Bears in Control as War Rages, Volatility Flares

(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/learn).

Here is Schwab's early look at the markets for Wednesday, March 4.

Though stocks pared sharp losses Tuesday to end lower but not dramatically so, bears remain largely in control and Wall Street enters mid-week on cautious footing watching every twist and turn of the Iran conflict.

Iran's escalating attacks on U.S. embassies and other U.S.-linked locations in the region heightened concerns, as did the expansion of conflict into other areas of the region, including Lebanon.

American and Israeli officials, working in cooperation, indicated the campaign could last "weeks" and may continue to intensify. Major indexes fell more than 2% early Tuesday before a rebound late in the session that cut well over half of their earlier losses, while crude oil stepped back from highs but was still up 3% as stocks closed yesterday.

"While the hope for everyone is that the conflict is short-lived, financial markets are mainly pricing in the tail risk of significantly higher oil prices and the potential ramifications on the economy, inflation, monetary policy and by extension, corporate profits," said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research, or SCFR.

Questions on Wall Street include how long the conflict persists, how long shipping through the Strait of Hormuz remains under threat, and how high oil prices go and for how long.

By late Tuesday, investors appeared to have a better understanding in at least some areas. Notably, President Trump vowed to keep oil tanker traffic flowing in the Persian Gulf, The Wall Street Journal reported, saying the U.S. Navy would provide protection if necessary. He added the U.S. would provide "political risk insurance and guarantees" for those tankers. This appeared to slightly cool the boiling oil market, which dropped noticeably from the day's peaks.

Trump also said Iran's military is largely "knocked out." However, drone attacks on Amazon's data centers in the Gulf region Tuesday could lead to extended outages, the company said. In another sign of the economic impact, thousands of flights remained grounded as of late Tuesday.

Back home, investors await earnings from chip behemoth Broadcom this afternoon and ADP February jobs data this morning. The ADP reading, which tracks private sector jobs growth and is a narrower measure than the government's official nonfarm payrolls release due Friday, is expected to be 42,000. That would be well above 22,000 in January but still low on a historic basis.

Later this morning, stay tuned for February ISM Non-Manufacturing PMI. The Briefing.com consensus is 53.9%, not much of a change from 53.8% in January. The main thing to watch here might be prices after ISM's manufacturing report out earlier this week revealed a dramatic increase in that category. No single month is a trend, however.

The U.S. dollar index played a defensive role Tuesday, drawing investors who were searching for perceived safety. At its peak yesterday, the dollar index climbed above 99 for the first time since late January.
Chip giant Broadcom reports this afternoon, an important milestone for that volatile part of the market, while Costco is due tomorrow after the close. Last time out, Broadcom topped consensus with its results and forecast strength ahead. The company said it expected fiscal first quarter AI chip sales to double year-over-year to $8.2 billion, CNBC reported at the time and also guided for fiscal first quarter revenue to rise around 28% to $19.1 billion.

When Broadcom reports, attention could turn toward its partnership with Anthropic, which commits Anthropic to buying billions of dollars in custom chips from Broadcom. Anthropic recently made several announcements about the capabilities of its Claude AI,, causing weakness in software shares on competition fears.

Earnings late Tuesday from cybersecurity firm CrowdStrike turned focus back toward struggling software. Cybersecurity stocks have fallen with the rest of the segment, but the companies themselves and sector bulls argue that the growth of AI raises needs for cybersecurity services.

Blackstone also made headlines after a late Monday filing showed its flagship private credit fund, BCRED, saw an unprecedented surge in redemptions. Investors withdrew roughly 8% of the fund last quarter, forcing Blackstone to raise its withdrawal cap and—combined with their employees—contribute $400 million in capital to meet redemption requests. The move follows similar pressure seen at Blue Owl Capital earlier this year.

The alternative asset manager sold $1.4 billion in assets from three of its private credit funds last month in order to return capital to investors when one of its funds met its redemption limits. Investor anxiety surrounding private credit and loans tied to ailing software companies has intensified following major asset managers' recent moves to allow fund withdrawals. Blackstone stock sank as much as 8% before paring some of its losses on Tuesday after the news of the private credit fund redemptions broke.

Friday's nonfarm payrolls report elbows its way into the spotlight to end the week and is under intense scrutiny after the economy added less than 200,000 jobs all last year. January's report showed improvement with 130,000 jobs added, but a repeat looks unlikely. Consensus for February is 60,000, and unemployment is expected to remain at 4.3%.

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 before gaining sharply Monday on inflation worries--stayed relatively calm Tuesday, rising one basis point to 4.06%. That's near the middle of its recent range.

Oil's rally temporarily sank hopes for any rate cuts before later this year. As of late Tuesday, the CME FedWatch Tool sees less than 3% odds of a Fed rate cut this month, and futures trading now anticipates the pause in rates likely lasting until September, penciling in just 40% chances of any rate cut by the Fed's June meeting. Hopes for a cut by July grew slightly Tuesday and stood near 45%. Investors now see more likelihood of one or two cuts this year, pulling back on chances of three or more.  

Several Fed speakers commented Tuesday, though the Fed soon enters its "quiet period" ahead of the March 17-18 rate-setting meeting.

Technically, chart watchers went into this week with their eyes on the 6,750 to 6,775 area for the S&P 500 Index. That range of support held for several months before yielding Tuesday, though one session isn't enough to do immense technical damage.

"When we have an exogenous event like this, the technicals kind of take a back seat, but today’s drop in stocks looks like it will take the indices below some key levels," Peterson said. Those include 6,800 for SPX, around 24,500 for the Nasdaq 100, and the 50-day simple moving average for the Russell 2000 of around 2,618.

The S&P 500 managed to keep its head slightly above 6,800 by the close yesterday after falling below it earlier. The comeback might be technically supportive, but another test seems quite possible consideri ng so much volatility. The Cboe Volatility Index, or VIX, traded above 23 late Tuesday. That's down from highs above 27 earlier in the day but still near recent three-month peaks.

On Tuesday, major indexes declined across the board and mostly finished down around 1%. At one point, 485 S&P stocks were lower, the largest percentage in the red at one time since last May. Small caps were among the day's worst performers, hurt by worries of delayed rate cuts.

Every S&P 500 sector finished down Tuesday, a departure from Monday's action when some of the sectors most harshly punished by the recent AI substation dive in software managed to finish higher or just slightly in the red. Even energy stocks couldn't manage gains in Tuesday's dismal trading. Financials came closest to a green close.

Despite the last two days of choppy trading, the S&P 500 is down less than 1% from Friday's close, a time before the war began. The same is true for the tech-heavy Nasdaq 100 and the small-cap Russell 2000.

In individual trading Tuesday, energy stocks fell about 1.4%, overall, hurt by slight drops for major producers like Exxon Mobil and Chevron. However, shares of refiners including Marathon Petroleum and Valero climbed.

Target added 7% after quarterly results topped expectations for earnings and met the market's thinking on revenue. Guidance slightly exceeded consensus, as well, but comparable sales last quarter—including internet sales and sales at stores open a year or more--dropped 2.5%, a bit more than the 2.4% Wall Street had expected.

Best Buy popped 7% despite revenue growth slightly missing the market's forecast. Earnings per share topped expectations, and same-store sales for the quarter (stores open a year or more) dropped 0.8%. Best Buy's CEO said the industry saw "slightly softer demand" during the holiday quarter. The rally in shares might reflect improved net income, Barron's reported.

Tech shares fell more than 1% Tuesday amid generally risk-off trading sentiment. Apple dropped 0.5% and Nvidia lost just over 1%, though Apple could be in focus today with a series of events planned that might include product introductions. Software shares were up in late-session trading, Tuesday, however, a sign that dip buying may remain a factor.

Consumer-oriented stocks descended for the second straight day Tuesday. Worries about rising gas costs and a longer wait for Fed rate cuts could both be behind this. Neither would help consumers much. Some of the major consumer names falling 2% or more Tuesday included Nike, Macy's, Tesla, Gap, Norwegian Cruise Line, Ford, Toyota, and Whirlpool.

Chip stocks ran into the mud on Tuesday, with some companies faring far worse than others. CoreWeave, Micron, Intel, and Western Digital were among the worst hit, while Taiwan Semiconductor Manufacturing and Advanced Micro Devices both fell close to 4%. The PHLX Semiconductor Index fell more than 4%. Worries that a long, widespread war could hurt economic growth played into the chip sector weakness.

Commodities producers, including miners, lost some shine on Tuesday, also on economic growth concerns. Albermarle, one of the world's largest lithium producers, fell 7%. Freeport McMoran and Newmont also declined.

Some fast food and big box stores bucked the lower consumer trend, especially places known for bargains like Walmart and Dollar General. The strength from Target and Best Buy probably helped this part of the retail sector.

Airlines shares had a better day than on Monday. United Airlines and Southwest suffered slight losses and Delta Air Lines gained.

The Dow Jones Industrial Average® ($DJI) lost 403.51 points Tuesday (-0.83%) to 48,501.27; the S&P 500 Index (SPX) dropped 64.99 points (-0.94%) to 6,816.63, and the Nasdaq Composite® ($COMP) gave back 232.17 points (-1.02%) to 22,516.69.