Photo by Ian Taylor on Unsplash
 

Market Recap

While we were waiting for yesterday to see how markets would react to the Atlanta Fed’s Friday GDP forecast of -1.5%,their forecasters had a “hold my beer” moment yesterday morning, almost doubling down and pulling the forecast lower, to -2.8%. Playing in to this seemed to be the “New Orders” component of ISM’s PMI Manufacturing release. While ISM PMI manufacturing came in slightly under consensus (but still above 50), “New Orders” fell considerably, to 48.6 as compared to January’s 55.1 print. Given this forecast double hit and President Trump confirming 25% tariffs on Mexico and Canada would go into effect, it’s no wonder market sold off. Trump also moved forward with an additional 10% tariff on Chinese goods,

The Dow took the least heat, courtesy of its relatively low technology weight, falling 1.48% followed by the S&P 500 dropping 1.76%, and the Nasdaq Composite shedding 2.64%. Small Caps led the race to the bottom as the Russell 2000 closed 2.81% lower. Sectors did see some daylight as Real Estate (0.86%), Consumer Staples (0.53%), Healthcare(0.44%) and Utilities (0.14%) ended the day higher but the remaining groups saw results ranging from -0.84% (Financials) to -3.94% (Technology). Mag 7 names featured in the top ten detractors from performance for the SPDR S&P 500 ETF Trust (SPY) which also included Broadcom (AVGO) and Exxon Mobil Corp (XOM). Nvidia (NVDA),the second largest holding in the S&P 500 and the Nasdaq Composite, accounted for just over 30% of SPY’s 1.75% decline. With the SPY advance/decline line at 168/335, the market reacted but it wasn’t a wholesale selloff.

Looking at the Tematica Select Model Suite it should come as no surprise that Market Hedge did its job yesterday as that strategy not only captured the inverse move on equities but also benefitted from a 16% rise in the Cboe Market Volatility index (VIX). What might have been a surprise was Luxury Buying Boom breaking into positive territory as Capri Holdings (CPRI) saw shares rise as one of it’s brands (Versace… no the other one) was tipped as a potential purchase by rival Prada (PRDSF).
 

Oh My! Trump Tariffs, State of the Union, ISM Services Data

While they pointed higher earlier this morning, as of this writing, futures across the board are in the red suggesting a continued move lower in equities when the US stock market begins trading later this morning. The Budget Lab at Yale modeled the total effect of the planned 25% Canada & Mexico tariffs and the 10% China tariffs, as well as the 10% China tariffs already in effect finding it to be the equivalent of a 7 percentage point hike in the US effective tariff rate, raising it to the highest since 1943. The lab also found those tariffs will increase average price levels by 1.0-1.2%, the equivalent of an average per household consumer drag of $1,600–2,000 in 2024. If you’re thinking that’s fodder for our Cash-Strapped Consumer model, we are right there with you.

Source: The Institute for Supply Management

However, in response to Trump moving forward with tariffs, China retaliated with additional tariffs of up to 15% on some US products. Canadian Prime Minister Justin Trudeau said his country would also put a 25% levy on U.S. goods. No word as yet on how Mexico will respond, but this certainly ups the ante, and markets will be looking to see how Trump responds. That likely means folks will be on edge today, as they wait to say what tonight’s State of the Union address brings.

What we learn will no doubt shape the direction of equity markets tomorrow morning, just as we get the February ISM Services PMI report. Similar to yesterday’s February Manufacturing equivalent, should the Services data also show a drop in new order activity, a gap up in price pressures, and slower employment, odds are it will raise investor anxiety levels even more. This anxiety will be reflected in the Market Volatility Index (VIX), and will have investors waiting anxiously for Fed Chair Powell’s Friday comments. We say this because so far the Fed has been mum on the potential impact of Trump tariffs as it focuses on its dual mandate.

Back to today, there will be modest “distractions” in part because we have no fresh economic data on tap and only two Fed speakers scheduled for this afternoon. We do have earnings from Best Buy (BBY) and Target (TGT), and we will be interested in their comments about the consumer but also the expected impact of tariffs on their respective businesses.

Because they will be among the first retailers to report following Trump’s tariffs going into effect, those comments could set the tone for what will be said by Nordstrom (JWN), Ross Stores (ROST), Abercrombie & Fitch (ANF), Foot Locker (FL), Macy’s (M), and others this week. More than likely the impact of tariffs will lead to weaker than expected guidance, but between those tariffs and the consumer, how the companies get there will be far more telling.

If you need a respite from the above, we’d suggest perusing the IPO filing for AI hyperscaler Coreweave (CRWW),whose lead customer is Microsoft (MSFT), but it also serves IBM (IBM), Meta (META), Nvidia, Mistral and others. We’ve already read the document and it has a much to say for our Artificial Intelligence and Digital Infrastructure models.

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