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 all about one stock - NVIDIA. Its big Q1 earnings report coupled with a 10-for-1 stock split announcement was more than enough to revive the tech trade and continue a multi-week stretch of strong outperformance for the sector. The only problem is that it was virtually the only sector to have a good week! The tech-adjacent communication services sector also posted a positive return, but seven S&P 500 sectors posted losses of at least 1% on the week. Real estate and energy lost more than 3%. The equal weight S&P 500 and Russell 2000 indices were both down about 1.3%.

Clearly, this is a market that’s still struggling to develop broader upward momentum. I believe this is a market that for months has built itself up on the idea that the Fed will be delivering imminent rate cuts and Powell has done nothing but push back on the notion that inflation has made sufficient progress to warrant this. The longer that the Fed keeps rates elevated as they are, the more risk it creates that the economy is eventually going to grind to a halt. One-off events, such as a big NVIDIA earnings report, simply mask the fact that consumers are running out of gas, inflation isn’t going away and the real estate market is showing some real cracks. I think most of the equity market is starting to reflect this even though tech isn’t.

Whether you look at sector-level performance or weekly flows, we can clearly see that investors are back on the tech train for the time being. After weeks of underperformance, tech has almost exclusively led in a way that often occurs when expansion is perceived to be stalling, but conditions are still positive enough so as to not raise immediate concerns about recession. In other words, it happens during mature economic cycles. Without a major shift in monetary policy until well into the 2nd half of 2024, I think this is where the markets might remain for a while.

Key Economic Reports This Week

The only new data of note in the United States will come on Friday when we’ll get the latest PCE inflation report as well as personal income and spending. Inflation, obviously, will get more attention since it’s been the one factor that has consistently moved the markets. I don’t think this number is really going to change the narrative in any significant way and I don’t think it’s going to change the Fed’s thinking in any way, but it could move the markets if it misses expectations in either direction.

We’ll get plenty of new inflation and GDP data from overseas, however, and in my opinion this will be worth watching more closely. We’re finally seeing some real signs of recovery in Europe and another round of modest inflation numbers could help convince investors that the recovery is still on track.

Dividend Landscape

Dividend stocks may have lagged the S&P 500 by a wide margin this past week, but I don’t think the damage was altogether that bad. Most of that lagging performance is due solely to tech stocks and dividend payers actually managed to match or beat many other sectors and themes. Dividend stocks overall seem to be in kind of a wait-and-see mode and have struggled to pick up any momentum as long as investors feel that the economy is still in satisfactory shape. The long-term trends, however, still seem to be favoring a comeback for dividend stocks, but the timeline is still questionable.

Market Outlook

Holiday-shortened weeks and those without a lot of macro catalysts tend to experience lower volatility and that’s good news for stocks. Treasuries are starting to make a bit of a comeback here and it’s interesting to see that it’s happening in the absence of a Fed-fueled rate decline. We still haven’t seen much participation from traditionally defensive equities, such as consumer staples and healthcare, so I’m not sure we’re in a regime where defense is taking over, but there are definitely some defensive undertones here. Investors may not want to give up on stocks, using AI as the backbone of their bullish arguments, but I’d still maintain some caution.

Looking better for: tech, momentum, Europe, gold

Looking worse for: consumer staples, value, junk bonds