What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

Even though the end result was largely as expected - modest gains for the major U.S. equity averages - there was more volatility than I expected. Friday’s action erased much of the week’s gains, but Treasury bonds are still having a tough time of it. Whenever you see a day, such as Friday, when both the S&P 500 and long-term Treasuries both decline by roughly 1%, it’s a sign of problems in the market and resembles 2022. Granted, it’s only one day during a period when large-caps have mostly been holding on to gains (although small-caps have not), but it demonstrates to me that inflation is still on investors minds and is likely to become a bigger theme in the new year.

What does that mean for the fixed income market in 2025? Probably not much good for Treasuries again. The 10-year yield is up 100 basis points since September and nearly 50 basis points just since December 6th. The Fed has dropped the Fed Funds rate by 100 basis points during the current cycle and that usually coincides with the onset of inflationary conditions and a decline in long-term rates. This time, however, we’re still not anywhere near a recession and the Fed could be contributing to the inflation problem this time around (not to mention the risk that would come with the implementation of tariffs). I still think there’s a good chance that the Fed executes zero rate cuts in 2025 and will be managing inflation, not trying to ignite growth. That could lead to a further steepening of the yield curve, but another tough year for long bonds.

There was a lot of flow activity over the past week, which isn’t surprising at this time of year. Within the ETF market, there’s a lot of year-end tax planning and window dressing taking place and that resulted in some large swings in and out of certain styles and themes. In particular, large-cap growth and large-cap value saw significant outflows, although large-cap blend funds saw inflows again as they have throughout the past several years. Even though yields have dropped, there’s still plenty of money moving into T-bill ETFs. A lot of investors still seem satisfied with grabbing risk-free 4-5% yields and sitting on the sidelines.

Key Economic Reports This Week

It’s going to be another week with little on the economic calendar. Manufacturing PMI data from both the United States and China will be the headliners, but neither is really expected to change the narrative. U.S. PMI hasn’t delivered an expansionary reading since March and December is unlikely to end that streak. China’s manufacturing sector, however, has been showing improvement over the past several months. It’s a step in the right direction, but the markets really want to see some development on the stimulus front. A modest uptick in manufacturing won’t do nearly as much as the Chinese government stepping in to boost consumer demand and resources in a major way.

Dividend Landscape

Dividend stocks trailed the broader market again last week, continuing a trend we’ve seen throughout much of the year. If inflation does indeed become a concern in 2025 or even a theme that remains in the headlines, dividend payers could be set up for a better year. When inflation dominated in 2022, dividend ETFs outperformed the S&P 500 by a wide margin. While inflation is unlikely to accelerate to the degree it did then, we could see the relative value and durability of this group play quite well in this market.

Market Outlook

Just like last week, I expect another low volatility week, although portfolio positioning prior to year-end could create a little more activity. There’s no economic data release that’s going to be a needle mover and unless there’s some sort of unforeseen geopolitical development, it’s likely going to be a quiet week again.

There have been a few occasions in years past where the start of the year has created some volatility as investors reset, so keep an eye on Thursday & Friday this week.

Looking better for: S&P 500, magnificent 7, dollar, high beta

Looking worse for: Treasuries, value, small-caps, emerging markets