Target Results, Fed Minutes Follow Tech's Hard Day

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 Wednesday, August 20th. A day before the Federal Reserve's annual Jackson Hole Symposium starts, investors get a look behind the scenes at the last Fed meeting with this afternoon's Minutes. The meeting featured two policymakers dissenting from the decision to keep rates unchanged, raising expectations for a rate cut next month. But the words of Fed Chairman Jerome Powell, who speaks Friday, could help set the tone for stocks and treasuries. In the meantime, investors are taking some of their profits from technology and putting them elsewhere, even fixed income, judging by the upward move in treasuries Tuesday after recent pressure.

1:01The dollar, which had been slipping all month, found buyers as well, but tech pressure pulled down equities. Today's market password is rotation, quipped Kevin Gordon, Schwab's senior investment strategist, speaking Tuesday. With Powell ahead, along with earnings from Walmart, the biggest U.S. retailer, early tomorrow, caution pervades. The S &P 500 index entered the week trading at a historically high multiple, despite the strong earnings season that's coming to an end, which may also be limiting buying interest in the sectors like tech that rallied most since the April lows. Powell is widely expected to at least hint at a September cut, but the question is whether he'll do so in a hawkish or dovish manner.

1:46Recent inflation and jobs data send conflicting messages, putting the Fed in a tough place. The central bank gets key numbers late next week on personal consumption expenditures or PCE prices for July, which might reflect the large gains in some items seen in last week's producer price index or PPI. Unfortunately, headline inflation is no longer benefiting from the decline in goods prices, as was the case from 2023 into 2024, said Lizanne Saunders, Chief Investment Strategist at Schwab. That is happening as core services prices are bouncing again. The CME FedWatch tool puts odds of a September rate cut at 85%.

2:28That's roughly unchanged over the past 24 hours.

2:35Data Tuesday featured mixed July housing starts and building permits. Starts rose 5.2 % month over month to a seasonally adjusted annual rate of 1.428 million units, but permits fell 2.8 % to 1.354 million. The briefing.com consensus was 1.311 million and 1.39 million respectively. It was the fourth straight monthly drop for permits. the longest stretch since October of 2008. This underscores the persistent weakness in the more cyclical parts of the economy, Gordon said. Building permits are one of the 10 components in the leading economic index, and they fell to a new cycle low in July, which means housing will continue to put downward pressure on the economy.

3:24Importantly, though, the economy has been able to grow while housing has shown no growth in the past several years. Home Depot kicked off retail earnings yesterday, missing analysts' earnings and revenue expectations as it indicated consumers remain cautious about large home improvement projects. In an interview yesterday with CNBC, a Home Depot executive said the company still sees the impact of a deferral mindset from homeowners that began about two years ago. Shares still rose, with investors encouraged by the company sticking to prior guidance. Target and Lowe's report today, and Walmart arrives early Thursday.

4:06Focus is likely to be on tariffs and consumer health, but retail is a vast arena populated by everything from big home improvement stores to grocery chains to furniture dealers. Retail is always a story of winners and losers, said Alex Coffey, senior trading strategist at Schwab. This happens with products and brands. Lowe's follows Home Depot's disappointing results, but the two stores serve somewhat different clientele, as Home Depot caters more toward professional renovators and Lowe's gets more business from do-it-yourselfers. With people apparently less willing to spend big on home projects, as Home Depot noted, it could be interesting to see if Lowe's benefited from smaller projects some homeowners are doing.

4:52Target has struggled, missing earnings expectations last time out. Many shoppers seem to be gravitating toward discount stores. Tuesday saw the fledgling tech-led sell-off really start to pick up steam intraday, with several heavy hitters, including Palantir, Oracle, Advanced Micro Devices, Broadcom, and NVIDIA down 3 % or more. Palantir fell 9 % for its worst day since late June, though it's still up 109 % year-to-date. One fundamental source of pressure on tech, besides worries about what Powell might say, was President Trump's announcement last week that he'll soon announce tariffs on semiconductor imports.

5:34He said he'll shield firms with U.S. production. Near-term price momentum in the S &P 500, even with Tuesday's weakness, continues to support the bullish trend. Bulls will look to the 20-day S &P 500 index moving average of 6 ,380 as a potential support level. It's not surprising to see some consolidation heading towards Friday's remarks from Powell. On the plus side, market breadth held up relatively well Tuesday, with 60 % of S &P 500 stocks advancing as of late in the session. It's weakness in the mega caps that took down the market, given their influence. For tech investors, a Tuesday served as a reminder that nothing goes straight up forever.

6:20After climbing about 40 % from its April low by early this month, the NASDAQ 100 cratered. The reversal in tech from its long rally isn't far enough along to call it a trend, but may reflect investors shifting into other parts of the market looking for places that haven't climbed so much. Defensive sectors, health care, and real estate are two of the three best-performing ones over the last five sessions and did well Tuesday, but cyclical areas like consumer discretionary and materials have also done nicely, suggesting the tech dip may not be a cause for general alarm. If retail earnings are strong this week and next, it may reinforce ideas of consumer resilience and continue lifting sectors beyond attack.

7:07The mega cap weakness yesterday doesn't overshadow what's been an impressive earnings season for six of the magnificent seven that already reported. Their earnings per share grew 26 % collectively year over year, and profit margins across the market have held up even with tariffs. This implies firms are finding ways to sustain margins, perhaps by splitting costs among suppliers and end users. As the broader market fell yesterday, volatility grew. Overall, though, there's an extreme lack of downside hedging activity, implying that institutional investors might not be getting too bearish just yet.

7:46That's reinforced by the fact that 7 of 11 S &P 500 sectors finished flat to higher yesterday, even as the index itself fell 0.59%. The S &P 500 Equal Weight Index, which weighs every member stock the same, rose 0.45 % Tuesday, meaning investors should look under the surface for the full story. The Dow Jones Industrial Average inched up 10.45 points Tuesday, or 0.02%, to 44 ,922.27. The S &P 500 index lost 37.78 points, or 0.59%, to 6 ,411.37. And the NASDAQ composite shed 314.82 points, or 1.46%, to 21 ,314.95. 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.

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9:09For important disclosures, see the show notes and schwab.com slash market update podcast.