What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

The most interesting development last week had, in my opinion, nothing to do with the financial markets themselves (not even Friday’s jobs report). It was the rise of geopolitical risk. That showed up in full force on Thursday when the rumors started making the rounds that Iran was planning on attacking Israel in the wake of the Gaza conflict. We immediately saw a sentiment reversal where stocks plummeted and Treasuries took off. It was a classic risk-off trade, something we’ve seen little of in recent years with government bond prices being heavily influenced by the Fed. Volatility rose, but not nearly to the level that would indicate any kind of panic behavior. Still, this reaction shouldn’t be ignored. If Iran follows through on its threats, we could see a sharp reaction again where stocks fall and Treasuries rally. I think there’s a less than 50% chance of something actually happening, but it seemed to cause a real crack in investor sentiment when the rumor dropped.

It’s impossible to talk about the markets without mentioning what’s happening with gold. Less than two months ago, gold was trading around the $2000 level. Today, it’s at $2350. I think there are a lot of factors at play here - what’s happening in Japan, geopolitical concerns or just an old fashioned flight to safety. Gold doesn’t rally this hard, this quickly without a reason and I think this is a result of instabilities in the system. We know that Japan & China are both taking measures to support their currencies (and may step them up at any moment). The Fed’s and the BoJ’s overly dovish stances raise concerns that they may be preemptively positioning themselves for growing risks, whether that’s currency, real estate or inflationary reasons. With geopolitical risk added to the equation, my sense is that investors are turning a bit jittery and could be prone to an overreaction with just the right (or wrong) catalyst.

I think it’s noteworthy that in terms of fixed income flows, the three biggest inflow categories were all in Treasuries and the biggest inflow of the week belonged to Treasury bills. Even though overall performance didn’t necessarily reflect it, there was a big move into safety. Given how the markets behaved last week and where investor money was going, I think there’s a chance that the markets remain cautious again next week. Any geopolitical event would be a wild card where volatility would undoubtedly shoot higher.

Key Economic Reports This Week

There will be no shortage of information and data for investors to digest this week! The most consequential will be Wednesday’s March inflation report and I fear that once again the street may underplay its significance. Even a 0.3% month-over-month increase, which is what’s currently expected, represents an annualized inflation rate of 3.5% to 4%. That’s not making progress towards the Fed’s 2% target and probably a big reason why they seem to be OK letting it run hot for the time being. They simply haven’t been able to bring it back down and don’t want to spook the markets by the idea of raising rates again. I’m sure we’ll hear the term “disinflationary” again this week, but this looks to me like sticky and persistent inflation with no immediate path for a return to 2%.

Speaking of central banks, the ECB delivers its latest rate decision and, while no action is expected this time around, the markets will be listening closely for hints that cuts might start in June. That’s currently the market’s expectation and any hints or indication that this is the plan will likely be cheered by investors. The Swiss National Bank recently cut and it’s reasonable to think that the ECB will soon follow.

Michigan consumer sentiment is another one that market watchers will keep an eye on, but I’m more interested in the Fed’s meeting minutes on Wednesday. Powell took a modestly surprising dovish tone following last month’s meeting and it’ll be interesting to hear if there was any dissension in that view or if rate cuts are still on the table (it’s a shame that this happened before last week’s labor market report, which legitimately could have changed the calculus).

Dividend Landscape

Dividend stocks are more or less hanging tough at this point, but not really making much progress at leading the market. The backdrop of a strong cyclical rally is still a net positive for this group, but defensive sectors got roundly rejected last week, especially after Friday’s strong jobs report. As long as consumer staples, healthcare and other conservative equities are underperforming, dividend stocks will struggle to make much headway.

We did see sort of a classic risk-off move last week where high yield equities lagged dividend growth names, but that’s been more the exception than the rule lately. Last week’s jobs report seem to support bullish investor sentiment and this week’s inflation report probably won’t yield many surprises, so I’m thinking that high yield again has a shot at outperforming its counterparts this week.

Market Outlook

It’s impossible to predict for things like geopolitical events, so there’s no point in even trying, but almost any elevation of tensions there will almost certainly be market-negative.

In terms of pure market action, this could be an interesting week. Investors seem satisfied with the state of the economy, but the rumors of political unrest and the likelihood that the Fed will push its first rate cut further out into the future will likely be viewed negatively. If we see this week’s inflation data come in above expectations, I think we need to acknowledge that 1) rate cuts will not be in our immediate future and 2) the re-acceleration of inflation could be growing into a real problem.

This feels like a week for caution. Investors are looking pretty resilient and focused on the economic growth narrative, but there are a lot of wild cards that could come into play.

Looking good for: utilities, Treasuries, bitcoin

Looking worse for: small-caps, junk bonds, tech