Will Defensive Tone Last? More Retail Results Next
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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, May 21st. Retail earnings roll on today with updates from Target and Lowe's following a mixed bag from Home Depot yesterday.

Home Depot made headlines by promising not to raise prices due to tariffs, something Walmart couldn't do last week when it reported. Consumer demand is high on investors' minds amid declining sentiment data, and today's earnings could provide some hints. Home Depot vowed not to raise prices, a move that came after Walmart said last week it might have to do so to protect margins as tariffs take effect.

This highlights the choices companies face whether to pass along tariffs or simply eat them and suffer a possible margin hit. One tactic could be to negotiate with product suppliers so each takes a portion of the tariff cost. Investors will likely watch lows and target to see how they're choosing to deal with tariff costs.

Other big earnings reports came late Tuesday from Palo Alto Networks and Toll Brothers. Palo Alto narrowly beat Wall Street's earnings and revenue estimates and guided for slightly better-than-expected fiscal fourth-quarter earnings, but shares fell initially in post-market trading. Later today come earnings from Snowflake and Urban Outfitters.

Budget negotiations continue on Capitol Hill this week, with House Speaker Michael Johnson aiming for the 1,116-page reconciliation bill to be passed before the weekend.

The next key day to watch is Wednesday at 1 a.m., when the House Rules Committee will make final changes and set the parameters for consideration by the full House, said Michael Townsend, Managing Director of Legislative and Regulatory Affairs at Schwab. That means investors should have an update by the time the opening bell rings today.

On the tax side, the bill makes all of the 2017 tax cuts permanent, among other things. But there's nowhere near consensus among House Republicans, and no more than three can oppose the bill if it's going to pass. I'm leaning toward the House passing the bill by the end of the week, but it could also collapse, Townsend said, which means the House would reconvene in June to try again. Once it passes, the Senate has to take it up, meaning there will likely be more changes.

Overseas, the People's Bank of China lowered rates this week and major Chinese banks cut deposit rates, part of an effort to encourage consumer spending amid a flagging economy, Bloomberg reported. Also abroad, investors await S&P Global's preliminary PMI readings due Thursday for May on a wide range of economies.

Economists are expecting modest improvement from April, but tariff whiplash could distort the data, said Michelle Gibley, director of international research at the Schwab Center for Financial Research. After a 30 percent drop in import volumes to the port of Los Angeles the first week of May, volumes since then have jumped around week to week. Freight rates from China to the U.S. West Coast recently rose as bookings increased, the Wall Street Journal reported.

Back home, Federal Reserve speakers had a busy start to the week with 17 Fed speaking engagements and other communications on the calendar. The next major event is Fed Governor Lisa Cook speaking on financial stability Friday afternoon.

As of late Tuesday, futures trading indicates a 5% chance of a rate cut in June and 29% in July, according to the CME FedWatch tool. The mid-September meeting is the first where futures indicate a better than 50% chance of a cut.

But the next Fed meeting is toward the end of June. Before that, near-term catalysts could include any positive or negative trade-related developments, NVIDIA's earnings next week, and personal consumption expenditures or PC prices late next week, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Another possible catalyst occurs smack in the middle of Memorial Day weekend this Sunday, when Fed Chairman Jerome Powell delivers baccalaureate remarks at Princeton University, his alma mater. The market is closed Monday for the holiday, but it's unlikely Powell would use this type of speech to make any policy predictions. Even so, it might be worth a quick glance on the long weekend.

Stocks lost ground Tuesday, ending respective six-day win streaks for the S&P 500 index and the Nasdaq 100 as investors gravitated toward more defensive sectors. Magnificent seven stocks fell, with the exception of Tesla, and healthcare names like Humana and UnitedHealth led counter-cyclical gains. Some of the weakness in tech, communication services, and consumer discretionary might reflect simple profit-taking after a long rally.

Also, many sectors heavily dependent on consumer spending, including homebuilders, travel companies, restaurants, and freight firms, fell sharply Tuesday. This came as recent Fed speakers generally counseled against near-term policy changes in the face of possible inflation from tariffs.

The Fed's current target range between 4.25% and 4.5% is down from this time last year, but still quite tight compared to where it was most of the last 15 years since the great financial crisis. Atlanta Fed President Rafael Bostic said yesterday price hikes may be imminent as tariff workarounds fade, Reuters reported.

Treasury yields were another possible drag on stocks yesterday. The benchmark 10-year yield rose one basis point to 4.48%, and the 30-year rose two basis points to 4.96%. This came as Congress grappled with a budget expected to raise the deficit and after Moody's ratings lowered its rating on U.S. debt late last week.

At the same time, President Trump warned Republicans not to reduce Medicaid spending even as the budget extends the 2017 tax cuts. All of this could be underpinning long-term yields, typically bearish for stocks. With yields at these relatively high levels, dividend-paying stocks also face more competition from the Treasury market. This could be another headwind.

The S&P 500 index had what's called an inside day on the charts Tuesday for the first time since May 9th, meaning it stayed between Monday's intraday high and low. This sort of trading often indicates a lack of direction as investors await catalysts. The 5,900 level, which looks like resistance last week, appeared to serve as support Monday and Tuesday and may be a level to watch on any downturn today.

Even with Tuesday's slight retreat, the S&P 500 is up more than 19% from its 15-month low close, reached April 8th below 5,000.

The Dow Jones Industrial Average fell 114.83 points Tuesday or 0.27% to 42,677.24. The S&P 500 Index dropped 23.14 points or 0.39% to 5,940.46. And the Nasdaq Composite gave back 72.75 points or 0.38% to 19,142.71.

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