What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

OK, well that was fun!

We appear to no longer be in a market rotation within equities. We’re now in a full-blown flight to safety. Last week’s winners - Treasuries, gold, utilities, consumer staples and low vol - all gained more than 1%. Last week’s losers - tech, small-caps, Japan, banks, growth and high beta - all lost more than 5%. This was a massive shift in market sentiment and the VIX nearly touching 30 last week indicates that there’s some degree of panic setting in.

Now, the markets need to determine how much damage the Fed has done by choosing to delay rate cuts again. The July jobs report was a serious misread and now more significant 50 basis point cuts will have to be on the table in September. But here’s the real pickle the Fed finds itself in. The yen is already soaring and that’s directly causing a lot of the damage we’re seeing currently. By cutting rates sharply here, interest rate differentials between the U.S. and Japan, which raised rates last week, get more narrow. That will add more fuel to the yen fire and threaten to accelerate the carry trade unwind. But if the Fed continues to slow walk it, it risks keeping conditions too tight for too long and sending the economy hurtling towards recession. There are plenty of reasons to believe that things could get worse from here.

I don’t think we can eliminate the possibility that central banks coordinate here to make sure liquidity keeps flowing. If that gets established, maybe as early as this week, I think equities could reverse and rip higher again, but the markets probably need to correct further before we get to that point. If there’s one thing that central banks have taught us, it’s that they’re more than willing to throw money at any problem the global economy has. This time may not prove to be any different.

It’s not often you see utilities delivering the biggest gains not just of the major S&P sectors but of ANY ETF group, but combining that with 6% gains in long-term Treasuries suggests a big risk-off move here.

Key Economic Reports This Week

This will be a very light week, especially in comparison to last week’s packed schedule. Monday’s ISM services number will probably show that this area of the economy is hanging on, but not necessarily demonstrating strength. We’ve gotten some unexpectedly lower-than-forecast numbers recently from the jobs market and inflation. I wouldn’t be surprised to see this number head in the same direction.

The RBA is the latest central bank to make an interest rate decision, but it’s expected to keep rates on hold at least until 2025. It’s still dealing with an inflation rate nearing 4% and there’s likely a little more work to be done bringing the rate closer to 2% before the central bank can feel comfortable moving rates lower.

Dividend Landscape

Dividend stocks are finally looking like a market leader, but there’s still a dichotomy within the group. The more conservative dividend growth strategy has been delivering better results than the comparatively riskier high yield group, but outperformance has been pretty consistent across the board.

While dividend stocks tend to perform better when they’re getting contributions from both cyclicals and defensives, it’s the latter group that’s giving dividend stocks the biggest boost. Cyclicals often contribute more to the high yield category. With cyclicals being average to below average performers at the moment, it’s not surprising to see high yield struggling a bit. Dividend growth tends to draw more from utilities, consumer staples and healthcare.

In other words, if you expect a more decisive risk-off trade to continue, dividend growth is probably the play. If things reverse, whether it’s due to liquidity or just a sentiment change, high yield probably pulls ahead again.

Market Outlook

I think there’s a lot of fear in the market. Monday will give us a good tell whether investors were able to digest that fear and settle down over the weekend or if they’re just spending their Sunday preparing more sell orders.

I think there’s a good chance we’ll at least see the volatility continue regardless of whether the markets move higher or lower this week. I suspect that the defensive tone from last week carries forward to this week considering how much a risk-off pivot Friday was. I feel that the only way we see a sharp reversal is if there’s some type of intervention to halt the bleeding. Otherwise, I think the direction is still tilting negative.

Looking better for: Treasuries, healthcare, quality

Looking worse for: credit spreads, higher beta, dollar, energy