What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

Last week, I talked in this space about the path to a reversal higher in equity prices being some type of central bank action to stop the bleeding. We didn’t really get anything in terms of specific action, but we have seen the Fed and the BoJ using their words to try to temper market risks here. The Fed has tried to reiterate a steady pace of future easing (an emergency cut seems like it’s off the table) and they’ll have plenty of opportunities to calm the markets this week with several governors making speeches. The Bank of Japan completely caved with their intention to tighten by saying they won’t raise rates if there’s high volatility in the markets. If there’s one thing that central banks do well consistently, it’s step in to defend the markets. For as much as we hear about price control and employment being their primary objectives, they usually seem more interested in preventing financial market meltdowns first and foremost.

For now, the markets have settled back down. After peaking at around 65 on Monday, the VIX is back to 20, not necessarily “low” but low enough that it should calm market fears for the time being. The S&P 500 and Nasdaq 100 each gained more than 3% during the final four days of the week, but those indices are still well off of their mid-July highs. It’s tough for me to see the major averages making a run back towards all-time highs unless we see the labor market start to pick up again and/or we see some moderation in the current disinflation trend (the July CPI number drops on Wednesday). With regard to the latter, another big below expectations reading would certainly get us closer to the Fed’s 2% target, but getting there too fast could spark fears that the pendulum is swinging too far in the other direction. Then we’re talking deflation instead of disinflation, which would be very bad for market sentiment. Right now, it’s all about the trends. If unemployment and disinflation start accelerating, I think volatility picks up and we’re looking at a retesting of recent lows.

In terms of market action, we’re starting to look again like we did a few weeks ago before volatility spiked. Cyclicals are outperforming, tech is sort of meh and defensives are looking like laggards again. Treasuries and the yen have both moderated. It almost seems like investors have just turned back the clock and said, “ok, that was scary, but now we’re back to good”. At this point, I’d hesitate to get bullish again. The negative-leaning macro factors that existed a few weeks ago still exist today and we’re far from out of the woods on those. The reverse yen carry trade, which exacerbated losses during the market correction, seems to have largely unwound itself and that should help temper market volatility moving forward. I’d be hesitant to overweight previous winners, including tech and growth, until we get a better understanding of whether or not the soft landing is at risk. Admittedly, we’ve been landing better than I would have thought, but the plane hasn’t touched down yet.

Key Economic Reports This Week

All eyes will be on the July CPI and PPI numbers, but it will be far from the only consequential data the markets will be digesting this week.

U.S. inflation was the catalyst that triggered the big large-cap to small-cap rotation last month. The much below expectation reading on headline inflation was the first negative month-over-month print since 2020 and followed a 0% number in May. That enhanced the soft landing narrative, which brought cyclicals and value stocks back into leadership, but it also raised concerns that slowing inflation was due to slowing consumer demand. Much of last month’s decrease was due to falling gasoline prices and core inflation is still stuck above 3%. That won’t be enough to deter the Fed from cutting rates in September, but another below average reading won’t assuage investors’ recession fears.

We’ll also get a new batch of core economic data - retail sales and building permits. The latter, in particular, has shown that the housing market continues to face difficulties due to high mortgage rates and an affordability gap. Mortgage rates have come down substantially over the past month and maybe that will help thaw the freeze, but we probably won’t see that impact until next month. U.S. retail sales have remained surprisingly durable throughout this cycle, as is expected to be the case again in July, but this hasn’t been a big market mover throughout most of 2024.

Elsewhere, the Q2 GDP growth number in Japan should get a lot of attention. With the BoJ swinging back and forth between a hawkish and dovish stance, this could shake the markets again should there be another big miss. Growth is expected, however, to look relatively good for the quarter.

Dividend Landscape

The markets have quickly moved past the recent bout of volatility, but it hasn’t necessarily come at the expense of dividend stocks. Tech and growth leadership is usually a sturdy sign that dividend stocks will underperform. This past week, however, we got solid leadership out of cyclicals, while tech continues to struggle to round back into form. That’s kept dividend payers at least on pace with the broader market, but there’s the potential to begin lagging again should volatility keep falling.

Financials, energy and industrials continue to show strength, which is keeping high yield in the lead within the three primary dividend strategies. The Invesco High Yield Equity Dividend Achievers ETF (PEY) has staged a nice comeback recently and has finally flipped its year-to-date performance number positive. The WisdomTree U.S. Quality Dividend Growth ETF (DGRW) has been a leader all year, but that’s mostly due to its overweight to the tech sector. Now that tech is trailing, we’re seeing this fund start to fall back into the pack a bit.

Market Outlook

I think there’s momentum to keep pulling the VIX lower after last week’s action (post-Monday, of course). That would be a positive for equities, in general, but I’m not sure that tech will get the big boost that it’s gotten used to in that situation. The large-cap to small-cap rotation almost certainly seems to be over. I don’t see defensive sectors getting much of a bid unless something happens with the inflation data this week that shakes the markets.

This could be a decent week for Treasuries. The market is already pricing in 100 basis points of cuts before the end of the year and another month of falling inflation would probably keep that trending in that direction. Credit spreads seem to be quickly returning to their pre-VIX spike range, which could be a good sign for riskier credit this week.

Looking better for: Treasuries, junk bonds, financials

Looking worse for: consumer staples, Japan, gold