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 a week like many others recently - the major averages pushing to new all-time highs, but the composition of the rally looking somewhat questionable. An inflation report that met expectations gave investors confidence that the Fed could keep its schedule of anticipated rate cuts later this year. That made the markets look a lot like 2023 - tech & growth leading with everything else trailing behind. For now, volatility is incredibly low, the data is probably good enough to avoid the appearance of an imminent slowdown and the Fed MIGHT be able to cut rates yet. All of those should add support for U.S. equities in the near-term, but I think individual asset class performance is still a mixed bag.

Over the past few weeks, I believed that there was a defensive shift taking place based on the steady outperformance of utilities and gold along with participation from low volatility, value and dividend stocks. Even though Treasuries and consumer staples have failed to take part throughout most of 2023, there was enough there to convince me that these asset classes don’t rally at the same time without reason. Last week’s inflation numbers (keep in mind that the PPI came in above expectations, so it wasn’t THAT positive) may be shifting sentiment towards more bullishness, especially with growth stocks. Treasuries likely rallied last week based on the expectation of lower rates, so I think the question at this point is whether the sentiment that is pushing the major averages to new highs will continue to be reflected in defensive underperformance.

One signal I watch closely is the VVIX/VIX ratio (which, generally speaking, rises during risk-on conditions and falls during risk-off conditions). It had been falling steadily throughout most of 2024, suggesting that there may not have been as much strength in U.S. stocks as many investors thought. That, however, has reversed in a big way over the past couple weeks.

Based on this, low volatility levels overall and the fact that the S&P 500 and Nasdaq 100 keep testing new highs, I do think that we could continue this uptrend in the near-term. With corporate earnings for Q1 largely finished and the next batch of jobs and inflation data not coming for another three weeks, the runway may be relatively clear for an extension of this rally for the time being.

In terms of asset flows, we saw new ETF money chasing the latest outperformers, specifically utilities and long-term government bonds. Treasury bills continue to retain steady interest as has been the case for most of 2024.

Key Economic Reports This Week

With inflation data now in the rearview mirror, the U.S. economic calendar becomes pretty light this week. That means attention will likely return to the words of the Fed for any signal on forward rate policy. The meeting minutes from the last FOMC gathering will be picked apart for details, but I don’t think we’ll really find out anything new that we don’t already know. We’ll get a slew of Fed speeches on Monday and Tuesday, but new & existing home sales as well as S&P flash PMI readings will be about the biggest reports we’ll get.

Overseas, the calendar gets busier starting with an interest rate decision from China on Sunday night (no changes are expected). Thursday we’ll get an abundance of PMI data from all over Europe and inflation updates from the U.K. and Japan. It seems that the Eurozone economy is showing signs of improvement and I’m hoping that the latest PMI data for the region will reflect that and reinforce the idea that European equities might be one of the better opportunities in global equities right now. The Japanese inflation reading, which is expected to move lower again, won’t help the yen regain any strength against the dollar.

Dividend Landscape

Dividend stocks took a step back last week with the re-emergence of tech stocks. It’ll be important for this group to see if last week’s inflation number produced a one-time pop for risk equities or if more defensive strategies can resume control. The composition of last week’s rally and persistently low volatility readings suggest that momentum for dividend payers may be diminishing. Cyclical stocks have been underperforming for a few weeks and if defensive sectors, including staples and healthcare, can’t step in to provide leadership, dividend stocks could lag in the short-term.

Long-term, I think the case is still strong. Inflation only moderated, not weakened, and is still running at a 3-4% annualized rate. Retail sales came in surprisingly weak in April and could be indicating that consumers are finally running out of gas. Unemployment is slowly ticking higher and we may be sending GDP growth starting to top out. The macro trends are overwhelming suggesting that we’re in the early innings of a broader slowdown, which should position dividend stocks nicely to outperform over the next 6-12 months.

Market Outlook

I think that riskier assets still have the upper-hand this week. They picked up quite a bit of momentum last week, volatility levels are very suppressed and there’s no obvious catalyst on the calendar this week that presents a real risk to derail it. With the Dow passing the psychologically important 40,000 level, investors may be in an especially good mood and ready to push asset prices higher again.

I’ll be interested in seeing what happens with Treasuries this week, especially in relation to equities. If both rise again this week, I think we can deduce that investors are buying more strongly into the narrative that Fed rate cuts are becoming more likely over the next several months. I don’t necessarily agree, but sentiment can be a powerful thing in the short-term.

Looking better for: tech, momentum, growth, emerging markets

Looking worse for: Japan, TIPS, GARP