Still Tracking Middle East, Market Awaits Earnings

0:05Welcome 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.

0:17I'm Keith Lansford, and here is Schwab's early look at the markets for Tuesday, March 3rd. First, an important note. For more on Schwab's perspective about the market cases for the war in Iran, make sure to read the daily Schwab Market Update article on schwab.com slash learn. After Monday's surprising resilience in the face of Middle East war, Wall Street enters the news session with one eye on crude oil and battle headlines, and the other on a full schedule of earnings. Volatility initially flared Monday before calming, as investors gingerly dipped their toes back into stocks and cryptocurrencies.

0:54Though turbulence could resume depending on how long the conflict lasts and its effects on oil shipping, investors should keep in mind that geopolitical conflict often has a short-lived impact on markets. While the initial market response seemed orderly and lacked signs of panic, second-order effects on the economy will matter, too. Higher energy prices can tighten financial conditions, which could pressure consumer spending, not to mention margin issues in energy-intensive sectors. There could also be a quick upward adjustment in inflation expectations and a resulting adjustment to expectations around the Federal Reserve's rate path.

1:34One factor that could limit oil's ceiling is China's recent build of massive crude oil stocks. China is the main buyer of Iranian oil, but if it has ample supply and can forego near-term purchases, that might be a lucky break for the market. Though the U.S. is less dependent on Middle East oil than it once was, thanks to record domestic production, oil trades globally, and U.S. customers will pay more if the rest of the world does. Stocks saw pressure late in the day after Iran threatened to attack ships traveling through the Strait of Hormuz, an important geographic choke point. Though Iran can't close the Strait, it can make it difficult for ships to get through.

2:15About 20 % of the world's oil travels through that passage near Iran's territory. The U.S. dollar index rose nearly 0.8 % Monday on what appeared to be flight-to-safety trading, though no investment is truly safe. The CIO Volatility Index initially charged higher Monday, climbing double digits to levels last seen since late November. However, it stayed below 25, sometimes seen as a key height and one that investors might want to watch. The VIX then spent much of the day rolling back those early gains, trading up less than 3 % by late in the session, but still above 20. It appears a number of hedges were in place entering the weekend, as many market participants appeared to anticipate military action.

3:02The markets weren't caught off guard initially, but appear prepared for relatively short-lived conflict. If the war spreads or shows signs of persisting longer term, that could mean a resetting of expectations and possibly more volatility.

3:20Turning to earnings, AutoZone, Best Buy and Target report this morning. Chip giant Broadcom reports tomorrow afternoon. Costco and Kroger come later this week. Retail earnings have been a mixed bag so far in the fourth quarter, with holiday sales generally holding up, but some signs of caution expressed about the current quarter and beyond. Rising gas prices in the wake of the war might be another headwind for retailers, and it wasn't surprising to see many consumer-oriented stocks struggle on Monday. Target shares fell Monday, possibly as market participants recalled Walmart's cautious guidance a few weeks ago.

3:59A new CEO took over at Target recently, possibly driving the stock's recent rally. This afternoon brings earnings from CrowdStrike, turning focus back to the battered software sector. The cybersecurity stocks have been struggling with the rest of software, but the companies themselves and sector bulls agree that the growth of AI raises needs for this segment's services. If it weren't for Iran, jobs data would likely be the focus this week. Days ahead are packed with jobs news, building up to Friday's February non-farm payrolls report. The data is under intense scrutiny after the economy added less than 200 ,000 jobs all last year before a revival to January's 130 ,000 growth.

4:45A repeat looks unlikely, with consensus for February around 60 ,000. Even that sort of outcome, which a few years ago would have seemed very tepid, might be welcome after Block's layoff announcement sent shivers through the market late last week. The payments firm said it was laying off 40 % of its workforce using AI to become more efficient. Today is light on numbers. In Data Monday, the February ISM Manufacturing PMI stayed positive above the 50 level that divides between contraction and expansion. The headline reading of 52.4 % fell slightly from 52.6 % in January, but slightly topped the briefing.com consensus of 52.1%.

5:32The ISM employment category, an important metric considering all the jobs data straight ahead, stayed in contraction at 48.8%, up from 48.1 % in January. Meanwhile, the ISM's prices category surged to 70.5 % from 59.0 % in January. The huge jump suggests this could be a one-time blip, but next month's report might tell the tale. This doesn't necessarily make the Fed's job any easier, after last week's January Producer Price Index, or PPI, came in well above expectations and crude prices climbed sharply after the war began. The 10-year Treasury note yield, which dipped below 3.95 % in trading late Sunday on ideas the war might cause flight-to-safety action in the markets, climbed about 10 basis points during the course of the day Monday.

6:24The ISM price data was one factor, along with crude oil values. There's less than a 3 % chance of a Fed rate cut at this month's meeting, according to the CME FedWatch tool. The chance of at least one rate cut by mid-year is around 45%, down from 55 % a week ago, possibly driven by inflation concerns as crude rallies. The market still works in two in three chances of at least two cuts this year. On Monday, major indexes started the day 1 % lower, clawed back to slight gains, and then spent much of the afternoon vacillating between light gains and losses before finishing mixed. Small caps had the best session, as they tend to be less affected by international trade.

7:11The Dow Jones Industrial Average was the only major index to fall, and the broader market ended flat. Technically, the 50-day moving average near 6 ,900 for the S &P 500 index again appeared to attract sellers, while recent lows near 6 ,800 found buyers. The index continues to trade in a tight range, but any dip below the 6 ,750 to 6 ,775 area might trigger additional selling. Only a handful of S &P sectors stayed above water Monday, while 7 of 11 fell. However, some of the most battered sectors of recent weeks, including financials and infotech, were in the top five, a sign that investors might be interested in buying dips.

7:59Consumer staples and discretionary had the worst days, pinned down by inflation worries related to the oil market. U.S. crude oil surged more than 6 % Monday to around$71 per barrel as Middle East violence flared, raising concerns about the impact of the Strait of Hormuz. Crude is now at its highest price since late last June, the last time Iran came under attack. In individual trading Monday, energy stocks led gains as the energy sector rose more than 1.75%. And ConocoPhillips rose more than 3%, while Chevron and ExxonMobil climbed 1%, boosted by the oil rally. Tech shares did well Monday, led by nearly 3 % gains for NVIDIA.

8:46This might reflect some participants electing to buy the dip in battered sectors like tech and financials. Airline shares got grounded by the Middle East war, which could raise input costs and interrupt travel flow in the region. United Airlines plunged nearly 3 percent, and Delta Airlines and Southwest fell around 2 percent. Defense industry firms, including Lockheed Martin and Northrop Rumman, added 3 percent and nearly 5 percent, respectively, as war led to ideas these companies could see increased demand for their weapons. There are concerns that U.S. forces could need replenishments if the conflict persists much beyond a few weeks.

9:29a military analyst told CNN today. Consumer-oriented stocks generally lost ground Monday, including 2 % or worse declines for Disney, Wendy's, Ford, Lululemon, Estee Lauder, home builder and home improvement companies and department stores. One source of pressure appeared to be ideas that higher gas costs could cause consumers to pull back on spending. Another worry is that the Fed may have less room to lower rates if the war keeps oil prices and inflation elevated. The Nasdaq Bank Index popped almost 2%, reversing early losses for the sector. Banks initially came under pressure from spillover selling after last week's private equity-fueled dive and on ideas that a war-torn Middle East might hurt risk tolerance and clamp down on investments.

10:21Those scenarios could still happen, but investors appeared less wary as of late Monday. The sudden rally and longer-term treasury yields also appeared to support banks, as a steeper yield curve tends to improve their profitability. Norwegian Cruise Line dropped more than 11 % after quarterly results came in short of consensus on revenue, and guidance also appeared to disappoint. Spillover from Norwegian, as well as worries about travel demand in wartime, weighed on other cruise line stocks as well. Natural gas futures surged more than 3 % Monday. Qatar accounts for around 20 % of global liquid natural gas, or LNG, exports, and its infrastructure sits on the vulnerable side of the Strait of Hormuz, a global choke point for the oil trade.

11:11Any serious disruption could reverberate across Europe and Asia. European stocks fell 1 % to 2 % in midday trading on Monday. Cutter stopped LNG production at the world's top plant, CNBC reported. And Bitcoin managed to buck predictions and put up a rally on Monday. A risk-off environment tends to hurt crypto and did overnight Sunday. But as the equities market got nibbles during Monday's session, investors dove back into cryptocurrencies and related stocks as well. Bitcoin rose 5 % and is knocking on the door of$70 ,000, a level at last closed above on February 9th. The Dow Jones Industrial Average dropped 73.14 points Monday, or 0.15%, to 48 ,904.78.

12:05The S &P 500 Index added 2.74 points, or 0.04%, to 6 ,881.62. And the NASDAQ Composite ticked up 80.65 points or 0.36 % to 22 ,748.86. This has been the Schwab Market Update podcast. To stay informed, visit www.schwab.com slash market update or follow us for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. Join us for another update tomorrow.

12:52For important disclosures, see the show notes and schwab.com slash market update podcast.