Stocks, Dollar Sag as Trump Fires Fed Gov. Cook

Here is the morning Schwab Market Update for Monday, August 25. Consumer confidence is on tap later, but investor confidence in Federal Reserve independence is front and center now. Stocks slid along with the dollar and Treasuries after President Trump announced that he'd fired Fed Governor Lisa Cook, but Cook said he lacks such authority. Cook said she'd stay on and hasn't been charged with any wrongdoing, though Trump cited mortgage fraud. "So far, the market is taking it in stride since it doesn't appear legal," said Kathy Jones, chief fixed income strategist at Schwab. "But the risk is that it sends the dollar lower and bond yields higher as investors demand more risk premium for investing in the U.S. It could prove inflationary."

Nvidia's (NVDA) earnings late tomorrow could be a market mover considering that much of the rally since April was predicated on the AI trade and Magnificent Seven stocks. That said, the upward move has broadened in recent weeks. The S&P 500 Equal Weight Index (SPXEW)—which weighs all the index's listings the same rather than by capitalization—broke out last week to its highest level since last December, another sign that technology isn't alone in the rally. "Cyclicals' and small caps' recent leadership suggests hopes for an economic rebound" as a rate cut or possibly rate cuts occur, said Liz Ann Sonders, chief investment strategist at Schwab. Cyclicals are sectors that tend to track broad economic trends.

Friday's enthusiasm following Fed Chairman Jerome Powell's hint of a September rate cut quickly crumbled Monday. Selling accelerated into the close, clipping all three major indexes and putting the market on its backfoot, technically. Lack of positive catalysts didn't help, and neither did rising Treasury yields ahead of today's $69 billion 2-year Treasury note auction. Auction results take on new importance following the Trump-Cook news.  

Three things to watch

Powell speech judged dovish, but was it? The market jumped Friday on Powell's words, but viewed out of context, the speech looked more neutral and maybe even a bit hawkish. Key words to remember include Powell's warning that it will take time for tariff-related price increases to make their way through supply chains and distribution networks, and his reminder of how the Fed's failure to adequately address inflation problems early enough in 2021 and 2022 led to "hardship" for the economy. The Fed historically has been unwilling to embark on a major rate cut regime if policy makers fear they'll have to return quickly and raise rates. After the post-pandemic inflation, they may be even more on guard. "The effects of tariffs on consumer prices are now clearly visible," Powell said. "We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts." Futures trading projects the Fed's target range a year from now at roughly 100 basis points below current levels, according to the CME FedWatch Tool. The likelihood of that depends on many factors, including tariff price increases being a one-time speed bump and perhaps labor conditions deteriorating further. Powell's term is almost over, but he does hold the reins until May.

Buy the dip persists: Earlier this year, investors poured into the market pretty much every time it went down, especially after April's nearly 20% tariff-based plunge. They kept that up most of the summer until a brief break earlier this month but were back with a vengeance Friday. There's a lot more speculative fervor than in a while, judging from the weekly flows into exchange-traded funds (ETFs), and it appears retail traders are stepping in at every opportunity they get. They're also pivoting toward higher beta stocks, or those that tend to be more volatile than the overall market and indicate higher risk tolerance. In the past, this sort of heavier risk taking among retail investors sometimes signaled the market approaching a top of some sort, but every time the market makes a new high and then recedes, it seems to bounce back. For now. Any retreat in risk appetite might be picked up by breadth metrics, perhaps before any sharp drop in major indexes from recent all-time highs. Breadth has steadily climbed this month, with more than 67% of S&P 500 stocks trading above their respective 50-day moving averages as of midday Monday. This can indicate a rising tide lifting most boats, so to speak. Any quick decline could raise eyebrows.

Different directions for Magnificent Seven, transports: After cyclical sectors led the way Friday, yesterday saw Magnificent Seven stocks resume their place as leading gainers, with tech and communication services taking the checkered flag. Nvidia climbed ahead of earnings and Alphabet (GOOGL) set a new all-time high. Tesla (TSLA) has been rising again, too, helped by the recent announcement of a price increase for a version of its Cybertruck. It's also begun taking orders in China for its new Model Y L. Meanwhile, the Dow Jones Transportation Average ($DJT)—sometimes seen as a barometer of the broader economy—fell nearly 1.8% yesterday and remains well off its highs from earlier this year. Railroads, trucking firms, airlines, and delivery companies performed poorly Monday after many of them rose Friday on hopes for lower interest rates. For airlines, the Labor Day holiday this coming Monday represents one of the busier travel weekends of the year but also the end of the traditional summer "driving season," which may mean pressure on energy prices. On a related note, July durable goods orders fell 2.8%, less than the 3.5% decline analysts had expected. Today's report looked relatively solid with the transportation component excluded, rising 1.1% from June. This could possibly indicate business investment picking up in areas like machinery and computers.

On the move
Advanced Micro Devices (AMD) climbed 2.5% early today after being upgraded to Buy from Hold by Truist, which notes that "hyperscale" customers are starting to embrace AMD's technology in a bigger way versus competitor Nvidia.

Eli Lilly (LLY) shares advanced 2.2% in pre-market trading after its weight-loss drug met its target in a diabetes trial.

EchoStar (SATS) rocketed 67% ahead of the open as AT&T (T) said it would acquire spectrum licenses from the company, calling it an investment in critical U.S. communications infrastructure. The acquisition is worth $23 billion, AT&T said.

CSX (CSX) fell 1.7% early today after Berkshire Hathaway (BRK.B) leader Warren Buffett told CNBC he's not interested in a railroad merger between CSX and Berkshire's rail unit BNSF.

Interactive Brokers Group (IBKR) jumped 3.4% this morning after news that its shares would join the S&P 500 index, replacing Walgreens Boots Alliance (WBA), which has been acquired by a private equity firm.

Circle Internet Group (CRCL) fell more than 7% yesterday, while bitcoin futures (/BTC) dropped nearly 5% and other crypto-related stocks like Coinbase Global (COIN) and Strategy (MSTR) joined Circle high on the list of the day's worst-performing stocks. Bank of America reported last Wednesday that in the week ending that day, all asset classes other than crypto saw inflows. That might have changed when bitcoin rallied Friday, but Monday saw more weakness and bitcoin futures fell another 1% this morning.

Chances of a rate cut next month stood at 86% this morning, with 14% odds of no Fed rate move, the CME FedWatch Tool said.

More insights from Schwab
If dollar dims, spotlight could turn to international stocks: This year's trend of international indexes outperforming those in the U.S. could accelerate if the dollar continues to weaken. Get Schwab's thoughts on currency fluctuations and what it could mean for U.S. and international markets as well as company earnings in a new report from my colleague Michelle Gibley, director of international research at the Schwab Center for Financial Research.

What to watch when Nvidia reports: Read about what metrics could be key to market reaction when Nvidia reports tomorrow in Schwab's preview.

The week ahead 
Check out the Investors' Calendar for a summary of the top economic events and earnings reports on tap this week.

August 27: Expected earnings from Nvidia (NVDA), Kohl's (KSS), CrowdStrike (CRWD), Snowflake (SNOW), HP (HPQ), Five Below (FIVE), and Urban Outfitters (URBN).
August 28: Second quarter GDP second estimate and expected earnings from Dell (DELL), Marvell Technology (MRVL), Autodesk (ADSK), Ulta Beauty (ULTA), Gap (GAP), and Petco (WOOF).
August 29: July PCE prices, July core PCE prices, July personal spending, July personal income, University of Michigan final August Consumer Sentiment, and expected earnings from Alibaba (BABA).
September 1: U.S. markets closed for Labor Day holiday.
September 2: August ISM Manufacturing PMI®, July construction spending, and expected earnings from Nio (NIO) and Signet Jewelers (SIG).