Stocks Up for Week but Tariffs, Auctions Take Toll

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. I'm Colette O 'Claire, and here is Schwab's early look at the markets for Friday, August 8th. Despite a rollercoaster ride of ups and downs in recent days, Friday dawns with the broader market on pace for weekly gains and only about 1 % below late July's all-time peaks. Trade policy remains in the spotlight as Tuesday's deadline for a deal with China approaches and many companies exposed to fresh tariffs saw their shares decline yesterday. Another weight on stocks late this week appeared to be poor demand for treasuries across several auctions.

0:52With yields falling from recent highs due to signs of economic weakness, bond buyers didn't seem eager to scoop up the government's new debt offerings. Weak auction demand often forces yields up, which makes borrowing more expensive. That's augmented now by the sheer volume of debt expected to hit the market due to the recent U.S. budget bill and its high deficits. Before the auctions sent yields higher, they'd fallen in part due to July's disappointing U.S. jobs data, along with recent softness in manufacturing and services components of the economy. Several Fed policymakers sounded supportive of rate cuts this week.

1:32Despite inflation pressure, tariffs and immigration policy are leading to slower job growth and consumer spending, which may prompt the Fed to cut interest rates soon, said Kathy Jones, chief fixed income strategist at Schwab. Though the market might welcome the first rate cut since last December, that move might come for the wrong reasons, addressing a slower economy. And the Fed doesn't set yields in the Treasury market, which could remain elevated if investors continue worrying about government debt. Weekly initial jobless claims released Thursday rose by 7 ,000 to 226 ,000, still relatively low, but continuing claims jumped to 1.974 million, the highest since mid-November 2021.

2:20That hefty amount suggests that for people who lose jobs, finding a replacement remains tough. Job openings fell in the latest reading, and the percentage of Americans in the labor force has fallen, both signs of struggle. Chances for a September rate cut reached 91 percent by late Thursday, according to the CME FedWatch tool, and the futures market projects high odds of two or even three cuts between now and the end of the year. Separately, but also Fed-related, President Trump nominated Stephen Moran to the Fed board late Thursday. Moran would replace Fed Governor Adriana Kugler, who announced last week she's stepping down.

3:05Caution surged on Wall Street Thursday as next week's deadline looms for the U.S. and China to agree on trade. It's possible China will see an extension, and markets seem to be betting on that. But if tariffs return to their triple-digit spring highs, it might threaten the rally. That said, China's 7 percent export increase in July suggests the country continues to enjoy demand for its products, perhaps not so much from the U.S., but from other trading partners. China appears to be making out better than expected in the new tariff regime thus far, said Michelle Ghibli, director of international research at the Schwab Center for Financial Research.

3:45Digging into the meat of the market, the rally continues to be led by Wall Street's biggest components. Magnificent Seven stocks closed at a collective record high Wednesday, led by Apple, before some members, including Microsoft and Meta Platforms, slumped Thursday. Major indexes continue to benefit from the buy-the-dip on drops. It appeared to happen again Thursday after a midday tumble, but major indexes struggle to push above recent all-time highs, as buying often seems to dry up quickly on rallies. Strong earnings and heavy AI investment continues powering the mega caps, while tariffs could drive the growth of onshoring and ultimately aid the U.S.

4:27industrial economy. On the other hand, recent jobs, manufacturing, and services data weakened, the market is in a tough time seasonally, and tariffs could hurt company margins. Next week brings key inflation data with the July Consumer Price Index, or CPI, Tuesday, and the July Producer Price Index, or PPI, Thursday. Analysts expect 0.2 percent monthly growth in headline CPI, and the same for core CPI, which excludes volatile food and energy. That compares with 0.3 percent and 0.2 percent, respectively, in June. However, annual core CPI is seen ticking up to 3 percent from 2.9 percent in June, well above the Fed's 2 percent target.

5:16In corporate news Thursday, stocks exposed to higher tariffs on imports generally performed poorly. Shares of retail and industrial firms like Lululemon, Nike, Toyota, Deere, Walmart, Best Buy, Caterpillar, GE Vernova, and Honeywell ended in the red. U.S. consumers face an overall average effective tariff rate of 18.6 percent, up 16.2 basis points from 2024 and the highest since 1933, according to the Budget Lab at Yale. Eli Lilly suffered its worst day in 25 years as data on its obesity pill trial failed to impress investors, who turned a blind eye to the company's solid earnings and guidance.

6:00The data showed less weight loss than analysts had expected and revived concerns about competition in the obesity business. Salesforce fell more than 3 percent yesterday as software stocks sagged following a plunge in shares of cybersecurity firm Fortinet, which implied in its forecast that a software product refresh cycle would be smaller than expected, according to CNBC. The weakness in Salesforce and Caterpillar sent the Dow Jones Industrial Average to sharper losses than other indexes Thursday. Sector-wise, investors generally stepped out of more risk-on areas and into defensive names. The market's leaders included utilities, staples, and real estate.

6:44All of these are among the top five performers over the last week, with staples far ahead of the pack. Traditionally, this sort of trading suggests caution, though it could also reflect the recent drop in treasury yields that might have some investors checking out dividend stocks. Financial shares have also softened over the last week amid mounting U.S. economic concerns. Checking technicals, the long-term picture looks bullish, but near-term, it's a little more suspect. Day-to-day volatility has been picking up, VIX has been seeing signs of life, and the VIX term structure is steep, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research, referring to the SIBO Volatility Index, or the VIX.

7:30October VIX futures reached 21 versus 17 yesterday for spot VIX, implying the participants expect more volatility in coming months. Higher volatility often, but not always, correlates with pressure on stocks. The odds of a 3 to 7 percent pullback in stocks is higher than average at this juncture, Peterson said. The Dow Jones Industrial Average fell 224.48 points Thursday, or 0.51%, to 43 ,968.64. The S &P 500 Index lost 5.06 points, or 0.08%, to 6 ,340.00. And the Nasdaq Composite gained 73.27 points, or 0.35%, to 21 ,242.70. This has been the Schwab Market Update podcast. To stay informed, visit schwab.com slash market update or follow for free in your favorite podcasting app.

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8:52For important disclosures, see the show notes and schwab.com slash market update podcast.