“The quieter you become, the more you are able to hear.” ― Rumi

Good evening, 

Major stocks indexes pared back some of last week’s gains, hurt by the ever-changing tariffs policy and warning of a hit to a major chipmaker’s earnings.

The S&P 500 fell 1.5% this week, with the declines led by tech stocks. The consumer discretionary sector and information technology sector were the worst performers, down 3.2% and 3.6%, respectively. Meanwhile, the Nasdaq Composite fell 2.6%. 

Despite being a holiday-shortened trading week, there was no shortage of market-moving events. On the tariffs-front, the percentage imposed by the U.S. on China became “further absurd,” rising to as much as 245%. That renewed some investors’ worries that the path to negotiations between the world’s top two economies remains difficult to reach. 

Fundstrat Head of Research Tom Lee isn’t too worried about that number because he believes that this is not a normal market at this moment. “In this post-Liberation day environment, ‘headlines’ not fundamental developments drive market moves,” he said. 

In fact, Head of Data Science “Tireless” Ken Xuan believes that, “If we compare this to last week, the situation and the shape is much better now.” But he is worried that if the talks drag out even more and morph into a tariff war or a supply-chain disruption, “it will definitely kick into the economy, but it’s still too early to call.”

Another drag on markets came Wednesday morning when Nvidia said it would record a $5.5 billion charge on its quarterly earnings, after the U.S. asked it to require a license for exporting the company's H20 processors to China and other countries. Xuan said during the weekly huddle that he likes that Nvidia Chief Executive Jensen Huang visited Beijing on Thursday to allegedly discuss new chip designs for Chinese customers.

The losses picked up steam later that afternoon when Federal Reserve Chair Jerome Powell warned that tariffs could make it harder for the central bank to address both of its dual mandates of stable prices and maximum employment. “We’ll make what will no doubt be a very difficult judgment,” Powell said at the Economic Club of Chicago. 

The messaging was undoubtedly perceived hawkishly by investors and President Donald Trump, who said Thursday that the chair’s end of tenure “cannot come fast enough.” 

But Xuan said that Powell wasn’t necessarily negative. “It has been the same message delivered by Powell, so nothing new. The Fed is basically in the wait-and-see game, which is fair because there are no clear signs” he said. 

Lee recommends investors to add to their stock positioning. One reason why is because the VIX, considered to be Wall Street’s fear gauge, fell to about 30 after surging to 60. Historical data show that the VIX has surged above those levels only two other times. The first was during the financial crisis in 2008 and the second was during the onset of Covid-19 in 2020. Both of those instances were accompanied by stocks rallying furiously afterward. Our Chart of the Week has more details:

“The fact is—it is wise to buy stocks when the VIX is above 50, and especially when it makes a move back below 50,” Lee said. 

Sentiment and momentum, however, remain negative for now. Head of Technical Strategy Mark Newton said that, “it's not unrealistic to think we're still going to be choppy, but the bigger picture is that in the second half of the year, I expect it to be much better.”

Elsewhere

Rare earths are rarely getting any attention in this ongoing trade turmoil. But China has halted the export of the group of metals, which threatens America’s ambitions of chips manufacturing and development and also its military prowess. Most of them and many other critical minerals come from China, where the government for years has worked to control the exports. The metals are used to make chips which can power everything from AI to fighter jets and guided missiles used by the U.S. military to wind turbines.

More big banks released earnings this week. They said that while consumers are worried about the economy and inflation, their spending behavior isn’t reflecting that yet. Citigroup reported profit and revenue that came in better than expectations, so did Bank of America. Bank executives in recent days have sounded the alarm on tariffs and its potential impact on the economy. 

Harvard University is standing up to Trump. The president threatened to withdraw funding from Harvard after the university said no to allowing the federal government oversight of admissions, hiring, and the ideology of students and staff. The drama escalated after he asked the IRS to take away the university’s tax-exempt status. Then on Thursday, the president delivered another blow by sending the university a letter, saying that if it doesn’t share information about its international students, the White House will prevent the international students from attending the university. 

Power is slowly returning to Puerto Rico, which faced mass electricity outages mid-week. It's the second islandwide blackout to hit Puerto Rico in less than four months, with the previous one occurring on New Year's Eve, NPR reported. That has understandably left residents angry, asking the government to cancel contracts with Luma Energy, which oversees the transmission and distribution of power, and Genera PR, which oversees generation, the article said.

Another loss for Big Tech stocks came this week after a federal judge ruled that Alphabet’s Google created an illegal monopoly over the online ad industry. That marked the second time in eight months that a U.S. judge has labeled Google as an illegal monopolist. Analysts say that ruling could force the company to sell off parts of its business.

And finally: There is a black market for everything these days, including children’s toy Lego. The company, which makes building blocks, has become popular with thieves in recent days. The New York Times reported that last month, the Alameda County Sheriff’s Office in California recovered nearly 200 Lego sets after arresting a person in connection with a burglary at Crush Comics, a comic book store in Castro Valley, California. Sadly, this doesn’t mean all of us can sell our Legos for high prices (unless you have the LEGO San Diego Comic-Con 2013 Spider-Man, valued by as much as $16,846) because the burglars are motivated by rarity.