What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

It’s amazing what a week of no real economic surprises and low volatility will do for the financial markets. In the United States, inflation came in right on target, which helped calm fears that the Fed may be falling behind the curve in keeping up with current conditions. U.S. retail sales came in above expectations, which helped calm fears that recession might be closer than some people anticipated. And in Japan, Q2 GDP growth beat estimates, which helped at least temporarily lower the temperature in the region where many fear that the growth/inflation balance is getting out of hand. The bulls already had the short-term momentum and this was the kind of week they needed to continue recovering from the recent correction.

The major equity averages aren’t back to new all-time highs yet, but they have recovered losses incurred from the start of the great rotation that started in mid-July. Overall, this looks like a market in a state of bullish recovery, but I’m skeptical about how long this can continue. On the plus side, growth still looks positive and that could push concerns about an imminent recession further out into the future. If the Fed starts hiking in September and completes 75-100 basis points in cuts by the end of December, there’s a better chance that the impact of these cuts could coincide with the point in time that the economy slows down enough that it really needs them.

On the flip side, I’m concerned about the state of the credit markets. Consumer delinquency rates are at 12-year highs. We’re seeing heavily increased usage of deferred interest and “buy now, pay later” plans. We’re seeing signs of cracking in the deeply low-grade commercial credit markets. Credit spreads still aren’t at the level where we’d expect to see them in more sustained panicky markets, but there are indications that the pendulum could get close to swinging in the other direction.

In the ETF markets, it’s more of the same. Investors continue to push heavily into two areas of the market - long-term Treasuries and technology. The latter probably isn’t surprising, but the former might. Despite the impact of 2022’s Fed rate hiking cycle, investors see potential in falling interest rates throughout the next six months and beyond. We typically see rates on the long end of the curve fall sharply in risk-off environments, but the past four months has been a slow & steady march lower. Combine this with new all-time highs in gold and I think we see investors maintaining a protective stance under the surface.

Key Economic Reports This Week

Very little on the economic agenda this week in terms of numbers, but we will get some fairly important central bank-speak. The most closely watched event will be the release of the minutes from the Fed’s August meeting. We know the Fed held rates steady, but this should be important for a couple of reasons. First, we’ll should see how much dissent there was among voters looking to cut last month. Second, we’ll get a better sense of the forward path of policy. Right now, the market sees it as a toss-up between a quarter-point and half-point cut next month. This could give a better sense as to which way the central bank is leaning.

Beyond that, there’s not much that has the potential of jolting the markets. The minutes from the Australian central bank’s last meeting aren’t likely to yield any surprises. They’ve held rates steady for several meetings citing a still elevated inflation rate and are likely to keep doing so for a while longer. The Japanese interest rate could draw some interest as it might force the BoJ to raise rates again should the number come in too high.

Dividend Landscape

The reversal of the July reversal continues to be a net negative for dividend stocks. Last week, quality-focused strategies got a nice boost. That’s thanks to the heavier tech tilt that exists within them. Gains remain steady if not strong, but it’s likely we’ll continue to see this lag as long as volatility remains subdued and tech is in control. It sounds like a broken record at this point, but the ability of investors to shake off the fear of the recent VIX spike so quickly is both impressive and concerning.

Market Outlook

With investor sentiment looking positive and no major stumbling points for the markets to trip on this week, I’m seeing another relatively favorable environment for stocks to take advantage of. The biggest risk to this trend could be the Fed meeting minutes this week, but that’s unlikely to be a market mover. A surprise geopolitical event, such as Iran attacking Israel, would certainly be a negative market event, but this was been lingering for a little while now.

I’m continuing to watch credit spreads. In a market where stocks are gaining, that likely means junk bonds will as well, but I’d be concerned with how well long-term Treasuries and gold are holding up. I don’t believe low-grade corporate credit can continue making inroads as long as these two traditionally defensive asset classes are holding up. Then again, I’ve been surprised by how resilient junk bonds have been up to this point.

Looking better for: mega-caps, quality, junk bonds

Looking worse for: consumer staples, low volatility, dividends