What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

A better than expected inflation reading on Friday went a long way to improve a sluggish start to 2025. The fact that cyclicals were the market’s best-performing sectors across the board indicates that investors still want to believe that the soft landing is intact. The last time the market reacted this way, we got a relatively sustained rally in cyclicals and small-caps. I’d argue that this report, which still showed some troubling sticky inflation trends, had an overblown bullish reaction and the broader trend of persistent inflation with no clear path towards 2% remains intact.

The report also helped reverse a nearly 10% pullback in long-term Treasuries since their December peak. While a number of recent inflationary data points and a likely lack of action from the Fed would certainly support the idea of a bond correction, a rise of 65 basis points from valley to peak over the past month and a half similarly seems a little overdone. I’m not necessarily optimistic about the future of long bonds here, but I do think there is a little value here based on where rates are. Keep in mind that the 10-year yield peaked at 5% in the period following inflation rates hitting 9%. The inflation rate today still isn’t even 3% and we’re talking about 10-year yields within a quarter-point of that high.

I do think it’s a good thing that we’re starting to see the market broaden out a bit here. It’s still early, but the fact that mid- and small-caps are outperforming, the magnificent 7 is a middling performer and cyclicals & utilities are leading the S&P 500 bodes well for longer-term market sustainability. Granted, 2025’s performance has largely been the product of one big week, but we’ve seen trends, such as defensive sector outperformance, bubbling up well before now. If we get an escalation of a global trade war and a firmer plan for tariff implementation, I wouldn’t be surprised to see defensives swing into the lead again and tech stocks see their valuations start to contract.

Key Economic Reports This Week

Even though it’s not an economic release, Monday’s inauguration day could be the most impactful. That’s not due to the inauguration itself, but due to the potential for Trump’s “day one” policies to begin getting put into place. We’re expected to see an almost immediate crackdown on immigration and deportation. We could see another threat or two on tariffs and probably several executive orders aimed at undoing a number of Biden policies, including climate change initiatives. Perhaps most importantly to the younger generation (including my daughter) is that TikTok is probably coming back Monday via executive order. It’s amazing how an app featuring 30 second dance videos being offline for just one day can have such an emotional impact.

I’ve mentioned it several times before, but the Bank of Japan rate decision could be very consequential to market performance this week. A rate hike, which is expected at this point, should strengthen the yen and raise fears of an August repeat. It seems like the hike is being better telegraphed this time, so the possibility of a sharp reaction might not be that high, but I’d expect an added dose of volatility nonetheless.

Dividend Landscape

Dividend stocks have gotten off to a relatively good start to 2025, thanks mainly to last week’s broad rally for cyclicals and utilities. This group has proven that as long as sectors, including industrials and financials, are doing comparatively well, dividend payers at large have at least a decent shot of keeping pace with the S&P 500. Obviously, it would be better if sectors, such as healthcare and consumer staples, would participate as well, but that’s been largely absent over the past two years.

Cyclical outperformance tends to translate into better performance for high yield equities relative to dividend growth strategies and that’s exactly what we’ve been seeing here. Whether this trend continues will depend a lot of how the first few months of the Trump administration will play out. Economic growth still looks healthy, but tariffs, inflation and interest rates will be headwinds for this group.

Market Outlook

There’s a lot of wild cards to digest this week. The inauguration will set the tone early on and the catalysts will continue throughout. In that sense, it’s more difficult to get a sense of what the week’s final outcome will be, but I anticipate it’ll probably come with an uptick in volatility.

Tariffs and a BoJ rate hike are somewhat priced in, but I don’t think they’re all the way priced in. That means there’s some downside potential left. I’d probably avoid some risk taking this week, but it could go a lot of ways.

Looking better for: low volatility, junk bonds, Japanese yen

Looking worse for: cyclicals, growth, China