After Ugly Reversal, Market Looks to Delta Earnings
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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 Wednesday, April 9th. Tuesday's turnaround from early rally to late sell-off reflected lack of progress in President Trump's trade war as heavy U.S. tariffs take effect today.

Hopes flared Tuesday morning on some positive headlines, but midday brought no fresh news and it appears China isn't ready to come to the table. The U.S. 104% tariffs on imports from China begin today, putting that nearly $600 billion trade relationship effectively on ice.

On the other side of the world, Trump rejected Europe's first offer to resolve the situation, though the administration says dozens of countries are talking with U.S. officials. It's unclear how long these negotiations might take, but it's very tough on businesses of all types that won't know the rules or will learn rules for each country as they trickle in. This could keep the market on edge for quite a while.

Delta Airlines unofficially kicks off earnings season this morning. The airline industry had a tough first quarter even before last week's tariff news undercut their shares dramatically. Many have already sliced guidance, but it wouldn't be surprising to hear more bad news not just from airlines, but from railroads and trucking firms set to report soon.

Constellation Brands, an alcoholic beverage company, is also on tap today and could have an interesting perspective considering imports of bourbon and beer are on the front lines of President Trump's trade battle. Big bank earnings begin Friday and could provide insight on how the broader economy is reacting to the new trade policy, as well as executives' thinking. JPMorgan Chase CEO Jamie Dimon issued a gloomy shareholders' letter Monday on tariffs.

Though companies aren't likely to be very eager to provide guidance given all the uncertainty, it might be interesting to see if any announce new stock buybacks now that their shares are down so much so fast. Another less positive earnings season development might be cuts to previous growth estimates based on tariffs or possible slices to dividends as companies try to preserve margins amid rising costs.

Banks specifically may be adding to their loan loss provisions as credit fears rise. The credit spread widened last week, suggesting it could be tougher for companies and consumers to borrow. Banks might face questions about loans they have on their books and whether they have any concerns about defaults from customers in the event of a recession. If loan loss provisions rise, that would likely hurt future bank industry profit growth.

Other things to watch this week are Federal Reserve Minutes this afternoon and the March Consumer Price Index, or CPI, Thursday. University of Michigan Preliminary Consumer Sentiment Data Friday could also be closely scrutinized for inflation expectations. Four CPIs scheduled tomorrow at 8.30 a.m. ET. Analysts expect mild 0.2% monthly gains in both the headline and core readings, with core excluding volatile food and energy prices.

Fed minutes date back to mid-March and might provide clarity on thoughts behind updated economic and rate projections issued then. The SIBO volatility index, or VIX, popped as high as 60 early Monday, slipped below 40 by early Tuesday, then stormed back late Tuesday. The tremors from last week's sell-off may continue for quite some time.

Odds of a rate cut at the Federal Reserve's May meeting hit nearly 50% on the CME FedWatch tool as of late Tuesday, up from 25% as recently as Tuesday morning. Several Fed speakers are scheduled this week after Fed Chairman Jerome Powell signaled little enthusiasm for any quick policy changes when he spoke last Friday. Meanwhile, Treasury auctions returned Tuesday to little demand for $58 billion in three-year notes, which helped push yields to more gains.

Most Treasury yields traded close to where they were pre-tariff announcement on Tuesday, with the 10-year Treasury yield essentially flat from the April 1st close and back above 4.2%. A 10-year Treasury note auction is on schedule today.

The reversal from last week's decline likely stems from optimism around potential deals being made with other countries regarding trade agreements. But we expect a lot of volatility going forward, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research. The tariffs, as announced, would likely slow down economic growth and boost inflation, not a good outcome for investors.

Making deals with all the countries with high tariffs slapped on their imports will likely take a lot of time, and any updates, positive or negative, can lead to wide swings in yields. High-yield bond spreads have widened back to long-term averages after staying narrow for many months, suggesting investors are worried about taking on too much risk with such an uncertain outlook.

The spreads could rise even more if tariffs remain in place, considering the damage high tariffs might do to economic growth, Martin added. From a sector view, energy, consumer discretionary and materials stocks finished deep in the red Tuesday, but every S&P sector was down after a day that began with 4% gains for the Nasdaq composite.

The early jump makes clear that investors are ready to pile back into stocks if there's good news on trade. And it's interesting to see that financials and tech led the rally before it failed. Those are two sectors that typically rise when investors get positive about the economy.

The S&P 500, up more than 3% at times early Tuesday, belly-flopped in the last hour to briefly below 4,915, the level that signals a bear market of 20% from recent highs. It ended down just 1.6% for the day, forging one of the steepest daily reversals recorded in Wall Street history to rival those seen during the 2008 financial crisis.

Markets at extremely oversold levels in overnight futures trading on Monday, lending to a technical bounce that started from those extremes yesterday into today, and then a rollover which is essentially bear market behavior, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Since we haven't yet had any real positive developments on the tariff negotiations, markets are in the process of pricing in an outcome lower that equates to no change in tariff rates from the ones Trump announced last week.

The Dow Jones Industrial Average fell 320.01 points Tuesday or 0.84% to 37,645.59. The S&P 500 Index dropped 79.48 points or 1.57% to 4,982.77. And the Nasdaq Composite slipped 335.35 points or 2.15% to 15,267.91.

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