What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

U.S. equities took a breather last week, which is understandable given the strength of the post-election rally. The one thing that’s still working is the primary beneficiaries of the Trump trade. Financials are looking exceptionally strong as are crypto and energy. These cyclical areas of the market are still relatively undervalued, so I’m seeing an environment that has more upside potential left. I think the initial Trump victory reaction has probably reached its end, but it could resume as we approach January. Seasonality may help equity prices drift higher in a lower volatility environment, but we might need to see some more certainty around the political policy landscape before the rally extends.

Another short-term positive for the markets is that bond market volatility seems to be subsiding. After touching a one-year high earlier in November, the MOVE index is in the lower half of its range over the past three years. Volatility in bonds can signal instability in equities, so it’s encouraging to see this moderate even though long-term yields still haven’t pulled back. I think it’s reasonable to think that the markets have been and will continue to price in re-inflation risk and that’s going to keep rates elevated for a while. These conditions are probably sustainable as long as growth remains healthy and the labor market shows no signs of cracking. If it does and stagflation starts to look like a real risk, then the flight to safety trade likely starts to kick in. I don’t think we’re near that point though.

In terms of net flows, we’re seeing some performance chasing, which isn’t surprising. A lot of money is flowing into equities and relatively little into fixed income. Bitcoin ETFs are drawing big money as are financial sector funds. Fixed income ETFs have been taking in a proportionally larger share of flows than equity funds all year up until just the past couple weeks. So this marks a fairly significant shift in ETF investor behavior. Investor new money is powering into ETFs at an historic pace and it doesn’t look like this trend will be waning any time soon. This could act as an important source of support in risk asset prices.

Key Economic Reports This Week

After a few busy weeks, the economic calendar cools down in terms of major releases, but there’s still going to be a number of notable releases. In the United States, we’ll get a new batch of housing data, including housing starts, building permits and home sales. Consumer sentiment and global PMIs will be watched, but won’t be market movers. Perhaps more watch-worthy will be a number of speeches from Fed members that could provide some guidance on the policy path.

The market will likely pay more attention to earnings. While NVIDIA’s report on Wednesday will be the headliner, retailer reports from Walmart, Target, Lowe’s, Gap and Ross Stores will give us a good tell on consumer sentiment and what they’ll be expecting for the holiday shopping season. Retail sales and spending figures have looked persistently healthy throughout this cycle even though the big retailers have warned that they’ve needed to discount merchandise in order to move it. It’s a bit of a disconnect that I want some clarity on.

Dividend Landscape

Even though the market is clearly feeling bullish, the environment is still positive for dividend stocks. This group certainly isn’t getting much help from the defensive sectors, but the cyclical tailwind from the Trump trade. Bank stocks especially are looking strong and should continue to as the anticipated Trump policies get implemented in 2025. The big banks are still only trading at about 12-13 times forward earnings, so I think there’s still a lot of upside potential here if the regulatory environment eases.

If we use 2016 as a benchmark, risk assets are probably more likely than not to broadly remain in favor over the next 12 months. That means dividend strategies tilted towards defensive equities, such as dividend growth, may have a tougher time outperforming. If forced to choose a strategy to buy-and-hold until the end of 2025, I’d probably go with high yield due to its overweight to cyclicals. That’s assuming, of course, we don’t see a big tail risk emerge, such as a China implosion or a significant deceleration in the labor market.

Market Outlook

We’re starting to approach some favorable seasonality for equities that could carry through to the end of the year. Bond market volatility has eased substantially and that’s a good sign that risk assets could keep drifting higher.

Outside of the obvious Trump policy beneficiaries, there hasn’t been a great dealership of market leadership elsewhere. Tech has been middling. Industrials have certainly moderated. Defensives have underperformed badly for a few months. I’d like to U.S. equity market leadership broaden out a bit more, but I think conditions are still looking pretty favorable.

Looking better for: bitcoin, value, convertibles

Looking worse for: pure growth, healthcare, dividend growth