Tariff Concerns Persist Ahead of JOLTS, Alphabet
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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, February 4th. After a major comeback Monday amid easing tariff tensions, investors await job openings data and Alphabet earnings today, with volatility still elevated and trade issues still on the front burner.

Yesterday's rebound after the Trump administration said it would delay 25% tariffs against Mexican imports by a month seemed to cheer investors, hinting that the tariffs could be a negotiating tool. However, as of late Monday, the threat of 25% tariffs on Canadian goods and 10% on Chinese goods remain in place, scheduled to begin today.

Tariffs could raise prices for U.S. consumers and sap demand for U.S. products overseas as retaliatory tariffs take effect. U.S. companies that would suffer the most negative impact include automakers, agricultural firms, transport companies, food and beverage firms, and chip makers. Canada has vowed to retaliate.

Tariff threats and retaliation raise market uncertainty, which is generally negative for stocks. Investors embraced safe havens like the dollar and treasuries yesterday, though no investment is truly quote-unquote safe. At one point early Monday, 85% of S&P stocks were down, including many in sectors not generally thought of as particularly sensitive to tariffs.

Breadth improved slightly during the day, especially after the S&P 500 index and Nasdaq Composite cut their losses in half on news of a one-month delay of tariffs against Mexico. Still, the early sell-off was broad-based and raised questions about investor sentiment.

Though the full fallout from tariffs is far from decided, any further instances of broad selling on bad news might suggest investors starting to de-risk and de-leverage, perhaps becoming more likely to embrace U.S. Treasuries, cash, gold, and the dollar rather than stocks. The dollar and Treasury yields could help tell the tale in coming days.

The quick delay of tariffs against Mexico may have called investors momentarily, but it also points up how quickly the map can change in this trade war. Volatility flared Monday, reflecting how facts on the ground have become less predictable. Uncertainty usually means a climbing SIBO volatility index or VIX, and it jumped nearly 20% early Monday to a two-week high above 20% before relaxing slightly.

That said, judging by the setup of the SIBO VIX futures complex, investors aren't building in massive amounts of drama. VIX for months ranging from February through June remain below 19 and doesn't reach 20 through October. Even so, investors seem less enthusiastic about the path of stocks based on the relative strength or RSI for the S&P 500 dropping under 50 Monday from recent peaks around 65.

Anything over 70 represents overbought conditions, and under 30 is considered oversold, so RSI remains at mid-range, implying it could tip either way. Continued greenback strength might add pain for U.S. multinational firms as a strong dollar raises the cost of U.S. goods overseas and can hurt earnings growth. The counter effect is that a higher dollar lowers the cost of imported goods for U.S. consumers.

Data and earnings roll on despite the trade drama, with investors focused on today's job openings and labor turnover survey or JOLTS for December. Analysts expect about 8 million job openings, down from November's surprisingly firm 8.1 million, according to Trading Economics. Alphabet is scheduled to report this afternoon, followed by Amazon on Thursday.

Software firm Palantir Technologies reported late Monday and beat analyst estimates. It also impressed with its outlook and shares gained in pre-market trading. Cloud growth will be closely watched at Alphabet after a better-than-expected 35% annual rise the last time it reported.

Microsoft's hazy cloud outlook from last week raised concerns about the business climate, and there's also heightened focus on industry AI spending after last week's DeepSeek news. Analysts have said Alphabet might get a tailwind if AI becomes cheaper.

January's ISM Manufacturing PMI came in Monday at 50.9, well above consensus of 49.8 and the first reading above the 50 level, which denotes expansion after 26 months below it. S&P Global U.S. Manufacturing PMI also topped 50.

New orders and employment were strong in the last month's manufacturing data, but one question is whether this sudden flurry can last. It's possible some of the uptick reflected last-minute activity as companies prepared for possible tariffs.

Chances of a March rate hike slipped just slightly to 13.5% after the tariff scare and manufacturing data. Tariffs put the Fed in a tough place because they can reduce growth and create joblessness, but also tend to be inflationary, according to many economists. The Fed might be more prone to wait things out and see where the dust settles until it's more clear what tariff policy will be and how long it will last.

Boston Fed President Susan Collins told CNBC Monday that unless tariffs cause higher, persistent inflation, the Fed would try to look through any rise in prices driven by tariffs, Bloomberg reported. This implies that the Fed sees inflation from tariffs as separate from the type of demand-driven inflation it fought against in 2022 and 2023.

Though the S&P 500 did fall below 6,000 yesterday, six of 11 sectors managed gains led by defensive areas like consumer staples, utilities, and healthcare. Infotech took another blow and is now down more than 5% over the last month. Consumer discretionary and industrials also struggled due to tariff concerns.

The S&P 500 index retreated 45.96 points Monday or 0.76% to 5,994.57. The Dow Jones Industrial Average fell 122.75 points or 0.28% to 44,421.91. And the Nasdaq Composite lost 235.49 points or 1.2% to 19,391.96.

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