What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

Note: Due to a minor data issue, some of the specific return figures for ETFs and sectors are inaccurate. My apologies for the issue. Hope to have it fixed for next week!

The market continues to look at the possibility of aggressive rate cuts as less and less likely. The Fed Funds futures market is down to expecting just 2-3 rate cuts by the end of 2025. Since this was the fuel that has driven a lot of the S&P 500’s gains in 2024, the “un-pricing” of some of these cuts is changing the composition of what’s working. Tech, which has long been a leader, has been nothing more than a market average performer since the beginning of this past summer. In its place we’ve seen leadership from financials, industrials and, more recently, small-caps. This is a fairly decisive shift to value stocks, which tends to happen when there’s concern about the future path of the economy. In this case, we’re talking about the threat of future inflation. With liquidity likely to increase heading into 2025 and the impact of tariffs and geopolitical risks on the radar, the markets are no longer in growth mode.

If I’m a market bull, I’m worried about what we’re seeing in gold. The recent pullback seems to have been a result of a risk-on pivot in the lead-up and follow-up to the election. Once that wore off, gold resumed its climb. Gold tends to have a long-term zero correlation with equities, but that correlation does tend to flip to positive when inflation is a bigger concern. That seems to be the theme of the markets at the moment, so I’m not surprised that it’s retesting all-time highs again.

The Thanksgiving to New Year’s period tends to be one that features lower volatility and steady gains for risk assets. While that could certainly happen again this year, I think there are a number of potential tail risks that could affect that. The Bank of Japan could deliver a surprise if it decides to hike rates in December. Geopolitical risks have been on the rise, which is usually a negative for equities, but could have a more severe impact on the energy market. Long-term Treasury yields still aren’t showing any signs of easing and that could put direct pressure on consumers if left unchecked. Investors, however, have maintained bullish sentiment for a while and could use that to sustain equity prices at least until next year.

Key Economic Reports This Week

With the holiday-shortened week, most of the biggest economic releases will come from overseas, but there are still a few reports to note. Personal income & spending have continued to reinforce the idea that consumers are still in good shape and are likely to again in October. I don’t expect any downside surprise here, but it would be cause for concern if we get one given Target’s huge earnings miss last week. The other big release is October PCE, the Fed’s closely watched inflation measure. Sticky core inflation has been an ongoing issue and the biggest reason why the Fed has been unable to cut rates as much as it may want. Nothing we hear this week is likely to change that view.

The other big release is manufacturing PMI in China, which is unlikely to show much improvement. It would be ideal if this sector were to show some level of expansion before any potential Trump tariffs are imposed early in 2025, which are likely to shrink the demand for Chinese goods further.

Dividend Landscape

Dividend stocks are starting to pick up some momentum here, thanks to the renewed leadership from cyclicals and value stocks. With the market pricing in higher for longer interest rates, the air is being taken out of the tech/growth bubble and that would be a good thing for dividend payers.

The seasonality factor could mean that dividend stocks lay low until the new year, but I like how the environment is starting to shape up for them. If the economy can sustain here while monetary conditions start to look a little more restrictive, that could be a nice setup for value stocks longer-term. Since many dividend strategies lean heavy on value and cyclical stocks, this would be the path where dividend stocks outperform in 2025.

Market Outlook

This is likely to be a low volatility week and that tends to be good for risk asset prices. Geopolitics are perhaps the biggest short-term threat to the markets and that could flare up whether there’s a holiday or not.

I wouldn’t necessarily be adding a lot of risk heading into this week, but I think this could be a good opportunity for traditional growth and tech leadership to return. And this is also looking like a good week for bitcoin to eclipse the $100,000 level.

Looking better for: bitcoin, growth, tech

Looking worse for: low volatility, Treasuries, dividends