Weekly Wrap

It was a rough week for the stock market. The major indices logged solid declines ranging from 2.4% to 4.1%. Growth concerns and tariff worries were the main driving forces again, along with some technical deterioration. 

There's a through-line connecting growth concerns and tariffs also. If tariffs drive up inflation, the market may respond (and has responded in recent weeks) to the notion that the higher prices will end up sapping consumer demand.

The trade war heated up after 25% tariffs for Canada and Mexico went into effect and tariffs on China increased by 10% to 20%, and the countries announced subsequent retaliatory measures.

The 25% tariff for Canada and Mexico were revised, though, such that all USMCA compliant goods from Canada (~38%) and Mexico (~50%) will be exempt from tariffs until April 2, according to CNBC. That means nearly two-thirds of imported goods from Canada and roughly half of imported goods from Mexico will face a tariff now.

Growth concerns were further stoked by some soft earnings and guidance from the likes of Target (TGT) and others. Target warned that price increases are likely, which may impact consumer demand and lead to lower growth in earnings and in the economy. Target's CEO also highlighted that the consumer has been cautious already.

This week's economic releases also played into worries about the economy. The February ISM Manufacturing PMI showed a mix of decelerating activity, rising prices, and weakening employment for the manufacturing sector.

The ADP Employment Change Report for February was weaker than expected, yet the ISM Services PMI for February was stronger than expected.

Also, the February employment report was neither hot nor cold, but at the same time it wasn't just right for a market that needed to see stronger growth.

Nonfarm payrolls were up 151,000; the unemployment rate ticked up to 4.1% from 4.0%; average hourly earnings were up 0.3%; and the average workweek stuck at 34.1 hours.

Technicals were in play this week after the S&P 500 briefly dipped below its 200-day moving average. The Russell 2000 and Nasdaq Composite dropped further below their respective 200-day moving averages and further into correction territory.

Just about everything in the equity market participated in downside moves this week. Ten of the 11 S&P 500 sectors were lower with the financial (-5.9%), consumer discretionary (-5.4%), and energy (-3.8%) sectors logging the biggest declines.

The defensive-oriented health care sector (+0.2%) was the only sector to close with a gain this week.

Treasuries closed with losses. The 10-yr yield rose nine basis points to 4.32% and the 2-yr yield settled unchanged at 4.00%.

Monday:

The stock market had a rough showing. There was an initial push higher after Friday's pleasing finish, but selling interest kicked in shortly after the open. The Nasdaq Composite fell 2.6%, closing below its 200-day moving average (18,368). The S&P 500 and Dow Jones Industrial Average settled 1.8% and 1.5% lower, respectively.

Losses were relatively muted through most of the session, but selling increased noticeably in the afternoon following President Trump's confirmation that 25% tariffs on Canada and Mexico will begin Tuesday as scheduled. He added that tariffs on China will increase to 20% from 10% tomorrow morning also.

The initial leg lower was driven in part by ongoing concerns about growth. The February ISM Manufacturing PMI was the latest report to play into these concerns, showing a mix of decelerating activity, rising prices, and weakening employment for the manufacturing sector. The Atlanta Fed reduced its Q1 GDP forecast again to -2.5% from -1.5% in response.

Reviewing Monday's economic data:

• February S&P Global US Manufacturing PMI - Final 52.7; Prior 51.6
• February ISM Manufacturing Index 50.3% (Briefing.com consensus 50.7%); Prior 50.9%
  • The key takeaway from the report is that there is a bad mix of decelerating activity, rising prices, and weakening employment for the manufacturing sector. It is the kind of mix that will stir talk of stagflation.
• January Construction Spending -0.2% (Briefing.com consensus 0.0%); Prior 0.5%
  • The key takeaway from the report is that the weakness in private residential spending was concentrated in multifamily construction.

Tuesday:

Tuesday's trade featured a negative bias. Market participants were grappling with the same themes that have been in play of late: growth concerns and tariff uncertainty.

The trade war heated up after 25% tariffs for Canada and Mexico went into effect and tariffs on China increased by 10% to 20%, and the countries announced subsequent retaliatory measures.

Growth concerns also remain top of mind following earnings and guidance from Target (TGT) and Best Buy (BBY). The companies warned that price increases are likely, which may impact consumer demand and lead to lower growth in earnings and in the economy. Target's CEO also highlighted that the consumer has been cautious already.

There was no US economic data of note on Tuesday.

Wednesday:

The stock market logged gains across the board. The S&P 500 jumped 1.1%, the Dow Jones Industrial Average registered a 1.1% gain, and the Nasdaq Composite rose 1.5%.

The session started a little slow, but buying increased in a noticeable way in the afternoon due to the following factors:

• White House Press Secretary Karoline Leavitt said President Trump will give a one month exemption for auto tariffs going through USMCA
• The Fed's Beige Book for February estimated that economic activity "rose slightly" since mid-January
• The S&P 500 remained above its 200-day moving average (5,728) at session lows
• Short-covering activity and buy-the-dip trading following recent declines

Mega caps benefitted from the afternoon uptick in buying, providing an added boost to the major indices.

Reviewing Wednesday's economic data:

• Weekly MBA Mortgage Applications Index 20.4%; Prior -1.2%
• February ADP Employment Change 77K (Briefing.com consensus 145K); Prior was revised to 186K from 183K
• February S&P Global US Services PMI - Final 51.0; Prior 49.7
• February ISM Services 53.5% (Briefing.com consensus 53.0%); Prior 52.8%
  • The key takeaway from the report is that the pace of expansion in the nation's largest sector accelerated in February, taking a little edge off the market's growth concerns; however, the acceleration in activity was also accompanied by an acceleration in prices.
• January Factory Orders 1.7% (Briefing.com consensus 1.3%); Prior was revised to -0.6% from -0.9%
  • The key takeaway from the report is that it reflected not only a rebound in orders for nondefense aircraft and parts, but a nice pickup in business spending overall, evidenced by the 0.8% jump in new orders for nondefense capital goods excluding aircraft.

Thursday:

The stock market returned to its downside trend after yesterday's brief reprieve. Like recent sessions, headlines around US trade policy engrossed the equity market.

The S&P 500 briefly dropped below its 200-day moving average (5,730), reaching 5,711 at its session low. The index managed to close just above that key technical level, while the Nasdaq Composite (-2.6%) and Russell 2000 (-1.6%) dropped further below their respective 200-day moving averages.

The market attempted to recover a bit around mid-morning after Commerce Secretary Lutnick told CNBC that all USMCA compliant goods and services will be exempt from new tariffs for one month. The upside attempt was short-lived and the market was in a steady downtrend by the time President Trump signed the executive order detailing the exemptions this afternoon.

Reviewing Thursday's economic data:

• January Trade Balance -$131.4 bln (Briefing.com consensus -$93.5 bln); Prior was revised to -$98.1 bln from -$98.4 bln
  • The key takeaway from the report is that efforts to get in front of expected tariff actions drove the huge increase in imports, which will be a drag on Q1 GDP forecasts.
• Weekly Initial Claims 221K (Briefing.com consensus 234k); Prior 242K, Weekly Continuing Claims 1.897 mln; Prior was revised to 1.855 mln from 1.862 mln
  • The key takeaway from the report is that the reduced level of initial claims -- a leading indicator -- will temper concerns for the time being about the labor market showing more pronounced signs of weakening.
• Q4 Productivity-Rev. 1.5% (Briefing.com consensus 1.2%); Prior 1.2%, Q4 Unit Labor Costs - Rev. 2.2% (Briefing.com consensus 3.0%); Prior 3.0%
  • The key takeaway from the report is that both components had the right skew for market sentiment in that productivity was higher than previously reported while unit labor costs (an inflation gauge) were lower than previously reported, aided by the improved productivity.
• January Wholesale Inventories 0.8% (Briefing.com consensus 0.7%); Prior was revised to -0.4% from -0.5%

Friday:

The stock market closed a downbeat week with gains. The S&P 500 logged a 0.6% gain, the Dow Jones Industrial Average settled 0.5% higher, and the Nasdaq Composite jumped 0.7%.

The buying interest reflected buy-the-dip action after the sharp declines this week. There was also likely some technical factors in play after the S&P 500 dropped below its 200-day moving average (5,733) again.

Strength in the semiconductor space was also a big help to the broader equity market. Broadcom (AVGO) fueled buying in the space after reporting strong results and guidance. The PHLX Semiconductor Index (SOX) logged a 3.2% gain.

Reviewing Friday's economic data:

• February Nonfarm Payrolls 151K (Briefing.com consensus 159K); Prior was revised to 125K from 143K, February Nonfarm Private Payrolls 140K (Briefing.com consensus 145K); Prior was revised to 80K from 111K, February Avg. Hourly Earnings 0.3% (Briefing.com consensus 0.3%); Prior was revised to 0.4% from 0.5%, February Unemployment Rate 4.1% (Briefing.com consensus 4.0%); Prior 4.0%, February Average Workweek 34.1 (Briefing.com consensus 34.2); Prior 34.1
  • The key takeaway from the report is that it was no better than just okay. It won't be enough to silence the growth concerns that have echoed in recent weeks through other data releases.