What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

While the markets saw relatively little volatility over the past two holiday-shortened weeks, there was a bit of a surprise in what led within U.S. equities. Over the past two weeks, the gainers have been energy, utilities, healthcare, financials and real estate - a mix of cyclical and defensive sectors with the traditional growth areas of market nowhere to be found. Another thing we’re seeing is a breakdown in consumer stocks, both staples and discretionary.

I don’t want to draw too many conclusions from a pair of low trading volume weeks, but I don’t think we should ignore that growth and retail-sensitive areas of the market are starting to lag. That’s consistent with pricing in less Fed monetary policy support and higher inflation risk in 2025. GDP growth and retail sales figures are still healthy heading into the new year, but the prospect of significant tariffs and sticky inflation both in the U.S. and worldwide may finally be getting investors’ attention. Treasury yields on the long end of the curve have continued to rise and gold has been able to hang on to its 20%+ gain in 2024, also signs that these risks are beginning to get priced into the market.

One of the most stubborn indicators, high yield credit spreads, may also finally be starting to budge. An increase from 260 basis points in November to 294 basis points at the beginning of last week isn’t a sea change by any means, but it’s also the sharpest rise since the August reverse yen carry trade unwind. Moving back into the 325-350 would, I believe, represent more of a normalization of credit risks based on what we’ve seen over the past few years. If spreads start moving above 350 basis points and staying there, then I think we’re looking at real stresses in the bond market beginning to develop.

I think we have to watch for whether the defensive lean over the past couple of weeks carries over into a more normal trading week this week. If we see something, such as tech, taking the lead again this week, we may be able to diminish its importance given the low trading activity. If sectors, such as utilities and healthcare (especially healthcare), are outperformers again this week, we may need to prepare for a genuine change in investor sentiment to start the year.

Key Economic Reports This Week

After two quiet weeks, we’ll get a pretty full economic calendar this week. Of most importance will be the non-farm payroll report for December. While job growth has certainly moderated in recent months, even a gain in the 150,000-200,000 range, which is what’s expected for last month, will demonstrate continued resilience in the labor market, a sign that recession risk is still low in the near-term. I think it might take a couple of sub-100,000 readings consecutively to start to raise concerns that the jobs market is really starting to slow. Until we get to that point, I don’t think there’s much reason for concern at the moment.

The services PMI number on Tuesday has been showing signs of slowing. Since services continue to drive the global economy, any movement towards the all-important 50 level (which is the separator between expansion and contraction) could be a sign of concern. Like the jobs report number, I don’t think we’re at any major risk here for the time being and I don’t really suspect that the services sector is going to see a major slowdown anytime soon.

Elsewhere, inflation readings in Europe will continue to show moderation and should give central banks the green light to get a little more aggressive with monetary policy should they choose to. The more intriguing numbers to watch may be those out of China next weekend. These could be important data points for the Chinese government to use in assessing the size of a potential stimulus package.

Dividend Landscape

Dividend stocks have seen better performance over the past couple weeks, which is consistent with the outperformance of some defensive and cyclical areas of the market. The next quarter or so could really depend on whether the shift away from growth equities over the holiday period was the real deal or just an aberration. If it continues this week, I wouldn’t be surprised to see the trend carry forward into the latter part of Q1. The risks of higher inflation and higher interest rates are very real whether the market wants to price them in in the near-term or not. I think that dividend stocks are setting up fairly well for outperformance in 2025, even if it doesn’t happen right away.

The one area of concern might be staples. They tend to be a larger part of the dividend stock universe and they have not participated along side all of their defensive sector peers recently. That could be a bit of a headwind for this group if the consumer ends up weakening in more of a major way later this year.

Market Outlook

I’m skeptical that we’ll see a return to growth and retail stocks this week, although it’s certainly possible. Investors often reset their expectations at the turn of the year and they be acknowledging that there are some concerning risks building. Again, I think we need a little time to see how the markets perform over the next couple of weeks to get a better read on investor sentiment.

In the meantime, I don’t think the non-farm payroll report will deliver any major surprises and investors have tended to react positively to confirmation that the economy is still in good shape. I think that probably creates a better environment for risk assets, in general, but maybe not one that ignites a stronger rally.

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

Looking worse for: materials, cannabis, dividend stocks