As Tariffs Arrive, Stocks and Yields Play Defense
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Welcome to the Schwab Market Update podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead. I'm Keith Lansford, and here is Schwab's early look at the markets for Tuesday, March 4th.

Barring any last-minute changes, 25% tariffs targeting imports from Mexico and Canada and additional 10% tariffs on Chinese goods take effect today after trade-related selling slammed stocks and Treasury yields to start the week.

There's still reasons to believe the tariff threats are negotiation tools, even if they go into effect this week, said Michelle Gibley, director of international research at the Schwab Center for Financial Research. The longer the tariffs are in place, the more they are a lose-lose for the U.S. and other countries, and Trump's inconsistent rhetoric suggests they may not stay in place longer term.

President Trump's tough talk on tariffs and soft U.S. data took their toll after risk-on sentiment opened the week. A brief rally based on hopes for establishment of a U.S. cryptocurrency reserve faded quickly, and treasuries rallied as investors scurried back into defensive territory. The recent pullback in yields provides more context around ideas of slower economic growth being priced into the market.

The shift from risk-on to risk-off seemed clearly associated with tariffs and landed particularly hard on the tech sector, where mega-cap chip stock Nvidia plunged more than 8% yesterday to a five-month low. Chip stocks could suffer from any new trade barriers against China, conceivably raising their cost to do business and the cost of products made with their chips.

That in turn could send prices higher and demand down for the multitude of products that contain chips well beyond the highly publicized AI cloud business. Every automobile these days has semiconductor chips with electric vehicles heavily dependent. Phones are another chip-dependent item. A trade war with China might also hurt agricultural stocks like Deere and Archer Daniels Midland. China is a major buyer of U.S. agricultural products.

Archer Daniels Midland lost 1.3% Monday and Deere dropped 3%. Bitcoin, which surged on the cryptocurrency reserve news, ended up falling nearly 9% Monday to erase most of its gains. Coinbase Global fell 4.85%.

Tonight's joint address to Congress could provide more insight on trade policy and perhaps on any minerals deals shaping up with Ukraine following last Friday's disagreement at the White House. But before that, attention could focus on a fresh round of earnings from tech and retail firms, including Target, CrowdStrike and Best Buy.

Any hints of more struggles when big boxes report could reinforce ideas of a retreating consumer and corporate caution amid uncertain tariff and economic policy. Earnings growth has been a bright spot so far this year, but economic data point to slowing growth that might clip earnings later in 2025.

That was crystallized yesterday when the Atlanta Fed's GDP Now indicator, which just fell into negative territory at minus 1.5% as of Friday, was downwardly adjusted again to show an expected 2.8% gross domestic product pullback. The weaker estimate reflected softer net exports, presumably because consumers pulled forward purchases in anticipation of higher tariffs, said Kevin Gordon, director and senior investment strategist at Schwab.

GDP Now data isn't official, and the government won't deliver its first estimate for first-quarter GDP growth until late April. Most analysts still expect a positive number, but that depends to some extent on data this month, especially hard data like jobs, retail sales, and manufacturing.

On the plus side, yesterday's February ISM manufacturing PMI remained in expansion territory above 50 at 50.3. That was below expectations, however, and down from 50.9 the prior month. February construction spending also slept. Though the ISM headline remained above 50, other aspects of the report were grim, including a rise in prices and a drop in new orders, rekindling stagflation fears.

That's the term for an economy where prices rise even as growth slows, a tough task for the Federal Reserve to manage. Friday's February nonfarm payrolls report will increasingly dominate conversation as the week continues, with early expectations for around 160,000 jobs added at a steady 4% unemployment rate.

In comments yesterday reported by Bloomberg, St. Louis Federal Reserve President Alberto Musalem said it's important that inflation expectations stay in check, but his baseline expectation is that inflation continues to decline and the labor market stays near current full employment.

Yields on U.S. Treasuries felt the pinch of slower growth worries Monday. The 10-year Treasury note yield dropped sharply to below 4.2 percent for the first time since early December. The December intraday low of 4.16 percent is just under Monday's close of 4.18 percent, which was down five basis points from Friday. The yield hasn't been under 4.6 percent since last October.

Falling yields appear to reflect U.S. economic growth fears more than falling inflation worries. The next key inflation data come next week with the February Consumer Price Index. Growth worries pinned down the U.S. dollar and crude oil on Monday, but other commodities, including gold and other metals, rose on ideas that tariffs could raise costs. The weaker dollar may have also played into this move.

Front-month U.S. crude dropped below $68 per barrel intraday for the first time in nearly three months. Sector-wise, the PHLX Semiconductor Index, or SOX, fell 4%. The latest pressure on NVIDIA came from reports that it, along with Broadcom, is running manufacturing tests with Intel, Reuters reported.

That helped lift Intel shares but pressured Nvidia amid concerns of possible rising costs if it shifts manufacturing. Worries about business reprisals from China continue to push investors away from tech and into defensive sectors. Real estate, staples and utilities, all of which tend to do better in a lower-rate environment, were three of the four leading sectors on Monday.

Volatility crept up lately, with the SIBO volatility index rising above 22 on Monday and showing signs of more hedging activity as investors grew increasingly bearish. As of late Monday, the CME FedWatch tool put rate pause odds at 91% for the March Federal Open Market Committee meeting, but chances of a rate cut by the June meeting topped 80%.

The S&P 500 index fell 104.78 points Monday, or 1.76%, to 5,849.72, the weakest close since January 14th.

The Dow Jones Industrial Average plunged 649.67 points or 1.48% to 43,191.24. And the Nasdaq Composite had the worst day, falling 497.09 points or 2.64% to 18,350.19, the lowest close since early November just before the election. This has been the Schwab Market Update Podcast.

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