeat earnings results in the sector. U.K. Q1 GDP growth was unrevised at a 1.2% y/y pace, as expected, but down from the 1.4% expansion posted in Q4, while German business confidence came in slightly higher than expected for this month. Bond yields in the region finished mixed as Italian political uncertainty festered and Spanish political worries flared-up. With the markets remaining skittish, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, How To Avoid A Shark Attack, which could take a bite out of unprepared investors' portfolios. Jeff notes that we don’t know exactly when it could occur, but we can take actions to prepare, while pointing out how a disciplined approach to rebalancing is important to achieving long-term investment goals.

Stocks in Asia finished mostly lower, with global uncertainties remaining in terms of trade and geopolitical tensions, with auto-related issues remaining hampered by news that the U.S. is looking into potential tariffs on auto imports, while the markets are digesting the U.S. decision to pull out of North Korean talks. Stocks trading in mainland China and in Hong Kong declines, and South Korean shares also traded lower. For a look global trade, check out our article, Global Trade: What It Is and Why It's Important. Australian securities dipped. However, Japanese equities ticked higher, with the yen giving back a recent uptick as the U.S. dollar rebounded from yesterday's decline and as a May read on consumer price inflation in Tokyo came in cooler than expected. Indian stocks extended yesterday's solid gain, moving into positive territory for the week as the recovery for the rupee and the recent pullback in crude oil prices eased inflation uneasiness. Schwab's Chief Fixed Income Strategist, Kathy Jones offers a look at emerging markets in her article, Emerging Market Bonds: Stay Underweight or Jump In?.

Stocks mildly higher amid a host of catalysts

U.S. stocks finished the week slightly higher, with earnings and economic data continuing to paint a solid picture, and bolstered by the minutes from the Fed's May monetary policy meeting that showed a June rate hike remained in the offing but inflation concerns didn’t appear strong enough to force a more rapid pace of tightening. The U.S. dollar continued to grind higher. Earnings from the retail sector boosted the consumer discretionary sector despite a disappointing reaction to results from Target Corp. (TGT $71). Markit's preliminary May business activity reports showed growth was stronger than expected, while regional manufacturing data continued to suggest output looks to be accelerating this month. Energy issues fell sharply amid the continued pullback in crude oil prices, while financials slipped as Treasury yields gave back some of a recent run with the 10-year note solidly back below 3.00%. Utilities and real estate stocks led to the upside, while the tech sector posted a solid gain. Stocks were held in check, as choppiness remained amid conflicting developments that kept global trade and geopolitical uncertainties alive.

Although next week will be shortened by the holiday, the economic week will still be robust, courtesy of the Consumer Confidence Index, the first revision (of two) of Q1 GDP, personal income and spending figures, the Fed's Beige Book report, and the ISM Manufacturing Index. However, the headlining report will likely be Friday's May nonfarm payroll report, with a close eye being on the wage component.

As noted in the Schwab Market Perspective: Buy in May … and Stay?, this May has generally been good for U.S. stocks, although the major indexes still remain within recent ranges.  We believe the bull market will continue, but the increased volatility seen earlier this year is likely to reemerge. U.S. economic data has shown signs of rebounding from its first quarter weakness; and while the expansion is extended in terms of time, it’s less extended in terms of “temperature” (not over-heating). Recent economic signals from international markets are less encouraging, but remain supportive of likely modest international stock market gains.

International reports due out next week that deserve a mention include: China—Manufacturing and non-Manufacturing PMI Indexes. India—Q1 GDP. Japan—retail sales, industrial production and Q1 capital spending. Eurozone—economic confidence, unemployment rate, consumer price inflation and Markit's Manufacturing PMI Index, as well as German retail sales and unemployment change. U.K.—Markit's PMI Manufacturing Index and consumer confidence.

Schwab Center for Financial Research - Market Analysis Group

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Next Steps

Schwab Market Perspective: Buy in May…and Stay?
Schwab Market Perspective: March Market Madness!

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