Key Takeaways
- Walmart warns tariffs will raise prices, triggering inflation concerns
- Markets seek tariff clarity; volatility trends suggest cautious optimism
- Retail earnings next week may reveal shifting consumer spending habits
On Thursday, stocks closed mixed with the S&P 500 up 0.4%. The Nasdaq Composite fell 0.2%. Small cap stocks gained 0.6%, while the Dow Jones Industrial Average, which had been hurt this week by weakness in UnitedHealth Group, closed higher by 0.7%.
Perhaps the biggest news yesterday was comments out of Walmart. The retailing giant said they would have to begin raising prices as a result of tariffs. Over two-thirds of products sold at Walmart are grown, made or assembled in the U.S. One could argue their exposure to the impacts of tariffs would be somewhat muted because of that. Yet, the company still said they would have to begin raising costs to consumers. My concern with this is, once one domino falls, the others may also begin falling, and we may start hearing about more companies announcing plans to raise prices.
If we go back to last weekend for just a second, the announcement out of Switzerland where U.S. and China negotiations took place yielded some positive results. Tariffs rates were reduced substantially from what was announced back on April 2nd by President Trump. However, it’s worth pointing out that the tariffs which remain in effect, are still significantly higher than they were earlier this year. That is true not only with respect to China, but other countries such as Canda and Mexico.
In 2024, the U.S. imported just under $1 trillion worth of goods from Canada and Mexico combined. While the United States-Mexico-Canada Agreement (USMCA) exempts a number of goods from tariffs, the increase in estimated costs U.S. consumers will pay on Canadian and Mexican goods will be around $750 annually because of new tariffs. When factoring in China, The Budget Lab at Yale estimates the additional costs incurred could be in the range of $1200 to $3800.
I think one of two things is taking place within the market at the moment. The more optimistic scenario is that we are nearing a point of clarity on tariffs. Ultimately, markets just want to understand the rules and then prices can adjust accordingly. The rally this week could suggest we’re closer to clarity than we were prior to last weekend. The pessimistic interpretation would be that the market has gotten out a bit over its skis. I think we’ll get some answers to that next week with earnings.
Home Depot, Lowe’s, Target, TJ Maxx and Ralph Lauren are among the retailers scheduled to report next week. I’m very interested in what these companies have to say and what they see with respect to consumer spending. For Home Depot and Lowe’s, the traditionally strong housing season has gotten off to a weak start. I think this mainly has to do with interest rates not coming down as many hoped. Therefore, I’m curious if people are instead spending on fixing up their existing homes or pulling back on spending altogether. Target, TJ Maxx and Ralph Lauren should combine to give us a sense of where people are spending their money and if they are pulling back from higher end brands, like Ralph Lauren, and instead spending money at places such as TJ Maxx. I’m similarly interested in whether or not Target is seeing changes in customer spend and if they are losing share to lower end retailers like Walmart.
There are a couple of stocks making news in premarket. Shares of Applied Materials are lower by 5% after the company reported mixed results but offered wide guidance because of tariffs. This gets back to the issue of clarity I mentioned above. Also making news, Charter Communications is buying Cox Communications in a deal valued at $34.5 billion. What I find most interesting about this deal is it comes just after ESPN announced plans for their streaming service. We are seeing so many different streaming packages being offered, I think some consumers are beginning to feel both overwhelmed and perhaps questioning if it isn’t more economical to go back to a traditional cable provider.
For today, I’m keeping an eye on the 6,000 level in the S&P 500 and also watching the VIX. Round numbers tend to be a big deal in the world of trading. While 6,000 is still around 1.5% above where we’re at currently, I think it’s a level worth watching. Related to that is the continued contraction in market volatility. The VIX is trading around 17.30 in premarket and the closer it gets to its historical mean of 16, the more bullish for markets. As always, I would stick with your investing plan and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.
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