What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

As expected, the markets experienced relatively little volatility this week and both stocks and bonds were able to add on to this year’s gains. The most notable event was Trump’s decision to target China, Canada and Mexico rather aggressively with tariffs following his inauguration. The implementation of tariffs has been expected for a while, but the speed and degree to which he wants them implemented signals that trade tensions are likely to be escalated for the foreseeable future.

This will be a theme throughout 2025, but we should wait and see how this ultimately plays out. Governments often talk a lot of bluster when it comes to threats, but they also realize it’s the consumer that’s going to suffer. The easy out for avoiding a trade war would simply be for Trump to claim that the border has been closed (which he has already done), take a victory lap and say that he helped Americans avoid the high cost of tariffs. Even if these tariffs were to take effect on day one, it’s unclear if it would even have a significant impact on the U.S. economy. During the COVID pandemic, a lot of countries pivoted away from China, including the United States, as a supplier of cheap goods. Now, countries, such as Vietnam, Malaysia, South Korea and Mexico have gained much more importance in the global supply chain. Tariffs at any level are negative in isolation since they just raise the cost of goods for everybody, but a worst case scenario is unlikely to play out.

A couple of things that I’m going to watching closely in the coming weeks - long-term Treasury yields and the yen. The case is building for a December rate hike by the Bank of Japan and the yen is beginning to strengthen in response. As I posted on Twitter/X last week, the 10-year yield and the dollar/yen rate have been moving in lock step with each other for months. If the BoJ hikes in December, the yen is likely to strengthen considerably, which would in turn likely send long-term yields considerably lower. The BoJ may ultimately decide to hold off on raising rates until Q1 of next year, but it’s very likely coming sooner rather than later. They’re getting more and more data that would support another move in rates and I think the bond market and the forex markets are starting to price this in. The stock market, however, isn’t and I think that presents a significant downside risk for U.S. stocks over the next few months.

Key Economic Reports This Week

Non-farm payrolls are back on the schedule this Friday and it could be one of the more important ones in a while. Last month, just 12,000 jobs were added in the United States, but labor strikes and weather events could have been the cause of such a disappointing number. The belief is that if those temporary events were truly to blame for the October reading, there should be a snapback in this week’s November reading. If there’s another big miss, that would suggest that last month’s reading demonstrates real labor market weakness and it’s carried forward for a second month. A slowing jobs market would be one of the factors that could really trigger a reversal in stock prices. Although it is slowing, the labor market so far has remained resilient. I don’t expect another big miss, but it can’t be ruled out.

We’ll also get another round of PMI numbers in the U.S. although I don’t think we’ll hear anything surprising. Namely, the services sector is strong, but the manufacturing space is weak. It’s a global theme right now, but the U.S. services sector is one of the strongest in the world currently. The more important number to watch might be the Chinese manufacturing PMI number on Sunday. China’s manufacturing sector has actually shown signs of picking up in recent months, although it would still be considered far from robust. It’ll be interesting to hear if any potential uptick is related to companies trying to front-load their orders ahead of any potential Trump tariffs. We know that’s happening already and China may need to build up as much momentum as they can now before the environment turns more challenging in 2025.

Dividend Landscape

Dividend stocks continue to hold up pretty well relative to the S&P 500 since the election. The strong outperformance from financials and energy stocks are making relative outperformers out of high yield strategies (although the recent ceasefire announcement in the Middle East dinged energy stocks pretty good last week).

I still think things are setting up pretty nicely for dividend stocks through the end of this year. Most people are expecting a relatively calm month, but I think there’s a world where volatility picks up and investors pivot to more defensive equities. For me, Japan would be the trigger for this and I’m already concerned given how the yen is rallying already. This may not ultimately happen in December and there’s a chance that we get the low volatility December that everyone thinks we will. I do think, however, that the risk of a pullback is higher than the markets are currently giving it credit for and that increases the chances that investors are caught off guard.

Market Outlook

The Friday jobs report will be the big event. I think we’ve learned never to bet against the non-farm payroll numbers since it’s usually shown resilience even when the market expects disappointment. It’s getting to the point where this report needs to come in right down the middle. A big miss and it'll renew fears that the U.S. economy is at risk. A big beat and it will raise inflationary fears & interest rates while liking pricing out more Fed rate cuts in 2025.

At this point, I think the base case should be modest to low volatility with the potential for some bumps this week. Geopolitical risk seems to have eased temporarily and I think the markets want to move higher in December. Friday’s jobs report is the wild card, but I think it’s unlikely we get a number that significantly moves the markets.

Looking better for: dividend stocks, value, cannabis, emerging markets

Looking worse for: blockchain, dollar, Europe