What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

Last week was marked by several central bank meetings, including those of the Fed, the Bank of Japan and the Bank of England. The Fed meeting delivered no rate changes, as expected, but it was surprising in that Jerome Powell reiterated his plan to cut rates three times before the end of the year.

It was notable for two reasons. First, Powell has consistently taken a hawkish tone throughout the past two years, especially as it relates to market expectations. On multiple occasions, investors tried to price in a Fed pivot only for Powell to confirm that no cuts were coming. Even in December when Powell made his initial three-cut forecast, the markets immediately priced in six cuts. Even when Powell seemed like he was in the minority, he held his ground citing the ongoing battle against inflation as his reasoning.

This time, however, was different. Inflation has begun re-accelerating, not slowing down, and the U.S. economy is still growing at a 3% annual clip. Yet Powell reiterated a dovish, not neutral, stance. I think we can conclude from this that the Fed is OK letting inflation run above target as long as the economy keeps growing and we don’t return to more of a hyperinflationary trend that requires a sudden and aggressive policy shift.

In the short-term, I think this is bullish for stocks since a high growth/high inflation regime has historically allowed stock prices to move higher. Sentiment is certainly bullish enough right now that investors are already willing to push risk asset prices higher, so the Fed might have just given the green light for this to occur. That also probably pushes bond prices lower in the meantime. It’s interesting though that long-term rates actually moved down following the Fed and BoJ meetings, indications that the markets might actually be expecting rates to move lower and/or there’s a flight to safety element coming out of this past week.

The BoJ meeting was more curious. The markets got the interest rate hike and end to yield curve control that they were expecting, but I don’t things really changed. The fact that the central bank indicated that it was going to continue buying Japanese government bonds suggests that they’re still going to control interest rates to some degree. Considering also that the BoJ gave no indication of when the next rate hike might come makes me think that its ultra-accommodative stance is probably here to stay.

The yen weakened pretty significantly instead of strengthened, which the market had expected. This suggests we could be headed for a period of heightened volatility as the market tries to figure out what’s coming next. That volatility could potentially spill over into U.S. markets, but probably not yet.

In the ETF market, investors continue plowing their money into tech stocks, although last week marked a notable outflow. Bitcoin ETFs, especially the two largest from iShares and Fidelity, are turning into money-making machines. Even though these two asset classes have underperformed in recent weeks, old habits die hard.

Key Economic Reports This Week

The most closely watched report this week will be Friday’s PCE report, which is the Fed’s preferred measure of inflation. It’s expected to tick down slightly compared to last month, but it’s possible that it actually moves higher along with recent CPI and PPI readings. If it does, I think the Fed has to acknowledge that inflation may slowly become a problem again, although they seem comfortable letting it run for now. Inflation reports in France and Italy should confirm that the disinflationary trend is still in place.

Outside of that, personal spending and personal income will give us a sense of whether or not consumers still have sustained purchasing power. Recent retail sales and corporate earnings reports indicate there are some cracks developing. There are some signs that China’s manufacturing sector may actually be stabilizing, so this coming weekend’s manufacturing numbers should help confirm whether or not this is the case.

Dividend Landscape

Dividend stocks are at least holding serve with the S&P 500 for the time being, but there’s little evidence that they’re ready to charge into the lead. Stocks have mostly been in a bullish mood, although it’s been cyclicals leading the way, not tech. That’s helped prevent dividend stocks from being underperformers, but they’re going to continue struggling to become outperformers without some type of risk-off catalyst.

The Fed has essentially announced that they’re going to allow the conditions that have traditionally been favorable for stocks, so I don’t see a likely path where dividend stocks outperform for the time being. The situation in Japan is concerning though and could be that catalyst that turns investors cautious. If the yen suddenly starts sinking rapidly, the chances for dividend stocks to outperform go up.

Market Outlook

Again, I think the weather looks pretty sunny for stocks for at least a little while longer. Powell’s speech is likely to just reiterate what came out of last week’s meeting, so not a high chance of something unexpected there, and I think the PCE report won’t deliver any surprises either.

I’m actually more interested in seeing what happens with bond yields and the dollar yield. If the 10-year yield keeps falling, it would seem to be moving counterintuitively in relation to Powell’s statements last week. Unless, of course, it’s the markets pricing in an increased chance of more rate cuts. The dollar’s move would be in response to what’s happening with the yen. If the yen sinks and the dollar rallies, it could be a function of the markets turning nervous about what it perceives as a potential policy mistake by the BoJ. I think this is potentially more of an intermediate- to longer-term risk for stocks, but things are probably still OK in the near-term.

Looking good for: growth, industrials, the dollar, junk bonds

Looking worse for: Treasuries, gold, low volatility stocks