Retail Sales, Fed Ahead as Investors Mull Economy
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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 Monday, March 17th. February U.S. retail sales greet investors returning from the weekend, providing the latest look at consumer activity amid worries of an economic retreat.

The report, due at 8.30 a.m. ET, could help shape sentiment in a week light on key economic data, but heavy on earnings and central bank activity. Retail sales fell 0.9% month-over-month in January, possibly reflecting people staying home during the coldest U.S. January since 1988. A February rebound, if it happens, might soothe concerns.

That said, recent warnings from airlines about falling first quarter growth and cautious outlooks from big retailers like Walmart raised questions about how quickly retail sales could recover. Today's report is expected to show a 0.7% monthly rise, according to Trading Economics.

The data come after U.S. stocks forged a moderate rally Friday to end another mostly disappointing week, featuring uncertainty around government policy and revenue growth cuts by airlines, although inflation and jobs data looked encouraging. At its lows, the S&P 500 dropped 10 percent from recent highs, making the pullback a formal correction.

Much of the damage comes from the biggest components, with five of the magnificent seven entering Friday in bear market territory down 20% or more from their peaks. Although the potential for volatility remains high in this uncertain environment, perhaps the recent 10% pullback from highs in the S&P 500 is enough to attract some bid support this week, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

He saw Friday's bounce as largely technical in nature. I'm encouraged on the technical setup heading into the week, as several technical indicators have been signaling an oversold state, but this was also the case last week. I'm a little concerned about Monday's retail sales report, but I'm also curious to see if the stock market reacts negatively if the report comes in weak, given the recent correction in stocks.

The Federal Reserve's Rate Setting Committee meets tomorrow and delivers its decision Wednesday afternoon with a rate pause built into the futures market. Inflation remains well above the Fed's 2% target, and Fed speakers have recently said they're in no hurry to lower rates. They cite uncertain U.S. economic policy and the need to see how it filters through.

Given the relatively benign inflation data and further evidence of a slowing economy, I feel the odds are that Fed Chairman Jerome Powell conveys more of a dovish rather than hawkish tone to the markets, Schwab's Peterson said. The Fed's meeting includes updated projections for personal consumption expenditures or PCE prices and a dot plot of the projected rate path both eagerly awaited on Wall Street.

They'll be the first to possibly reflect how new economic policy is affecting the Fed's thinking about the course of rates and U.S. growth. Speaking of growth, the Atlanta Fed's GDP Now meter is due for an update today after falling to negative 2.4 percent last time it came out. The GDP Now isn't a prediction, however, and most analysts expect light first-quarter gross domestic product or GDP growth.

Chances for a May rate cut have retreated over the last week and were around 30% by late Friday, according to the CME FedWatch tool. But chances for at least a 25 basis point cut by June remain above 75%. And futures trading builds in around a 50% chance of three or more rate cuts this year.

Corporate earnings start the week quietly but gain traction as several keystone results loom. These include FedEx, Micron, and Nike. The latest facts at earnings update on Friday pegged first quarter earnings per share growth at 7.1%, down from the estimate of 11.6% on December 31st, with all 11 sectors seen reporting lower first quarter earnings growth today than they were back in late December.

So far, 65 S&P 500 companies have issued negative earnings per share guidance and 39 have issued positive guidance. Also on the corporate front, investors will watch NVIDIA's GPU Technology Conference, which starts today and features a keynote speech from CEO Jensen Huang tomorrow, according to Forbes. His words could be market-moving.

Checking valuations, the S&P 500's forward price-to-earnings, or P-E, ratio has contracted by 2.1 points over the last 30 days, the largest drop since October of 2022. It now stands just above 20, still on the high side historically, but the lowest since early last year. Another metric that investors might want to watch is credit spreads, which rose sharply last week before reversing slightly on Friday.

They're still relatively low, but if the rising trend continues, that would become more worrisome. Also worrisome was the University of Michigan's preliminary March consumer sentiment data released Friday, showing a drop in headline sentiment to 57.9. That's down from 79.4 a year ago and well below the briefing.com consensus of 65.6.

One-year inflation expectations jumped to 4.9% from 4.3%, the worst since November of 2022. Weaker sentiment was seen across all age, income, and political affiliation groups, with policy uncertainty and inflation both among key concerns.

In another unpleasant note, the sentiment survey showed five-year inflation expectations rising to 3.9% from 3.5%, the largest month-over-month increase since 1993. In trading Friday, every sector rose, led by Infotech and Energy. Defensive health care and consumer staples brought up the rear.

Though the S&P 500 index gained more than 2%, it still finished the week lower and below its 200-day moving average, a key technical level. However, it did bounce after hitting the 10% pullback level.

The S&P 500 index gained 117.42 points Friday, or 2.13%, to 5,638.94, down 2.27% for the week. The Dow Jones Industrial Average added 674.62 points, or 1.66%, to 41,488.19, down 3.07% for the week.

And the Nasdaq Composite climbed 451.08 points, or 2.61%, to 17,754.09, down 2.43% for the week. This has been the Schwab Market Update Podcast.

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